Nonprofit Philanthropy: More Charles Darwin than Adam Smith?

on September 12, 2013
in Blog

In a recent survey of 121 nonprofit leaders, the Center for Effective Philanthropy found that nearly half (48%) of nonprofit leaders say their foundation supporters are blind to the biggest challenges charities face and could do more to help them meet rising demand for services, train leaders, and deploy new technology, according to a poll released this week. Ellie Buteau, vice president of research at the center and author of the report, says foundations´┐Ż lack of awareness of their grantees´┐Ż challenges stems from poor communication.

I beg to differ on foundation blindness to needs, but do believe communications are a problem. Specifically too many nonprofits don’t understand how foundation’s operate and thus don’t position themselves for support in a way that best serves their needs and those of the foundation as well. Foundations aren’t blind to nonprofit needs, they simply have different objectives. I describe how to best understand them below:

After a dozen years in philanthropy, I believe Darwin’s Theory of Natural Selection has more relevance to the nonprofit and donor grant negotiation process than Adam Smith’s ideas of supply and demand and the theory of Natural Price. A nonprofit organization’s perception of funding needs often differs significantly from those of the donor it is trying to convince. The nonprofit by necessity must understand what factors drive donor decision-making to obtain support successfully.

Natural selection is a process that affects the capacity of individual entities to survive as the result of heritable traits that give it the upper hand. Natural price theorizes that all products have a value intrinsic to what is involved in producing them and factors of supply and demand determine cost and, ultimately, real value.

Let’s consider a nonprofit homeless shelter. From an economic perspective, the assumption is that nonprofit shelters exist, and their services are valued, because of demands posed by homelessness and other factors that cause people to seek refuge. For supporters of supply and demand, this all makes sense. The problem is that the money needed to support those shelters fully does not come from the people using them but from third party donors. At this point, the 800-pound gorilla in the room tips its hat to Darwin. What motivates an institutional donor to give? Is it really supply and demand? Or rather, is it ‘perceived’ demand that facilitates a peculiar form of natural selection requiring potential grantees to create survival strategies aimed at obtaining support for their projects?

In our homeless shelter example, we assume that the shelter is functioning properly and satisfying a real need. If true supply and demand were at work, a donor institution would sense a need for a shelter based on demand. It would either start an operational program to create and manage shelters or form a separate nonprofit whose mission was to do so. That process sometimes occurs. However, in the more common scenario, a committed individual who sees a need for shelters, forms a nonprofit on his own to create and manage them. The nonprofit then seeks money from third party donors to support the project. In this defined ecosystem, an entity (grantee) with few resources satisfies a real demand and then turns to another entity with resources (donor) for support. The issue then becomes if the donor evaluates the request based on real demand or perceived demand created by their selection process.

Donors typically have well defined initiatives with specific criteria supporting some projects while excluding others. For example, ‘We only give to shelters that house over fifty adults, or that remain open more then 12 hours a day, or exist in X geography, etc.’ Government programs defined by divergent political constituents also operate with a variety of programmatic and administrative criteria that accomplish the same type of exclusionary exceptions. Why do donors do this? The answer is simple and rather logical if not particularly gratifying. There is a lot of need out there. All donors have a finite amount of resources they can dedicate. This necessitates some type of criteria and process to distinguish support of one initiative over another. Consequently, there are two things donors inevitably create, allocation parameters for their funds and gatekeepers to insure that defined parameters are met. Hence Institutional donors define their funding criteria separately and are one-step removed from the nonprofit providing shelter services despite the fact that they are critical to resourcing the endeavor.

Philanthropy is a very personal and subjective undertaking especially for institutions supported by living donors or family boards. How well donors define their selection criteria to meet real demand is a function of two primary factors; their actual understanding of the problem they are trying to address, and their real interest in actually fixing it. Other objectives may exist, for example size of tax write-off, extent of recognition or kudos, satisfaction of a political constituency, and so on.. Whatever these factors are, one can express how far a donor support criterion digresses from the demand side of the supply and demand argument with this formula:

Divergence from Demand = Extent of misunderstanding related to need *
other factors that have little bearing on actual need * restrictiveness of final grant parameters set

The other process-helpers donors create are gatekeepers in the form of grant giving staff or grant evaluation boards. Their job is to shield the donor directly from the many grantees requesting support by conforming to the parameters on the right of our equation that ultimately decide which grants to accept and not accept. A skilled intermediary knows how to limit the negative factors in this equation to support proposers while also satisfying the parameters and the donor. An adequate intermediary conforms to the parameters and a poor intermediary exacerbates the parameters, making divergence from demand even worse. Note that poorly conceived criteria may make even intermediaries classified as adequate ultimately very poor at meeting demand by doing nothing other than their stated job of conforming to them.

This is where Darwin and natural selection come into play. Our shelter grantee assumes it has created an entity that meets a demand. It further assumes that any donor it approaches with an initiative that in some way supports shelters, will naturally see the appropriateness and justification of supporting its shelter. However, we exist in an ecosystem where donors do not operate on that logic. The donor-gatekeeper’s inclination [and job] is to check the initiative not against actual demand, as defined by the NGO’s shelter mission, but rather by perceived demand defined by the donor’s own selection parameters. Most nonprofits do not consciously appreciate this fact – or at least do not demonstrate that they do in their negotiations with donors. The typical conversation concentrates on why the donor should support their proposed initiative in its present form, rather than focusing on how it conforms to the donor’s defined selection parameters. I have often found myself reworking the argument for quality grant requests so that they conform to the perceived need of a donor initiative rather that nonprofit’s perception of demand as they see it.

Outside of an absolute disqualifying factor, (if for example, the NGO’s shelter is in Utah and only enterprises operating in California are supported), there is always room for successful donor negotiation if a nonprofit is opportunistic – or more precisely Darwinistic enough to appreciate how natural selection takes precedence, replacing demand. Natural selection favors two types of nonprofits in these negotiations.

1) A nonprofit that generates an engaging enough argument, through personal connections and relationships, (often gained through earlier successful interactions) to convince the donor gatekeeper its project matches donor guidelines.

2) A nonprofit that focuses less on marketing its initiative to meet user demand and more on promoting it to meet donor criteria. It can do this in writing or in person and relies less on a personal relationships in favor of solid marketing strategies

The critical factor for success of both types of nonprofits is their instinctual understanding of the justifications needed to bridge the gap between actual demand and the selection criteria they must meet. These qualities are often associated with the most successful nonprofits because they know how to navigate the current funding ecosystem and successfully accomplish a necessary survival challenge. They do good work on the ground and make the appropriate case for support to donors operating at 30,000 feet above the ground.

The loser in this negotiation process is often the earnest nonprofit that approaches the donor purely based on its need and not the donor’s requirements; and often comes away without life support. Unless of course the need and donor requirements actually match perfectly without any negotiation – a unique and uncommon state of Zen in the typical donor nonprofit interaction. Natural Selection overtakes the laws of Natural Price and Demand in this interaction.

Of course there are also successful nonprofit ‘spinners’ and ‘schmoozers’ who can make a successful case for support but that accomplish little of value in satisfying demand. They are not the focus of this article, although they are the gatekeeper’s responsibility to evaluate properly and cull, because they waste resources otherwise spent on needy nonprofits that actually meet demand.

It is not my intention to denigrate either the donor or grantee in this article, but to point to an existing ecosystem that affects both the funding negotiations and donor resourcing. One can try to educate donors to do two things: refine criteria so that it is demand-driven, and hire effective, inventive gatekeepers. However, donors come in many shapes and sizes and will always create limiting criteria to match limited resources. Just as importantly, they do not approach nonprofits for resources; the system works the other way around. It is therefore incumbent on nonprofits to understand the donor landscape and better navigate funding negotiations even as they satisfy real demand.

In a perfect world, donors would create actual-demand versus perceived-demand criteria. This would free nonprofits to concentrate on making a needs-based case for funding rather than telling donors what they want to hear, as many nonprofits must do to secure funding. On the other hand, for a donor to do this, it would probably need the experience gained by the nonprofit meeting that demand rather than the alternative experience it has creating the wealth and resources neccessary to grant to such activities.

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