How Philanthropic Stress Tests Can Help Funders Evaluate Organizations

Philanthropic stress test
Wednesday, June 11, 2014

In the world of fundraising, it sometimes seems money goes more to success, rather than need.   Some of the most pronounced examples of this can be seen in the fundraising prowess of top tier universities where schools accomplish multi-billion dollar fundraising campaigns on top of existing endowments that reach into the tens of billions. 

There are, of course, several factors that lean funders towards such institutions, one of them being an increased confidence that the funds will be used wisely and another being the assurance of longevity. Funders are frequently concerned about the capacity and sustainability of organizations that have significant need. 

Fortunately, for those interested in deep social impact, need is a powerful communicator.  However, when being responsive to need, it’s entirely appropriate for – even incumbent upon - funders to assess a potential grantee’s capabilities.  This is even more so in cases of corporate giving, where monies are ultimately linked back to shareholders. 

Before making any large gift to a need-oriented organization, funders may have questions such as:

  • Is the organization so focused on seeking continuing funds that it is distracted from its core mission?
  • Will my investment turn into lost dollars if the organization shuts down due to lack of government subsidies?
  • Will the grantee be able to retain its staffing without an influx of dollars from other funders? 

How does one get answers to these questions?

Following the banking crisis of 2008, the Federal Reserve and other similar oversight organizations in Europe, conducted stress tests on banks to determine their sustainability.  The concept of conducting this type of assessment, a very focused due diligence, can also be applied to prospective grantees.

Such philanthropic stress tests involve an assessment of available funds and accounting, a review of staffing and structure, and an evaluation of the organization’s ongoing sustainability.  While there may be no impetus for conducting this type of review for a small philanthropic expenditure, more strategic investments directed at creating impact require confidence that the recipient is capable of making a difference and sustaining its position and influence.

Stress test results don’t necessarily provide a yes or no answer as to whether or not funding is given, but they are helpful in determining whether an investment should be made.  For example, at The Philanthropic Initiative, we see clients across the individual-foundation-corporation spectrum who are interested in making capacity building grants. The stress test can be a helpful tool in identifying the operating needs of a nonprofit.  In addition, stress test analyses may lead to further due diligence, uncovering additional needs or helping to set the terms of a gift and how fund use will be evaluated.  

In the end, it’s about giving to an organization that can use philanthropic dollars both wisely and effectively.  Stress tests are a mechanism for funders to increase the likelihood that their money will go to both success and need.   

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