Before Your Foundation Deploys Non-Grant Capital, Ask if You’re Ready

There's growing interest among philanthropic donors in moving beyond grants.

Testing new capital mixes that include recoverable grants, loans, guarantees, outcomes based funding and more is taking on a life of its own.

I think that's a positive development! But there's a question that should come before deciding which instrument to use: Is the funder itself ready to deploy?

A lesson from the corporate side

I advised a global corporation that wanted to leverage its sustainability investments alongside capital from other corporations, governments and philanthropies.

There was no shortage of potential opportunity. We identified and prioritized nearly 50 high-impact projects across areas including water, regenerative agriculture, social impact and innovation. I initiated discussions with 33 prospective co-investors and worked with regional teams across East Africa, India, Mexico and South America to explore new funding mechanisms and develop an impact-fund strategy.

Ultimately, leadership paused development of the fund.

Why?

The internal systems weren't sufficiently ready for the more complex financing structure. The organization returned to traditional grantmaking.

That experience reinforced something I think is equally relevant to foundations: Having capital available does not necessarily mean you're ready to deploy it differently.

Funders must ask themselves questions like:

How will financial risk be assessed? What happens if capital isn't repaid? How will the foundation account for it? Does the Board understand the risk? Does the investment committee need to participate? Who manages the relationship? How will financial and impact performance be evaluated? What happens when an organization needs restructuring rather than another grant?

And perhaps most importantly: Is the foundation comfortable accepting the risk necessary for the instrument to actually be catalytic?

Instead of being stuck on these questions, donors should be asking about what funding problems grantees and partners are experiencing that the current grantmaking cannot adequately solve.

Once the problem is clear, the instrument becomes easier to evaluate.

Can the organization responsibly use this form of capital?

And:

Can we responsibly provide it?

If either answer is no, that doesn't necessarily mean abandoning the idea. It may mean starting smaller. Pilot one recoverable grant. Guarantee a portion of a transaction. Partner with an intermediary. Co-invest alongside someone with more experience. Create a small allocation for experimentation. Build internal knowledge before building a new fund.

Sometimes the right answer will be a grant. Sometimes it won't. Sometimes the most useful role philanthropy can play is absorbing risk so someone else's capital can participate.And sometimes the answer should be: we aren't ready yet.

That's still good capital strategy.

The objective isn't to deploy more non-grant capital. It's to deploy the right capital, at the right time, for the right need.

Wondering where you stand in this series of questions? Take this Non-Grant Readiness Assessment and get personalized recommendations on next steps.