The New Philanthropic Normal

Posted by on 12/05/10 in Philanthropy, Stewardship

One of life’s mysteries is how and why donors give money. In the eyes of many, philanthropists and foundations remain elusive givers or deniers of financial sustenance. As these donors go, so go our social service agencies, environmental causes, faith based initiatives, and countless essential elements of our civil society.

The Utah Society of Fund Raisers (www.USFR.org) recently asked Syntrinsic to present thoughts on how foundation thinking has shifted over the course of this economic crisis. Of course, there is no such thing as monolithic “foundation thinking.” Each foundation possesses a distinctive approach to stewarding its resources and to giving those resources away. Nonetheless, on December 2, Syntrinsic gave a keynote address to the USFR in Salt Lake City that spoke to the themes below.

What has changed?
Prior to the economic crisis, most foundations were confident, hopeful, and feeling generous. They maintained a perpetual time horizon and were accustomed to growing year over year in excess of their spending. Life was good. Now, however, many foundations are highly uncertain and feel constrained in their ability to support all that they want. They are concerned about their ability to grow assets organically and thus about their ability to live in perpetuity.

We all know what happened. Foundation assets generally declined 30-50% from their peak in the fall of 2007 through the spring of 2009. Depending on their investment strategy and spending, many foundations remain quite a bit smaller than they were before the economic bust. Three other factors, however, are less obvious. First, many foundations have investments with limited liquidity due to private placements that have put up gates or extended the time horizon for distributing funds. Second, most foundations have significantly lowered their forward-looking return assumptions. Whereas foundations routinely expected to make 8-10% per year just a few years ago, most now plan on returns in the 5-7% range, and many do not even try to predict their gains. Thirdly, there remains uncertainty about how estates and foundations will be treated under the tax code. There are those at think tanks and in DC who believe that charitable gifts should not be as tax deductible as they are now and others who think that nonprofits should be taxed similarly to for profit organizations. Clear statements from Congress, the IRS, and the White House to the contrary would be helpful.

In the meantime, organizations seeking to raise funds from foundations wonder if their thinking is fundamentally different than it was pre-crisis. Five general trends have emerged around the country and across foundations of varied sizes and missions.

I. Getting Directly Involved
Some foundations are seeking ways to be more directly involved in the initiatives and programs they fund. The participation can take many forms: foundation representatives might want to be volunteers in the organizations they fund, whether in providing direct service or serving on a board or task force; they also may want to help the nonprofit secure funding from other sources or otherwise influence long-term strategy. In many cases, nonprofit organizations may not want direct involvement from their funders (or at least certain funders), but in other situations, creating opportunities for direct involvement might open doors otherwise closed.

II. Concentrating Support
Some foundations are dealing with a smaller resource base by supporting a smaller number of organizations and/or sectors. In many cases, these foundations have revisited their missions to reaffirm their purpose. If giving has drifted from that core purpose over time, then foundations may use the economic crisis as an opportunity to refocus. If the foundation supports five mentoring programs (for example), then it may decide to concentrate on the 2-3 it deems most effective. It behooves nonprofit organizations to understand a foundation’s current mission and current strategic focus, and to only pursue funding from those where the alignment or “fit” is strongest.

III. Seeking Experience and Credibility
Most foundations were started by entrepreneurs or their descendants. Nonetheless, when it comes to supporting organizations and initiatives—particularly in an environment of scarce resources—foundations tend to be conservative. They want to support organizations or leaders they know (or know of) and support. Thus, it is imperative that those seeking funding be able to demonstrate the credibility of their organization and leadership. Want to launch a new initiative? Have a proven leader take the reins. Want to launch a new organization? Be sure that it is necessary, and if so, then assemble a board and staff whose familiarity will inspire confidence.

IV. Demanding Accountability
Over the last three years, “efficacy” has become a constant theme at foundation conferences and in foundation board rooms. In this context, efficacy is about foundations trying to determine whether they are having an impact in the world. Given all the work involved in establishing and running a foundation, is it really worth it? Nonprofits that hold themselves accountable to mission-specific outcomes are much better positioned to address these concerns than those that do not. The nonprofits in the strongest position are those that plan ahead how they will address the foundation’s head and the heart. Do you have quantitative evidence of impact for those who need it? Do you provide anecdotes, videos, and in-person presentations for those touched by more emotional evidence?

V. Seeking Flexible Capital Structures
Nonprofits almost exclusively strive to appeal to the grants making side of a foundation—and understandably so given how foundations have historically approached the business of allocating resources. However, a shift seems to be afoot, though at the early stages. Some foundations—a small number at this point—are considering how to use their asset base to make strategic investments that support their mission. We’re not talking about negative or positive social screening, but rather more creative options. Some foundations are looking at ways to lend money to nonprofits in lieu of investing in traditional bonds, or to make long-term equity investments in projects in lieu of stocks or private equity. These types of investments have been common in the faith-based community for decades, but we sense increasing possibilities throughout the foundation community in the years to come, particularly as more nonprofits create meaningful opportunities for such investment.

We expect that many of the pressures facing foundations—lower asset sizes, reduced growth assumptions, uncertain tax policy—will continue for many years. We also expect that the social needs foundations strive to address through their support of nonprofit organizations will only increase in scope, intensity, and cost—and dramatically so. In short, today’s funding challenges are not an exception but what we believe to be a “new philanthropic normal.”

That said, the nonprofit organizations and other concerned community organizations that innovate and proactively strategize for this environment will find that generous foundations and philanthropists will be all too eager to support their good efforts. The resources are diminished; the spirit of giving in America is as robust as ever.