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To Serve Youth, Clark Invests in Organizations’ Capacity

By Tom Watson on March 25, 2008No Comment

Investing in Impact by Kate Golden

1.)  Can you begin by telling our readers a little bit about the Edna McConnell Clark Foundation? 

The Edna McConnell Clark Foundation currently focuses on advancing opportunities for low-income youth (ages 9-24) in the United States.  We believe that large long-term investments in nonprofit organizations with proven outcomes and potential for growth are among the most efficient and effective ways to meet the urgent unmet needs of disadvantaged young people.

Our goal is to increase significantly the number of low-income young people (ages 9 to 24) benefiting from proven services, and to help develop stronger, sustainable organizations that can serve more youth at greater scale.

The Foundation conducts extensive due diligence before making investments. Our unrestricted grants extend over many years, frequently support operating expenses, and help grantees build organizational capacity so they can improve program quality, increase the number of young people they serve, and eventually become financially sustainable.

2.)  An article in The New York Times questioned the benefits of short-term, project-based foundation funding, citing recent studies by the Center for Effective Philanthropy, Grantmakers for Effective Organizations, and CompassPoint Nonprofit Services. Your Foundation was mentioned as one who has been touting the advantages of general operating funding for the past several years. How long have you provided operating support to your grant recipients, and why do you think this type of funding is so valuable? Are there challenges in granting this type of support?      

We consider each of our grants to be an investment against an organization’s carefully crafted business plan.  This strategy of helping grantees build their organizational capacity and expand their programs began in 2000.  Our investments are unrestricted and typically range from $3-5 million over several years. 

Every grantee’s business plan is crafted by the organization itself, so it reflects the organization’s goals and plans rather than the wishes of a funder.  (We do provide an initial grant that offsets the expense to the organization of undergoing the business planning process and covers the costs of business strategy consultants and other experts.)  This plan outlines the various steps the organization will take to bolster its infrastructure and operations, improve the quality of its programs, and, if appropriate, undertake smart growth.  Our investments are aimed at enabling organizations to realize their wishes and goals, since we believe and trust they are in the best position to know what will make a positive impact on the lives of youth in their communities.

For us, the biggest challenge is finding the right organizations which are able to take the greatest advantage of our investment approach.  We look at an organization’s product that is, its services to youth — as well as the evidence for those services’ efficacy, the organization’s financial strength, leadership and board, operational viability and potential for growth, and compatibility with our style of grantmaking, among other things.

3.)  Do you think funders do their recipients a disservice if they grant solely project-based funding?

We are not in a position to speak about other funders, since each has its own goals and approach.  For Clark, it’s a strategic choice.  Our objective is to help build high-performing, sustainable youth-serving organizations that can deliver proven programs ensuring that large numbers of low- income youth make a successful transition to adulthood.  To reach a large, sustainable scale, an organization must have strong internal operations, including evaluation and performance measurement capabilities, and the financial resources necessary to expand its services.  So our unrestricted grants allow organizations to direct resources where they’re needed most.  Project-based funding wouldn’t do the job in most cases. It’s important to note, however, that all our investments, even though unrestricted, are made against performance metrics outlined in the grantees’ business plans.  Our payments are contingent on grantees’ achieving key milestones that their boards have committed to as part of the structure of our investments. 

Clara Miller, president of the Nonprofit Finance Fund, presents an interesting perspective on this issue in her article, Linking Mission and Money.  She illustrates how different funding and capitalization strategies effect nonprofits and makes the point that sometimes project-based funding is appropriate — although funders need to understand the differences and align their reporting requests and expectations accordingly.

4.)  Many funders are increasingly demanding tangible, measurable results for their dollars.  Is it more difficult to evaluate the impact of an unrestricted operating grant?  How do you do so? 

All our grantees’ business plans include a set of year-end and overall milestones for which they (and their boards) hold themselves accountable.  These milestones are determined by the organization itself; they are not directed or prescribed by Clark.  Moreover, these milestones enable an organization’s leadership and board, as well as its funders and supporters, to see how successfully it is implementing its business plan.  Typically, these milestones include targets for youth served and revenue growth, and initiatives to maintain or improve program quality.  Since our grants are investments against such business plans, it’s only natural that we evaluate a grantee’s success in these terms.  We also work with an organization to monitor the ongoing quality of the services and programs it provides to youth, to ensure they remain true to their model.

5.)  The Paying for Overhead study conducted by the Center on Philanthropy found that 2/3 of the nonprofits surveyed lacked adequate funding for their operating expenses.  One would assume that nonprofits would like to see additional foundations broaden their grant-making strategies to include general operating support. What advice would you give those foundations that are considering it?

Our experience over the last several years has taught us a few important lessons.  First, the business planning process itself has been transformational for grantees.  Thus we encourage funders to support comprehensive business plans that are truly “owned” by a grantee’s management team and board. 

Second, we’ve also found that it’s usually hard, and takes much longer than anticipated, for organizations to raise the unrestricted funds to implement their business plans.  However large, Clark’s investment alone is not enough.  For many reasons and factors, this has been the case for nearly all our grantees. 

The Center for Effective Philanthropy (click here to view PDF) found that the median size of 163 large foundations’ grants was $50,000 — hardly enough to support in a meaningful way organizational growth and infrastructure needs, if this is a donor’s goal. So whatever you’re funding, think seriously about the best way you can help a grantee achieve solid and lasting results. 

Our final advice to other funders interested in learning from Clark’s example is to look for opportunities to pool resources with other donors.  With perhaps the exception of a select few, no single funder can provide all the growth capital an organization needs.  It’s imperative to work together not just with other foundations, but other funders as well if you want to help organizations reach their full potential.

It’s partly to address this situation that Clark has launched a pilot to test a new form of grantmaking. In partnership with three of our most successful grantees, we are raising up-front all the growth capital these organizations need from groups of like-minded investors.  What I believe is unique about this pilot is that all the funders are uniting in agreement to the same terms and conditions for their investments, as well as reporting requirements and grant milestones.  What’s also unique is that all three organizations’ business plans outline how they will achieve financial sustainability once they reach their new, larger scale without resorting to additional growth capital down the road to sustain that scale.  If these plans are successful, they will provide a clear and responsible “exit strategy” for the growth-capital investors.

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