Helping to Prevent a Culture of Inadequacy

Foundations often complain about the inefficiency, duplication of services, and “lack of scale” that characterize many of the small charitable organizations they support. Grant makers believe that they are forced to make numerous small grants because there are so few large, well-managed organizations to support. Yet seldom do they recognize that their own philosophy of giving may be one cause of the problem.

Most foundations believe that if they give a small organization too much money, it will drown in the excess. Small or new charities, grant makers believe, lack the capacity to absorb large gifts — and, if they received them, would inevitably expand their operations beyond what was prudent or sustainable. By limiting grants to a modest percentage of charities’ current operating budget, grant makers believe that they are actually doing their grantees a favor: saving them from themselves.

But there is a cost to such allocation of funds. When grant makers refuse to give a large sum of money to a new or small organization, they force it to grow with inadequate resources and an uncertain future. Without the ability to pay adequate salaries or the assurance of continued funds, an organization cannot hire the best people or plan for orderly growth. And if managers must constantly scramble to raise money, they cannot reasonably be expected to focus on an organization’s mission or lay the groundwork for operational excellence.

Foundations generally expect their grantees to attract funds from other sources before awarding them larger grants. But that is not so simple. Other donors may hesitate to support a new organization, fearing that their grants may be wasted if the organization is financially unstable. And each contributor wants to keep his or her support in proportion to that of all the other contributors, compounding the dilemma.

For all of foundations’ talk of wanting to create self-sufficient organizations, nothing fosters dependency more than a practice of making subsistence-level grants every year. The inevitable result is that most grantees have no way to raise money beyond the meager amounts needed to keep operating at their current levels.

And there is an even more harmful effect: Grantees quickly develop a “culture of inadequacy.” The way people think and the way things are done come to be based on a conviction that the charity will never have the resources to hire the right people, do the job properly, use the right tools, or fulfill a broader vision. This becomes an indelible and self-fulfilling prophecy — a stunted vision, which is the biggest barrier of all. And it pervades every aspect of the non-profit world.

How could this situation be changed? Grant makers assume that those with large sums of money know how to handle it, and that those without do not. But the ability to handle large sums of money well involves no magic. It is a question of management, nothing more.

In the hypercharged venture-capital world of recent years, organizations have jumped from handling no money to handling millions or billions of dollars in a year or two — leaps that no non-profit group is ever likely to face. Still, those managers deal with the growth successfully, and investors are not reluctant to provide ample resources for expansion.

To be sure, a careful business plan is required so that the growth, when financed, is sustainable. Few grantees would reject a large gift that carried such prudent conditions. With good management and a good plan, there is no such thing as too much money.

But since non-profit groups lack resources, they cannot attract the right management. And that dilemma, caused partly by inadequate foundation support, is what dooms the non-profit world to be made up of thousands upon thousands of small, struggling organizations.

Ten years ago, the situation was not so different in the world of venture capital. It took many years to develop a company, and venture capitalists put in carefully measured amounts of money at each stage. That made it hard to attract first-rate managers at the outset. So management was frequently replaced as the company grew, and that slowed down progress considerably.

Today, there has been an explosion of venture capital, and an equivalent explosion in the amount of money being made. Companies are starting with $100-million in capital on day one, and they are attracting managers of an extraordinary caliber — senior executives of major companies who would never have joined a start-up under the older, more conservative financing model. Those managers are capable of taking a company all the way through its initial public offering, often in only a year or two — a rapidity of growth that used to be unheard of. But with large capital commitments and commensurate management talent at the outset, venture companies are growing much faster than ever, and succeeding as never before.

Imagine what caliber management team a non-profit group would be able to attract if it started with even $10-million in funds on day one? How quickly could it expand? What degree of excellence would drive its vision?

Foundations focus so completely on the purpose of their grants — the project to be financed — that they often lose sight of the impact created by their grants’ size and number. For example, there has recently been substantial and growing foundation support for building organizational capacity — financing the administrative infrastructure that is necessary for charities to grow and operate effectively. That is an important and long-overdue trend that should be applauded. But while recognizing a new purpose for their grants, foundations have not often changed the magnitude of their giving.

Instead, they have redirected their modest-sized, project-based support to help improve operating performance — supporting a marketing campaign or management-information system — rather than supporting direct delivery of services. Giving a grantee the resources to improve its management and operations makes a big difference in its ability to grow, but it may not erase the culture of inadequacy.

If foundations are serious about building the ability of non-profit groups to do more, they need to worry about more than what they support. They need to increase the amount they give at any one time. Indeed, foundations have it it their power to provide enough support for an organization to make the leap from inadequacy to excellence.

Mark R. Kramer is managing partner of the Center for Effective Philanthropy, in Boston; a grant maker; and the former chairman of the Jewish Funders Network. He is a regular contributor to these pages. His e-mail address is mkramer@effectivephilanthropy.com.