Supporting nonprofit startups in a difficult economy

In today’s difficult economic climate, the urgent needs of communities have dramatically increased, placing an increasing burden on existing nonprofits.  In the U.S., the number of nonprofits has grown at twice the rate as for-profit organizations. There are myriad reasons to start a nonprofit.

For the purposes of this article, a startup refers to a nonprofit organization that has been in formal operation a short time and does not have an established infrastructure and track record.

Nonprofit startups can provide new services that arise from a previously unmet need, offer a new approach to solving community problems, provide a new kind of institution or program, expand or replicate an existing model or program or connect organizations within a field via a network or “center.”

Risks and rewards

Given the tight economy and limited funding resources of foundations and corporate grant-makers, it is more difficult than ever for nonprofit startups to secure financial support. While funders recognize that many startups offer innovative and impactful solutions to community problems in both established and new fields of interest, the due diligence required of startups entails special concerns and potential risks.

While risk is a normal part of business, in the business of philanthropy the decision to fund a startup poses more risk than other forms of grant-making. New nonprofits often lack established policies and procedures, have leaders and staff that may be visionaries and energetic but have limited management and practical experience, have a small board of directors, and often do not have the usual documentation such as outside financial audits to demonstrate their operational health.

Following are steps grant-makers can take to evaluate a nonprofit startup and manage the inherent risks:
Due diligence. Conduct the same initial due diligence a private investor would for a for-profit business. Does the new organization have a real purpose? What is the problem or opportunity to be addressed and is the need substantiated? Is the organization providing services that aren’t offered by other organizations? Research the experience of comparable startups and obtain feedback from their constituents. National grant-makers may want to check to see if the organization has local or government funding, a sign of viability.

Similar missions. Consider startups with missions closely aligned with your philanthropic goals and interests. As a grant-maker, your experience and expertise in a particular field of interest bring added value as the organization is built and shaped. In addition, the demands of supporting a startup should be consistent with your own organization’s operating style, culture and willingness to tolerate risk.

Focus on leadership. While visionary leadership is essential to a nonprofit startup’s success, the management skills of the prospective leaders and staff demand careful scrutiny and consideration. “Who” you fund may be just as important as “what” you fund.

Supplemental assessment tool. For practical information on conducting a risk assessment after the initial due diligence process, see “Tool for Assessing Startup Organizations: A Due Diligence Supplement for Grantmakers,” available from La Piana Associates (www.lapiana.org) and developed with support from the David and Lucile Packard Foundation.   This tool is designed to assess the level and types of risk the grant entails by helping grant-makers think through the nonprofit’s strengths and weaknesses.

Test the waters. Make an initial financial grant for one to two years, giving the startup a chance to document success.

Finding a balance

Once the need for your support has been substantiated, a funder will determine what kind and how much support to give. Ask yourself if there is a good fit between the knowledge and financial resources you as a funder are willing to commit and the overall resources required to make a meaningful impact on the startup’s chances of success. How deeply do you want to be engaged in the planning and development of the organization’s mission and structure, if at all?

Many grant-makers struggle to find a balance between actively engaging in the planning process and dominating it. A funder with too much influence on decision-making may hinder a new organization’s need for independence.  An organization may not succeed in the long run if it doesn’t have control over decisions from the beginning.

Following are ways grant-makers can provide support besides direct funding of programs and services or involvement in the development process:
Technical assistance grants. Grant-makers can provide funding to startups for management consultants to help build the capacity of an organization and its entire leadership team. Technical assistance may include help with organizational development, management, strategic planning, fundraising, communications, financial management, legal services, technology and board training and development.

Ideally, the grantee should have authority over the selection and management of the technical assistance provider to “own” the project and its expectations and outcomes. However, grant-makers can be a great source on the best providers in the market based on experience and knowledge of the industry and field of interest.

Open the right doors. Introduce startups to your own networks for access to advice, support and visibility. Invite a director of a startup to a regular monthly policy meeting for organizations working in that field.

Fund a capacity-building training program for startup groups. In one case, a large national funder brought its nonprofit educational grantees together regularly to work and hear from leaders in the field.

Invest in leadership. Help build leadership capacity by sponsoring activities that build skills or offer networking opportunities. Rather than one-time workshops, design leadership initiatives that will have a long-term impact on the organization, such as executive coaching, which provides ongoing support specific to the challenges and priorities that a particular executive is facing at his or her new organization.

Planning your exit

Finally, as a grant-maker to a nonprofit startup, planning your exit strategy is equally important. While it is exciting to support a new organization from the beginning at a significant level, it is essential nonprofits develop a diversified secure base of funding, one that does not rely on one funder’s support alone.

It is also essential grant-makers develop a strategy to bring their investment of money, time, development expertise and other support to a level that they can sustain indefinitely. Recognize however that the economic downturn has resulted in many organizations needing more time to move toward independence than originally planned.

When the new organization’s infrastructure is in place and on more secure financial footing, sharing the ownership becomes extremely important, as stepping back may help make room for others to step in and sets a new organization on a path toward independence, the real goal of your work with a nonprofit startup.