Seven Signs a Funder Is Ready to Deploy Non-Grant Capital
Increasingly philanthropic organizations are exploring non-grant mechanisms to amplify their own grant funding approach. But that doesn't mean this approach is right for every donor.
[Wondering what I mean by "non-grant capital" ? See the explanation here]
So how does a donor know whether it's truly ready?
Here are seven signs to guide you towards "yes".
1. Your grantee partners need more than grants
Some organizations need flexible grant funding. Others may have a business model that requires grant funding to move a project or program into a more sustainable position, at which point there may be future funding to support recyclable capital. Not every organization would be able to take on non-grant capital, but even NGOs may ask for combination funding (grant, non-grant) to help support their future goals.
If your partners are beginning to need capital for geographic replication, working capital, infrastructure, equipment, or other growth needs, grants may no longer be the only appropriate tool.
2. You want to help build a sustainable funding model, and limit partners' reliability on donors
Grants are best suited to fund charitable causes that would never be funded without contributions of others. Grants also fund experimentation, capacity building, technical assistance, or work that government or the private sector would never fund.
But grants can't fund forever. And maybe they shouldn't.
Other capital types can help fund alongside grants to create a more sustainable model that isn't forever reliant on grant funding. For example, a recoverable grant might help bridge a temporary funding gap. A low-interest loan could finance expansion. A guarantee might reduce risk enough to bring another investor into a transaction. If a funder wants to help reduce dependency, non-grant capital approaches may be a consideration.
3. You are seeing funding gaps that traditional investors will not fill
Many high-impact organizations need funding that could easily fit between philanthropy and impact investment. They may have a recurring revenue model, or a method of recouping a certain percentage of resources typically provided by funding, that could be paid back in some format to a lender. They may still be considered too early in their model testing, too small, too risky or just not traditional enough for typical lenders or impact investors. This is a great opportunity for a philanthropic funder to close that gap and play a more catalytic role.
4. Your program officers are starting to have similar conversations as those who work on impact investing
In some quick research of more than 1,000 foundations, only 381 of them showed any instance of having provided non-grant capital to their partners. 115 of these have done so more than once. Even among these 115 foundations, most non-grant transactions are made in a completely separate side of the organization than that which manages philanthropic grant making.
To effectively make investments that meet partners where they are, these two sides of a donor organization must intersect.
If your teams are beginning to discuss how grants, investments, guarantees, recoverable grants, and other forms of capital could work together toward the same impact goals, that is an important sign of readiness.
5. You have partners who could bring additional capital
A foundation does not necessarily need to fund an opportunity alone. Non-grant capital can be particularly powerful when philanthropic funding helps unlock other types of capital from different funders including impact investors, development finance institutions, corporations, family offices, or other funders.
If your foundation has relationships with potential co-funders or co-investors, and your partners could benefit from a diversity of funding partners and capital types, it could be a good time to try something new.
6. You are willing to rethink how you define success
With grants, success is generally measured primarily through certain reported programmatic outcomes. With non-grant capital, impact may be measured differently. Sometimes it may be as social, environmental or economic outcomes coupled with rate of repayment, use of technical assistance, shared learnings, additional funding mobilized, risk abatement, financial sustainability or even diversity in funding.
If this is of interest to you as a donor, you may be ready to test forms of non-grant capital.
7. Leadership is willing to experiment
Perhaps the strongest signal a funder is ready to use non-grant capital is not financial at all.
A donor does not need a fully developed non-grant strategy to begin exploring other types of capital. But leadership does need to be willing to ask different questions, tolerate some uncertainty, and test new approaches.
Starting small can be entirely appropriate. A single transaction that tests new products like a low/zero interest loan, guarantee, or recoverable grant can can provide valuable insight before a donor develops a much larger strategy.
You will always benefit from starting with the questions: what does the recipient actually need, and what type of capital is best suited to that need?
Once those questions are clear, the right funding mechanism becomes much easier to identify.
Happy to be a sounding board if this is a direction you are looking to head. Additionally if you are looking for a more quantitative way to examine readiness? Try the Non-Grant Capital Readiness Assessment and get feedback to your inbox right away.