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How funders can assess nonprofit effectiveness for investment

3 people sitting in a meetingAs with any investment, the decision to support a nonprofit should be grounded in empirical evidence. An organization is worthy of investment if it’s having a concrete, positive impact in the community and it’s run well enough to maintain operations sustainably. Exceptions include startups that have exciting potential but may not be far enough along in their lifecycles to show trackable, long-term impact or demonstrate sustainability. Organizations launched by, from, and in the communities being served are often the most deserving of investment interest and consideration.

There are many ways to determine the effectiveness of nonprofits (in terms of their impact and internal capacities), from reviewing their tax documents to observing their work directly. Funders should be well acquainted with a nonprofit’s leadership team, its strategic plan and the KPIs it uses to track progress toward its goals, and its culture. Lived experience among staff and board leadership is also an important ingredient in the mix. Instead of viewing support for effective nonprofits as mere charity, funders should view it as an investment in the communities and mission areas they care about. When they focus on culture, capacities, and impact, they’ll ensure that their investments are being put to good use.

Learn all you can about the organization’s culture

While donors can learn a lot from tax documents (such as the Form 990, public documents that the IRS and nonprofits are required to share with anyone who asks), impact reports, and the media, there’s no substitute for in-person engagement with an organization. Funders should get to know the teams they’re investing in, which means they need access to meetings in person or via Zoom, site visits, and other interactions that can illuminate how nonprofit employees communicate and collaborate with one another, address disputes, execute their mission, interact with stakeholders, and so on.

According to a survey conducted by Glassdoor, more than three-quarters of workers say they consider a company’s culture before applying for a job there. The nonprofit workforce is no different—an unhealthy organizational culture can have a significant impact on morale, productivity, turnover, and other issues. Donors should also be on the lookout for management and leadership skills, relevant expertise (including business experience), and diversity at the staff and board level. When nonprofit leaders have lived experiences that help them understand the challenges communities face, they won’t just have a perspective that many others lack—their communities will also feel authentically represented.

Although it’s essential for nonprofit leaders to prioritize results and push employees to do their best work every day, they should also show genuine concern for their colleagues, welcome contributions from diverse voices, and establish norms of open communication to make sure their teams feel heard and appreciated.

Focus on nonprofits’ capacities

Before investing in a nonprofit, funders need to have a thorough understanding of the organization’s capacities—an assessment which should encompass everything from financial management to personnel to the execution of programs. There’s a reason more and more funders are providing capacity-building support to their nonprofit partners: When organizations are capable of deploying resources more efficiently, tracking performance, managing personnel, and maintaining a healthy culture, they’ll be more effective and less susceptible to risk.

Funders should be especially interested in security and stability on nonprofit leadership teams, diversity, and expertise among the staff, the relationship between staff and leadership, how sustainably the organization has been able to scale, the organization’s financial health, and how long it has been in operation. Considering many of the problems endemic to the sector, from a lack of revenue to insufficient cash reserves, it’s no wonder that funders increasingly are creating or funding programs that hire third-party experts to provide grantees with training in capacity building. Many funders also offer assistance to help nonprofits improve their internal capacities before they become eligible for funding, or after funding as part of their ongoing partnership.

When funders are well acquainted with the nonprofits they want to support—from the people running the programs to the infrastructure of support for their staff to the execution of programs—they can confirm that they’re investing in strong and sustainable organizations that will be capable of scaling impact for many years to come.

Outcomes over outputs

Capacity building, culture, and the other elements funders examine when deciding which organizations to fund ultimately converge on one overarching priority: impact. In assessing impact, funders have to go beyond superficial indicators of success and determine whether organizations are making a measurable difference in the communities they serve. Given that a majority of nonprofits say they have no consistent framework for measuring and reporting impact, this is clearly a major issue in the sector that funders can’t afford to ignore.

First, funders have to understand the mission and goals of a nonprofit, which will help them determine if they’re aligned with that mission, whether those goals are being achieved, and, when applicable, the nonprofit’s theory of change and how it’s executing that strategy. Next, funders should prioritize outcomes over outputs. The number of textbooks a nonprofit delivers to a school and the number of hours volunteers spend mentoring or teaching students are outputs, while potential outcomes would be the percentage of students who got on the honor roll, graduated, went to college, helped others in their communities, etc. Nonprofits should be able to provide information about the outcomes they’ve achieved, as well as tell a compelling story about the cohesion between these outcomes and their overall mission.

When funders invest in a nonprofit, they have one central goal: to help an effective organization scale its impact. By analyzing the culture, capacities, and outcomes of potential partners, they will simultaneously hold nonprofits accountable and direct their investments toward organizations that are doing the most good in their communities.

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