Here’s a sentence few foundations ever hear from grantees: “Thank you for your support, but we won’t be seeking further funding.” That’s how Second Street Second Chances, an organization I co-founded, essentially put it when we announced that starting in July, we would no longer ask grant makers to support our operations.
We made it clear that while foundations were welcome to continue funding us, many other causes could benefit from their resources. Thanks to their generosity, Second Street, which provides services for formerly incarcerated people in Berkshire County, Mass., had built reserves sufficient to sustain a $1 million annual budget for six months with no revenue — considered by many the gold standard of fiscal stability.
Although the decision seemed like common sense to us, we were advised by some fundraising professionals that it ran contrary to customary nonprofit practices and that we should continue to raise money no matter our need or our reserves. But given the region’s challenges — and our own mission and structure — that thinking felt wrong.
Berkshire County, with its population of about 126,000 spread over 927 square miles, has one of the highest per capita concentrations of nonprofits in Massachusetts — nearly 1,000 organizations. Although the county also has a strong tradition of generosity, philanthropic resources for local nonprofits, especially those engaged in human services, are limited. Many people in our community are in need, and nonprofits struggle to keep up. Second Street started out as just such an organization.
When we launched in 2022, our initial pitch to potential funders was straightforward: Give Second Street three years to prove we can have a meaningful impact on the successful reentry of formerly incarcerated individuals in the county. That would in turn strengthen the local workforce and community and allow us time to create a path to sustainability.
Early funders took a calculated risk, evaluating the people and nonprofit partners involved, the pressing community need, and our plan to address it. We were also fortunate to receive a $700,000 American Rescue Plan grant from the city of Pittsfield in 2022, payable over three years. We knew, however, that once that grant expired, our start-up philanthropic support was unlikely to turn into predictable annual grants that could sustain us over time.
From the start, finding other sources of revenue was an organizational priority. In September last year, we announced an agreement with the Berkshire County Sheriff’s Office to expand its initial in-kind support of office space, technology, transportation, and other resources to fund Second Street’s core budget.
We informed our private funders that, moving forward, we would seek support only for special projects beyond our core operating budget, such as our literary journal, art exhibition, and theater productions.
A Saturated Nonprofit Sector
Second Street’s decision to suspend further philanthropic funding for operations raises a broader question for nonprofits, which operate within an ecosystem of organizations — some would say too many of them — working to strengthen communities. Much as individuals may temper their personal desires in order to address the needs of others, nonprofits should consider their role in this shared mission. By pausing to assess whether their fundraising is essential in the moment, larger organizations can make space for smaller or less stable nonprofits to thrive.
This shift in perspective encourages a spirit of collaboration, ensuring that philanthropic resources reach those in the greatest need at any given time. Even mission-fixated nonprofits can agree that when the community thrives, their mission is supported.
This same thinking could apply to other forms of fundraising. Annual appeals, for example, often present heart-wrenching client stories, while the money raised gets funneled into investment accounts instead of addressing urgent needs. This certainly isn’t a call to do away with fundraising when a nonprofit becomes financially stable, but to consider what it means when organizations persist in vacuuming up dollars in the absence of their own current need, while more vulnerable nonprofits struggle. That seems a bit, well, uncharitable.
A New Grant-Making Paradigm
The onus for this shift, however, shouldn’t fall only on nonprofits. Grant makers, too, must evaluate how their funding practices can better align with the evolving needs of the community and principles of equity.
The perfect storm of the pandemic, racial and social justice movements, and growing awareness of systemic inequities caused forward-thinking foundations to revisit outdated and inequitable practices. Some have abandoned the prohibition on funding salaries and expanded their support of operating expenses. Others have moved away from matching fund requirements. And a growing number have stepped back from micro-managing grantees, embracing a trust-based form of philanthropy that focuses more on outcomes.
I believe it’s time to challenge another pillar of traditional philanthropy: the requirement that nonprofits demonstrate financial stability to receive funding.
In the for-profit world, venture capitalists understand that while some early-stage investments will inevitably fail, the successes more than compensate for the risk. Similarly, philanthropy could benefit from creating a portfolio of grantees representing a spectrum of risk and reward in which not all grants will yield desired results, but others could lead to transformative change. By taking strategic risks on under-resourced organizations, funders are more likely to foster innovative solutions to entrenched community issues.
Even risk-averse foundations could prioritize their giving by eliminating grantees that simply don’t need the money — those that will be adding the grant to their own investment account or applying the proceeds to budget line items that allow them to free up other money for investment. Building up nonprofit endowments might be appropriate for organizations with predictable long-term needs, such as museums and hospitals, but make little sense for groups addressing urgent challenges like hunger and housing.
What criteria might funders consider in making such decisions? While each situation is unique, and exceptions could be made for capital projects, specific initiatives, and other special circumstances, halting funding might make sense for organizations with these financial attributes:
- An operating surplus greater than 10 percent of revenue for at least two of the last three years.
- A reliable source of revenue other than private philanthropy for the year of the proposed grant; and/or
- Reserves available to fund operating expenses greater than 40 percent of the most recent annual budget.
Donors, of course, are free to support any causes they want, regardless of how well-resourced they may be. But for those prioritizing impact or need, this approach — derived from frequently used standards of nonprofit financial stability — is worth considering.
A Call for Smarter Philanthropy
Philanthropic capital is finite and should be deployed strategically. Rather than funding organizations that have already achieved financial stability, foundations could focus their investments on emerging ideas and high-impact initiatives — supporting visionary, motivated, smart and, sometimes powerless, individuals and small grassroots organizations. In doing so, grant makers can encourage real innovation, addressing unmet needs and driving long-term social change.
Ultimately, nonprofits and foundations share a common goal: improving the lives of those they serve. But both sides need to take a more intentional approach, ensuring that the funds available are directed where they’re needed most. By rethinking funding criteria and challenging long-held assumptions, we can ensure a more equitable, impactful distribution of resources that unlocks the potential of untapped talent and untested ideas.
