Funding Diversification is a Tradeoff

Great post!

I think one other major complications of funder diversification is managing multiple competing interests. So in some ways it’s great to have more funders so you aren’t reliant on them to agree with all of your strategic choices but you can just do the most impactful thing and get one of the funders to back it but sometimes that also works in the opposite way with funding diversity. I think this is less the case for AIM as you are more established, but in the early stages of funding diversification there aren’t actually that many EAA funders to chose from, people often argue that its a higher counterfactual to have non EA funders but on the flip side you then have to manage those funders priorities and if they are less EA they often want you to invest more in a less impactful thing in order to fund you. So being that the funding options are so small in the EAA movement I’m not sure that funder diversification nets out as positive for all organisations or that we should all strive for it.

<< Needing more than one funder provides a healthy sanity check on if the project is really the best use of funds>> Also to this point… doesn’t it heavily depend on the funder? If the funder isn’t impact driven I’m not sure it’s a great sign they want to fund you?

Additionally less important but it also takes up much more time to report and communicate with non EA donors. For us for example they don’t care or understand ICAPs (fair enough) so then you have to spend time translating your work to what they care about. I think this is fine but it’s a bit more of a time sink when they care about things that you don’t actually think are important to track in regards to impact eg vanity metrics.

I do however firmly agree with this your point on increasing funding in itself not being an aspirational goal and wish more organisations would be firmer with capping their funding goals if they will likely decrease their impact per dollar significantly consistently in the future, particularly in contrast to other organisations. So I agree with the conclusion but perhaps not that funding diversification is a prerequisite for it. Is it not possible that organisations can just reject funding over a certain amount regardless of funding diversification?

<<Would AIM produce more than one times our current impact at four times our budget? Sure, almost definitely, but it would be way less than four times the impact, and I think this is true for many organizations. Thus AIM made a deliberate call to stay at a smaller level of scale than the highest amounts offered to us.>>

Couldn't you just take (some of) the funding and regrant?

(This could be discretionary rather than through application processes and presumably wouldn't take you much time, given that you have lots of informed views about different orgs' needs and potential anyway. E.g. could mostly be to incubatees. Although I imagine maybe there are some dynamics you'd prefer to avoid there in terms of your relationship with them.)

I think ultimately funding diversification feels like a really useful signal that your project looks good by a somewhat independent assessment from multiple funders. Particularly if you are working in a space without a charity evaluator or clear feedback loops, I think you should not aim for the maximum amount of money you can get, but instead the sweet spot of where you produce the most impact per dollar, at the highest scale that is well above the counterfactual bar as would be accessed by independent but informed people (e.g., four separate funders).

I think there may be a useful broader principle here, but it may imply a sweet spot closer to the ~median counterfactual funder bar rather than one "well above" multiple independent informed evaluator bars.^[1]

In my model, funders estimate the impact of each charity, and set a funding bar based on the results of their impact assessments across all candidate charities. Each funder's individual estimate for any charity has an measurement error term. However, a funder's estimation errors are also reflected in its funding bar (because the bar is built on the funder's estimates). Thus, if the funder is 50% too optimistic on average, its funding bar will be likewise inflated 50%. In other words, there's no reason to assume by default that the funder is bullish or bearish on a randomly-selected charity. In most cases, funders should be at least roughly as likely to be right about the charity in question as the charity to whom they would counterfactually donate.

If all the funders are reasonably competent, the best measure of a  charity's cost-effectiveness is likely to be some sort of median/mean/other measure of central tendency of funder evaluations. In this model, seeking to be "above the bar of what [the charity's] most permissive funder would accept" makes a lot of sense. There's a high risk that the charity's most permissive funder is permissive because of a measurement error (vs. because all the other funders measured wrong).

On the other hand, if most of the charity's funders would fund at a higher spending level, that is at least some evidence that the marginal funding would be cost-effective. Charities likely have better information on their impact, including the marginal impact from additional funding, than funders possess. But the funders probably have a better sense of the counterfactual value of funding.^[2] As the number of funders who think additional marginal funding for the charity would be above-bar increases, the odds that the charity is overstating the effectiveness of other charities relative to itself should increase.

In the end, given certain assumptions about funders, a guideline of "stop growing when a ~majority of funders would not find your growth cost-effective relative to the bar" may minimize the risk of various types of errors here. That strikes me as a moderately pro-growth perspective in comparison to a goal of remaining "well above the counterfactual bar."

1. ^{^}

   This analysis is based on an assumption that funders are pretty good at what they do. 

2. ^{^}

   This is likely to vary by cause area -- for example, the counterfactual value of providing additional monies to GiveWell top charities is relatively easier to understand.

Thanks for sharing this interesting and (at least to me) novel argument. It strikes me as a way of mitigating Winner's Curse issues.