The Unrestricted Funding Dilemma: Advantages and Challenges to General Support Grants

Tuesday, October 20, 2020 - 9:30 am
Birger Stamperdahl

Earlier this year, the Council on Foundations issued a COVID-19 Call to Action to its community of domestic and international funders, asking foundations to provide unrestricted funding to grantee organizations during the COVID-19 pandemic. This call to action prompted a timely discussion with several of Give2Asia’s funding partners about the trade-offs of offering unrestricted funding generally. We continue to welcome these conversations and encourage funders and other intermediaries to consider whether general support grantmaking needs renewed focus as a best practice.

Choosing the Right Approach to Grantmaking

At the risk of over-generalizing, philanthropic grants largely divide into two groups: 1) project-specific funding for activities, which in many cases align with a foundation’s goals; and 2) general support funding to be used at the discretion of the grant recipient.

These two approaches create very different relationships between a foundation and grantee. For project-based grants, foundations tend to view recipient groups as contractors who implement projects. In contrast, general support grants invest in the overall organization and don’t tie the funds to specific outcomes.

General support funding is critically needed, especially at this time when nonprofits are struggling to keep the lights on due to COVID-19. These grants can invest in leadership, business planning, and priority programs chosen by the grant recipient. Of course, project funding and unrestricted funding are not mutually exclusive. It is common for foundations to give limited general operational support in addition to project-based grants.

Challenges with General Support Grants

In conversations with our donors, we often hear challenges to the idea of unrestricted grantmaking. This tension often arises from a (perceived) mismatch between the goals of donors and the needs or preferences of many nonprofit organizations. Here are some of the more common challenges:

  1. The funder needs to show impact: Many foundations and other types of funders seek to aggregate the impact of all their grantmaking in order to report on their own results to their community and board. This would seem to require project-based funding that ties grants to specific projects and outcome measures. The results of project-specific grant reporting can include data required to help foundations improve future funding decisions, marketing content that corporate foundations use to demonstrate their good work in communities, and metrics that feed into larger initiatives, such as the United Nation’s Sustainable Development Goals (SDGs).
  2. The foundation’s needs to control risk: We like to think of philanthropy as an area where risk-taking is commonplace. However, this is not always the case. In our work with corporate foundations, for example, risk mitigation is an important part of the overall grants program. Corporations and their foundations have many stakeholders, such as the company leadership, employees, shareholders, and customers. It is not just corporate foundations that have to mitigate risk for their stakeholders. We see it in many places. Project-based funding by individual donors and family foundations also controls the use of funds. While this takes some of the flexibility away from the recipient, it is used to reduce perceived risk for donors.
  3. Government regulations: In many countries in Asia, project-based funding is the norm. For example, the 2017 Overseas NGO Law in Chinarequires project-based funding because of the government approval process for proposed grants. Every project needs to be approved, monitored, and reported on as part of China’s compliance requirements. In Vietnam, Give2Asia submits project-based activity reports to a government agency every six months. In the United States, the Expenditure Responsibility guidelines for project-based funding, not general support funding, can be the most practical way to support smaller or newer charitable entities overseas.
  4. Lack of trust: Many of the comments we hear from donors boil down to a lack of trust between the donor and the recipient organization’s leadership. This may be the result of limited direct contact between the donor and the recipient organization, or a lack of transparency on the usage of funds from the grant recipient.

Counterpoints to These Challenges

We also have heard counterpoints to these and other challenges to general support funding. In some cases, these counterpoints would require a significant shift in how the funder thinks about their own work. Rather than thinking of themselves as “project funders,” foundations would need to start thinking of themselves as “leadership funders” who decide on grants because they believe in an organization’s leadership team or believe the organization itself has the possibility of being a leader in its work. This mindset requires a change not just in foundation staff leadership but also in foundation boards.

Here are a few ways we see foundations adopting this mindset:

  1. Finding shared paths to impact: Instead of funding projects that tie grants to specific impact metrics, some funders approach grantmaking as if they were venture capitalists. They look for a leadership team they believe in, an organization’s goal that is aligned with their own, and they invest in the organization itself so it can make its own funding priorities to do what it does best. The Southeast Asia Foundationin Seattle, for example, makes general support and project-specific grants by ranking a potential recipient on three criteria: 1) the quality of its management team; 2) community buy-in for its projects; and 3) a clear roadmap to sustainability. The foundation assesses its own impact by looking at the total impact that each of its grantees generate as an organization.
  2. Separating project-based funding from risk mitigation: While project-based funding can be a way to mitigate risk, there are other methods. At Give2Asia, our due diligence process usually exists separate from the exercise of project scoping. In some cases, foundations enter into more general agreements with recipients that ban the use of funds for certain activities rather than restricting their use to a specific project. This gives grant recipients more control to use the grants as needed while clearly defining boundaries that are acceptable to the funder.
  3. Fully handing project definition to recipients: Another approach is to keep a project-based funding model while giving full control over project definition to grant recipients. While this is often the intent with project-based funding, foundations and other funders often underestimate the narrow range of work their guidelines allow for. Truly handing project scoping to the grantee can help avoid the problems that arise when funders are overly prescriptive in their objectives. By allowing grantees to set objectives and metrics, funders maintain accountability while letting grantees prioritize the needs of the communities they were created to serve.
  4. Trust-building between funders and nonprofit leaders: All of the above strategies depend on a high level of trust. Unfortunately, these relationships are difficult to build when individuals are separated by large distances. Mutual confidence can be developed at the interpersonal level, such as through regular video check-ins or site visits. It can also be cultivated through systems, such as working with trusted intermediaries and membership networks.

Making Changes Where We Can

Assuming funding is tied to strong leadership and groups with good objectives, general support can strengthen whole communities and the overall nonprofit ecosystem. Leaders are allowed to innovate, deliver consistent services, and invest where needed. Unrestricted funding can also lead to longer-term engagements between funders and grantees that are less based on projects and more based on a shared mission.

Evaluating a move to unrestricted funding starts with re-examining one’s own goals. A health-focused foundation, for example, can ask whether its goal is to eradicate a specific disease today, or to create the infrastructure and capacity for communities to prevent current and future diseases. The answer to that question may lead to different choices around general support funding.

For ourselves at Give2Asia, the question of restricted versus general funding is very much determined by the preferences of our donors. To fulfill our mission to increase philanthropic funding to communities in Asia, we build local relationships with grant recipients and try to educate donors on the real needs of our local partners where possible. But we also must respect our funders’ varying preferences for their charitable gifts. Thus, we have not yet joined the many esteemed foundations who have signed the Council on Foundation’s Call to Action.

We encourage our donors to consider seeing themselves less as “project funders” and more as “leadership funders,” striving to continually increase resources that meet the real and changing needs of communities. For those who wish to explore more unrestricted funding, we hope that the Council’s pledge increases foundations’ interest in general support of trustworthy organizations and investing in strong local leadership.

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