Funding the Extraordinary

Nonprofit Finance Fund (NFF) recently concluded work with The Kresge Foundation to assess its Arts and Culture grants within two specific initiatives. The central goal of these initiatives was to promote the adoption of capitalization principles within the field. In 2013, Kresge asked NFF to assess the effectiveness of these grants in spurring the adoption of capitalization principles and seeding longer-term balance sheet improvements among grantees. Findings are detailed in the full report, Funding the Extraordinary. NFF also provided recommendations on what works, available here in full, and summarized below.

In broad terms, capitalization refers to the financial resources that support the achievement of an organization’s mission over time—and this topic continues to be of interest among grantmakers in the arts. So what are the necessary elements of a grantmaking program that aims to improve grantee capitalization? Below, we outline key tips during each phase of making the grant.

• Start with education. Organizations that understand and embrace capitalization principles are far more likely to set comprehensive capital goals as part of their annual and longer-term planning. Grantee trainings on capitalization best practices, strategies and vocabulary offered at the outset of a capital grantmaking program can help build a shared understanding among managers and staff. A terms sheet can help ground the vocabulary.
• Include the board. Strong knowledge about capitalization at the staff level is not enough. Trustees influence fundraising priorities and serve as a pipeline to major donors. Board education and buy-in about capitalization (beyond facilities and endowments) should be a pre-requisite to participation in any capitalization program.
• Encourage realistic, integrated planning. Consider supporting organizational planning efforts that link vision to strategy, and strategy to a financial roadmap with balance sheet goals. A strong capitalization plan is grounded in a clear understanding of a grantee’s historical and current financial situation. It sets targets for the types and amounts of capital resources needed to achieve long-term business and savings goals.

• Tie your grant to the plan. If an organization has prepared a thoughtful, data-driven capitalization plan with the board’s involvement and approval, the most helpful investment is aligned with the priorities in that plan. Trust that organizations often know best what type of capital they most need even if it means paying down debt or accessing recovery capital.
• Match capital to need. When making a capital grant, it’s important to know the primary capital challenge. All nonprofits require working capital as a first order of business—to manage cash flow and handle everyday risk, but organizations need different kinds of capital at different phases of their development.
• Right size the investment. Capital investments should be made in proportion to the scale of an organization’s goals, as quantified in its capitalization plan. Funding discreet projects (for example: a critical facility repair) can be just as meaningful as larger capital investments. When seeking large-scale change, however, organizations need enough capital to cover the one-time cost of the change, as well as the temporary deficits incurred during the transition period.
• Be flexible with match requirements. Some organizations may be more successful raising flexible capital from their boards and other major donors if the investment is structured as a challenge. For organizations without a strong individual donor base, or those with too many competing priorities, a match requirement can be distracting and may detract from efforts to raise much needed operating support.

• Pair the investment with an advisor. Balance sheet change—especially when it is associated with a plan to grow or adapt programs and operations, merge, or restructure—is not easy, even for the most sophisticated organizations. While sound planning is critical, implementation requires a willingness to make data-informed decisions along the way. Large, multi-year investments can be paired with resources for ongoing coaching and consulting with advisors who bring expertise in change strategy and management, market/donor analysis, and financial modeling and reporting.
• Encourage peer-to-peer learning. Many grantees benefit from having a safe space to discuss their business and capitalization challenges with organizations that are grappling with similar situations. To ensure grantees can prioritize this, consider setting aside grant funding for convenings and less formal one-on-one discussions.
• Invite ongoing dialogue. Encourage grantees to openly discuss their capitalization progress and challenges with you. Set the tone that these conversations are not an exercise in compliance but a forum for exploration and problem solving.
• Be patient! Capitalizing organizations is a long-term, often risky endeavor. Grantmakers should be aware that some investments may not achieve their desired results in the time expected, if ever. Economic downturns, leadership change and staff turnover—on the funder or grantee side—can all have tremendous impact on grant outcomes. Patience is essential when assessing outcomes of a long-term strategy.

Capital grantmaking isn’t easy. Likewise, fundraising for flexible capital presents its own set of challenges for nonprofits. By sharing the lessons learned from Kresge’s experience, our hope is that capital grantmakers and grantseekers are better prepared to navigate capitalization strategies for long-term financial health. For more in-depth advice, check out NFF’s full set of recommendations for funders and nonprofits.