All flexible funding is not created equal: GOS, capacity building grants and change capital
December 5, 2011
Today, with the help of a
particular kind of money--Change Capital--Alvin
Ailey American Dance Foundation is attracting new revenue by building a
technology platform and internal capabilities that maximize opportunities for patron
and audience engagement. Merce
Cunningham Dance Foundation is raising money upfront to wind down its
operations in a graceful way and leave a meaningful legacy.
These are success stories. But, when grantmakers and grantseekers fail
to make the distinction between different kinds of revenue and capital, the consequences
can be dire: desired outcomes aren’t met, organizational infrastructure is
hollowed out, and communities go underserved. Given these risks, the
nonprofit field and funder community need greater clarity about the role of
each type of money and what they can separately and collectively achieve.
First, some definitions:
General Operating Support
GOS is unrestricted revenue, meaning it can be spent at the
organization’s discretion – on anything. It might be used to fund programming,
to offset administrative salaries or to pay the rent. In a universe where
many grants are tied exclusively to specific programs or projects—often without
paying for an appropriate share of the infrastructure required to deliver
them—GOS is a rare form of flexible revenue that can pay for mission-critical
expenses that few (sadly) are yet willing to support. As such, annual GOS is an
essential element of a healthy revenue mix for any organization. It is
typically raised from select foundations as well as individuals and
corporations, often through special events.
Capacity Building Revenue
Grants for capacity building,
whether formally restricted or not, are revenue
typically earmarked for building new organizational knowledge, staff and
infrastructure. Board development, expansion of the marketing department and
the purchase of new technology would all qualify as capacity building
expenses. GOS is often but not always used to pay for capacity-building
activities. In that sense, the two can overlap. The difference is that capacity
building dollars usually have a specific non-programmatic intention. They
are typically raised from foundations.
capital is a
concept we developed at NFF to describe a flexible form of capital, distinct from revenue. It allows for periodic investments in an
organization’s strategy that have the greatest likelihood of impact and
viability over time. Ailey and Merce are just two of NFF’s clients that are
using change capital to adapt their programming and operations.
Change capital is flexible in that it can be spent on any
number of program related activities or infrastructure building priorities.
But don’t be fooled: it is not revenue to pay for business as usual like
GOS. Change capital is an investment in
adaptation at the organizational level. While it may build organizational
capacity, change capital—unlike a typical capacity grant–—is invested with the
explicit intent of securing reliable revenue to pay for the future ongoing
expenses associated with an organizational change strategy. Change capital
should result in a healthy business modelthat contributes to a healthy balance sheet, characterized by
sufficient liquidity and adaptive capacity. More importantly, its effective use
means that communities are better served by healthier, more vibrant nonprofits.
The conflation of these three
very different types of money often causes a mismatch of expectations between
funders and nonprofits about the purpose of funding and the impact grant
dollars can have. In distributing or raising each type of funds, grantmakers
and nonprofits may want to consider the following guidelines:
General Operating Support
Do not expect grantees to do
anything differently from what they are currently doing, although certainly
continue to hold grantees accountable for producing the quality of results
that they delivered before.
Since GOS is still not the
funding norm, avoid the temptation to use it as project or program funding.
While serving one more child or producing one more great work of art are
worthy pursuits, having the infrastructure to fully support programs is
necessary to achieve mission success.
Capacity Building Grants
Count on your funds achieving
their designated purpose – whether that be building stronger management or
improving internal systems. The dollar amount provided, when combined with
other funds available for the same purpose, needs to cover the full cost of
the organization’s investment and no less.
Be careful not to promise
capacity building on the cheap in an effort to secure new grant
support. In assessing the full costs of an infrastructure investment,
consider those less intuitive but very real costs, such as the time an
executive or other staff will need to spend on the project. If the cost is
likely to continue but the capacity grant is one-time (for example, one year
of a development director’s salary), have a viable plan to raise future
years’ funding before saying ‘yes’ to the grant.
As a capital investor, you
are committing to be a builder of healthier, higher impact organizations. You
will be taking significant risks with your dollars and deserve to have high
expectations of results. Resist the temptation to interfere with
grantees’ spending decisions as long as their financial and programmatic
roadmap is clear and progress is made along the way. Avoid penalizing the
inevitable mistakes and roadblocks that will occur; rather, use these times
as opportunities to engage about smart mid-course corrections.
squander the opportunity to use precious, all-too-rare change capital to
rethink strategy, invest in revenue-generating activities and measure
progress and results. Expect to share your progress candidly with investors
and to be transparent about challenges and mid-course corrections to
plans. Be clear in your financial planning and reporting that change
capital is not ordinary revenue, but that investing it appropriately should
lead to improved revenue and greater effectiveness.