Funding diversification over time periods: secure future funding vs. short term funding

By Engin Arıkan @ 2024-11-08T15:59 (+16)

Funding diversification is typically presented as more funders funding more organisations or more cause areas. But I think there is another way of thinking about funding diversification: its diversification in terms of time periods. 

As expected, the majority of funding is concentrated on short term funding: organisations ask for funding/donations from funds/donors for their current annual budgets (or the budget for the next year which I also put under “short term”) and funders/donors (if they agree) give them what they ask for. And when these funds are used, organisations ask for a renewal. 

Of course, there is some long term funding. Open Philanthropy has two-year grants (but typically not longer than two) for a number of organisations. But overall, most individual grants in the EA space are typically short term (12-months or less). 

I will argue that this is a problem that results in organisations seeking for more short term funding unnecessarily in order to mitigate their long term funding insecurities which decreases their cost effectiveness in the long run by locking in premature budget growth. 

Why is this happening?

The main reason for this is that organisations just ask for short term funding. Although there is not an official rule for not asking for long term funding, asking for short term funding seems more intuitive since if the organisation needs more funding later on, they can apply for funds in the future. Organisations may also expect that they have better chances to be approved if they apply with more short term plans rather than long term projects. It feels somewhat bad to say “You know what, we are uncertain about our project. We can only see comprehensive results in a few years. So we don’t really have plans for scaling up at this point. In fact, we are busy with the project itself and we don’t even really know how to scale efficiently. So we just want some money to continue working on this for a long time so we will put the money in the bank to be used in three years”. It feels much better to say “This thing we are working on is great. Since it is great, let’s make it bigger. We also have all these great ideas that are ready to go if you give us this money now”. Note that if you are not saying things similar to these, you might need to concede that your project might not be great after all - which sounds bad in a grant application! 

There are additional (irrational) reasons that make organisations apply for more short term funding: many organisations decide to scale up early because it feels more powerful to have more people around and have more money at the bank (even if it will be used in a year). It also has to do with feeling “more secure” as well. If you achieve a significant annual budget, it feels more secure even if it needs to be renewed annually. There is some rationale behind this too: organisations can expect that if they do achieve a certain size, they may be “too big to fail” in some sense, since the funder(s)/donor(s) will be heavily invested in its success. 

Regardless of the funder/donor preferences, they don’t typically steer organisations to making applications for long term funding, they work with the applications they receive. In most cases, funders prefer not to interfere because they don’t have comprehensive information. They defer to organisations’ judgement and assume that the organisation needs to scale up at this time using short term funding. 

It can also be said that funders and donors have a tendency to prefer short term funding too. For major funders, they may prefer to make decisions based on existing data, and delay further funding until more data is available. For individual funders, it can also be said that it “feels” better: why wait for years instead of seeing (or more realistically, expecting) the impact to occur in the short term.  

One can also speculate that fund managers have a tendency to use their funds to meet the short term impact expectations of their donors. A lot of funds typically use the majority of their annual donations in that year.  It may sound bad for the donors and the community if fund managers say “Well, although we received all this money from you, and received all these applications, we just decided not to use these funds and decided to leave them in the bank”. Given that it may also be expected from the fund managers to find giving opportunities, this may steer them to use funds for existing (short term) giving opportunities.

What is the problem?

I am not going to argue at length that this harms the organisations by making long term planning harder and creating insecurity. I think this is on one hand a bit obvious, on the other hand, can be mitigated by recurring funding. 

I think less obvious and more important harm here is that when there is a lack of such funding diversification, organisations typically push for more short term funding unnecessarily which decreases their cost effectiveness in the long run by locking in premature budget growth.  

Here is an (fictional) example:

An EA organisation called “Big Impact Org” starts to work on a problem in a high priority cause area and shows signs of success.  

Big Impact Org has at this point very few paid staff and decides to apply for funding. 

Big Impact Org could apply for two or more years of funding that covers the salaries of its existing core staff members and main program costs only (say 300K for 3 years - 100K per year), but given the dynamics above it instead applies for more short term funding (say 200K for one year). 

Since Big Impact Org wants to achieve a budget that feels secure, it adds more items for its annual spending like hiring additional staff (like one or more marketing managers) in order to justify the numbers in its application. 

An EA fund then reviews Big Impact Org’s application and does not question whether this is the optimal approach and defers to its judgement. Since Big Impact Org seems promising, independent of the items requested in the grant proposal, the fund approves its request. 

Big Impact Org receives a large amount of short term funding and starts to hire more staff in order to comply with its grant application. 

Big Impact Org makes similar applications to other funders too in order to establish relationships with a larger donor base and increase its funding diversification (!). And since Big Impact Org seems promising, other funders would also like to contribute to its success and approve its applications for further (short term) funding. 

One year later, Big Impact Org prepares its next renewal proposals. It doesn’t occur to Big Impact Org whether the new hires really contribute to high impact, or whether they would be more cost effective with a smaller budget because it is very painful to fire team members and things are going good so far. In fact, Big Impact Org checks other organisations’ budgets (or their grants) in the space as a benchmark and decides to apply for even more short term funding for next year in order to solidify its presence and secure its future funding indirectly.

And this goes on…

At the end, Big Impact Org hired more staff and scaled up more quickly in this scenario compared to the scenario where Big Impact Org had a smaller yet timewise more extended budget. 

This might cause several problems. Big Impact Org might face problems of scaling early and experience inner inefficiencies. Its mature final budget might be more than necessary and become permanent since again it is painful to make cuts and funders typically defer to organisations’ judgements. Funders may also find it difficult to make significant cuts since they don’t want to break something that is working (even though it is not optimal).

An important side note here is that while Open Philanthropy provides a reasonable amount of long term funding to a number of organisations (although most of its grants are biannual, not longer), it typically provides grants to mid-sized or large organisations that already have more or less mature budgets. So the harm explained above may already be done when Open Philanthropy steps in to provide long term funding.

What can be done?

Especially the funds that receive applications from small and emerging organisations can communicate that they are open to consider long term funding (say 2-4 years, perhaps with lower amounts for the later years). Funds can even recommend organisations to remain small and not scale up too early (rather than not interfering at all and deferring to them immediately)- and provide options to apply for long term funding. Many (inexperienced) founders and organisations would be more than happy to receive advice like this from more experienced grant managers. 

I think this is also reasonable because it takes a long time to solve hard problems. So it should be okay to leave organisations enough time to execute their programs. It should also be noted that, in many cases there can be a (long) lag between the execution of the program and the results. And this may take more than a year in many cases. So from the perspective of the funders, “the ability to check results” argument for the short term funding may not work in many cases anyhow. I wouldn’t be surprised if most funding renewals are based on overall promissingness of the organisation and continuing imperfect results, rather than major updates in a year. 

Organisations can also be more open about their expectations and needs in their communication with their funders. I wouldn’t be surprised if many funds would be equally excited with long term funding requests as long as they are reasonable. I am also very confident that many EA funds are in fact more content to see applicants to communicate their uncertainties. 

Finally, individual donors can support the organisations and funds they are donating to by allowing them to use their donations to be used in the future and by making commitments to support them for long periods of time.