Efforts have accelerated in recent years to disrupt the nonprofit “starvation cycle” in which donors insist on funding specific programs while hesitating to cover the costs of salaries, infrastructure upgrades, and other less sexy but equally vital operating expenses. Under fundraising pressure, nonprofits respond by underspending in those areas and underreporting them in public materials such as annual reports. This perpetuates donors’ unrealistic expectations. And so goes the cycle.
Campaigns to change this scenario typically focus on pressuring grant makers to provide multiyear flexible funding and general operating support. One innovative solution, however, is rarely given airtime: funding nonprofit reserves and investments.
Our organizations, the Ford Foundation and Urgent Action Funds, have seen how this strategy can accomplish two crucial things for nonprofits. First, reserves, which are essentially a nonprofit’s savings account, allow leaders to exhale. When the next economic downturn comes, reserves provide a cushion to sustain programs and cover payroll. Second, investments such as stocks, bonds, and other financial vehicles can completely change how a nonprofit views itself, enabling more courageous and visionary approaches to its work.
Together, these two strategies allow nonprofits to focus on solutions instead of survival.
In 2018, Ford provided the Urgent Action Funds with a five-year, $5 million Building Institutions and Networks, or BUILD, grant, aimed at social-justice organizations. The Urgent Action Funds — a global consortium of four regional feminist funds supporting women, trans, and nonbinary human-rights defenders — already had modest reserves built up over time through donor contributions. Investments, however, had always felt out of reach.
To address this, both organizations agreed that the Urgent Actions Funds would devote 20 percent of the original BUILD grant to investments dedicated to women’s rights and social justice, reflecting the group’s values. The size of the original grant was expanded by 20 percent to account for these investments.
Under this plan, the nonprofit invested 15 percent of its investment portfolio in community-impact funds, 20 percent in bonds, and 65 percent in vehicles that meet environmental, social, and governance, or ESG, investment guidelines.
The strategy was the outgrowth of an open conversation between Ford and the Urgent Action Funds about how the BUILD grant could support the group’s long-term sustainability, including through investments. Making this strategy part of a larger grant that set aside additional funds for investment ensured that Urgent Action Funds was not forced to trade investments for operational dollars, which would perpetuate the nonprofit starvation cycle.
Foundations need to create alternative ways for grantees to not only operate sustainably, but also to adequately respond to financial volatility, including high inflation and recessions. Grant makers can do this by first committing to general-operations support that gives grantees the flexibility to develop investment and reserve policies. They can then engage nonprofit leaders in conversations about the importance of building endowments for long-term financial health.
The investments made by the Urgent Action Funds with Ford’s help and encouragement have proved transformative. For years, the group struggled to cover operating costs. But as the opportunity to pursue a long-term growth strategy and build an endowment took hold, the future started looking more secure. This enabled the Urgent Actions Funds to develop a bolder leadership posture that attracted the attention of major institutional and individual donors.
Expanding Fundraising
Having a financial safety net gave the organization’s leaders the confidence to significantly expand fundraising efforts. One of the most notable outcomes was a $20 million donation from MacKenzie Scott, of which the Urgent Action Funds invested 20 percent to build on the success of its earlier investment and ensure resources would grow beyond the initial contribution.
The security of an endowment has also allowed the group to take more risks. That includes the planned launch of Urgent Action Fund-Africa’s Healing Farm, a rejuvenation center for African women human-rights defenders who face relentless violence and discrimination. The project is riskier than what UAF-Africa, one of the four consortium funds, has undertaken in the past — both because of donor reluctance to invest in capital projects of this kind and the ongoing cost of upkeep. The financial stability that resulted from a sound investment strategy gave UAF-Africa the monetary bandwidth to make this move.
Ford has seen this story unfold time and again. An impact study, commissioned by the foundation, found that these types of investments, paired with financial resilience training such as assessments of the organization’s financial health and tailored funding and investment strategies, led to greater confidence and increased revenue: 82 percent of nonprofits improved their reserves and 52 percent raised funds from new sources. Almost 80 percent were more assertive with donors, negotiating for funding that covered their true costs and allowed them to plan for the future.
What Grant Makers Can Do
Because nonprofits are stuck in the starvation cycle, most are unlikely to come up with a financial reserves and investment strategy on their own. They need donors to initiate the conversation. Grant makers should let grantees know that they want to help them develop an investment strategy that ensures they have the resources for long-term viability. They should then provide them with funds beyond the original grant allocation so they can invest and build reserves without compromising day-to-day operations.
Starving nonprofits has never made strategic or economic sense. Not only do nonprofits provide essential services and advocate for critical policy change, but they are also highly cost-effective. One analysis of nonprofits in the United Kingdom found that each $1.25 donated generated an average of $6.25 in value for society. For example, nonprofits often support constituents before a crisis, helping to pre-empt public spending on emergencies.
While all nonprofits will benefit from reserves and investment funding, if donors want to supercharge their giving, they should focus on chronically underfunded groups such as women’s rights organizations, which have an outsized impact in areas including health and economic opportunity, climate and food insecurity, and strengthening democracies.
During this time of deepening crises across the globe, nonprofits need more sustainable ways of operating that allow them to rise to new challenges and continuously adapt. If all grant makers invited their nonprofit partners to set aside funds in reserves or investments, civil society could substantially expand its impact. Donors looking for effective solutions need to provide effective resources.