Funding Diversification is a Tradeoff

By Joey 🔸 @ 2024-11-04T12:39 (+62)

TL;DR: I think funding diversification is an easy thing to pitch as positive, but it comes with real tradeoffs to growth and time spent fundraising. In this post, I go into why I think these trades are not obvious but still end up thinking they are worth making. Mainly because I think it's good practice not to aim for the maximum amount of money you can get, but instead the sweet spot of where you produce the most impact per dollar.

Funding Diversification is Good

I think the first but pretty uncontroversial point is that both funders and charities prefer having funding diversification for practical and psychological reasons. I suspect other posts have and will continue to cover this point well, so I will not really dive into it deeper here.

Funding Diversification has Heavy Tradeoffs

Broadly, I think aiming for more diversification is virtually never free and requires at least one of two tradeoffs:

More Time Spent Fundraising

There is always going to be the most sympathetic donor, and that donor will be the easiest to fundraise from. Absent the donor setting hard caps on the percentage fundraised, typically it will be quicker and less stressful to ask that donor (who often is already giving a large percentage of your budget) to give a little more. Any donor offering 50%+ of your budget is often one of the people who most believes in your project and thus has the lowest bar for supporting it.

Logistically, there are also time additions even if there are two identically interested and sympathetic donors. A funder who has already supported you has already evaluated you, understands the work, and operationally knows how to make a donation to you; the size of support changes a relatively small amount of this. Similarly, on the charity side, by its very design, getting funding from, e.g., two funders instead of one requires two relationships to manage, two applications to fill out, and two different aspects of your work to highlight and present. Even assuming you have a 100% success rate on fundraising, this takes double the time.

Less Total Scale

There is always going to be a donor with the lowest bar, often this is a donor already supporting you significantly. For example, let's do a theoretical case with AIM (Ambitious Impact, the organization I CEO). Let’s say our budget is $2 million today and we have four donors each who think AIM is a good bet at $2 million a year. At this level of scale, it's easy to diversify, but say AIM wants to scale to $4 million a year; at this level of scale, only two donors think AIM is worth it. If those two donors are big enough, they might fully fund AIM anyway, but we have traded donor diversity for scale. Maybe one of those donors is willing to fund AIM at $8 million a year, and again we would be faced with the tradeoff of donor diversity versus maximum scale.

In any group of funders, one is going to have the highest appetite for funding and/or the lowest bar for AIM to clear. Often this is the largest funder to the organization and, fairly often, a large funder in the space. This natural dynamic can lead organizations that scale quickly to be extremely undiversified, and indeed, I would bet that the most diversified organizations are often ones that run into non-dollar scaling limitations, as that stops them at a lower level of scale than the limit their most permissive donor would allow.

Why I Still Think Diversification is Worth It Despite These Tradeoffs

Although these costs are both non-trivial, I think they are majorly mitigated by an action that both benefits funding diversity and many other factors. I think EA organizations should aim to be way above the bar of what your most permissive funder would accept. I think this is an important habit to have in a world with counterfactuals and imperfect information. One funder thinking your project is worth $4 million does not mean it is, in fact, the best use of that money. Needing more than one funder provides a healthy sanity check on if the project is really the best use of funds, particularly if your top funder is time-poor or otherwise has imperfect information about your project.

Concrete Example of AIM: If AIM was aiming for an $8 million budget, I do not see a way of doing that without one or two funders providing 80%+ of our budget. I also expect we would need about two full-time equivalent (FTE) fundraisers. At a $2 million budget, though, it's pretty easy to cap the maximum contribution at 25% because we pass the bar of so many funders. It also significantly reduces the time spent fundraising (AIM spends about 0.1 FTE a year on operations fundraising). More importantly, that $6 million that AIM could have used is instead spent on other organizations (e.g., it could fully support GWWC, ACE, HLI, Probability good and AAC). 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. This is somewhat rare in the charity sector but I don’t think it should be within EA.

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).

P.s. If you found this interesting, you may want to check out Ambitious Impact's Impactful Grantmaking Training Program or our Charity Start-Up Incubation Program.