Funding Diversification is a Tradeoff
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 itâs 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, letâs do a theoretical case with AIM (Ambitious Impact, the organization I CEO). Letâs 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, itâs 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/âor 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, itâs 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 donât 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 Impactâs Impactful Grantmaking Training Program or our Charity Start-Up Incubation Program.
Great post!
I think one other major complications of funder diversification is managing multiple competing interests. So in some ways itâs great to have more funders so you arenât 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 arenât 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 Iâm 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⊠doesnât it heavily depend on the funder? If the funder isnât impact driven Iâm not sure itâs 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 donât 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 itâs a bit more of a time sink when they care about things that you donât 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?
Expanding acronyms for readers who might not know them:
EAA: Effective Animal Advocacy
ICAPs: Importance and Counterfactuals-Adjusted Placements, an Animal Advocacy Careers specific metric
A funder who isnât impact driven could be the best funder of all! The âcostâ of fundingâin terms of good that wasnât done because the funder didnât donate to the next organization on their listâmay be low, zero, or in rare cases even negative.
I think people model this in theory more often than it happens in practice. Three reasons why:
The total funding pie is pretty fixed; I expect it to be quite rare to grow it.
It could be that the next org on the list is much worse, but normally, if they are funding something effective, there is a non-random reason they came to the top of the list. I think itâs more common that a funder has different valuesâe.g., they are supporting global health and mental health, and you have a strong view that the one you are working on is significantly better (of course, someone working on the other would say the opposite). But I think that seems a bit immodest/âmorally presumptuous to then treat this counterfactual as massively different based on a pretty debatable value call.
You could, in fact, recommend your funding to go somewhere else with high EV (thus making the counterfactual higher). E.g., if someone says, âI like AIM, I want to give it $1m,â and I say, âSorry, we have no room for funding, but have you considered X charity? It is also really good and hits similar ground.â This is not possible in every fundraising situation, but it is doable, and if I know an opportunity that I think is $-for-$ better than AIM, I have been pretty successful at redirecting funding that would go to AIM there.
Could you say more on how you came to this conclusion?
Mostly basing this on the macro data I have seen that seems to suggest giving as a % of GDP has stayed pretty flat year to year (~2%).
Oh interesting. I want to dig into this more now, but my impression is that an individualâs giving portfolioâboth major donors & retail donors, but more so people who arenât serious philanthropists and/âor havenât reflected a lot on their givingâis that they are malleable and not as zero-sum.
i think with donors likely to give to ea causes, a lot of them havenât really been stewarded & cultivated and there probably is a lot of room for them to increase their giving.
A hundred percent true. Less âimpact drivenâ funders money is likely far more counterfactually valuable than that of an impact driven funder.
Well i think thatâs the point of the post to debate this! And i think there are relevant trade offs in regards to maintaining the impact of the organisations which are seeking to diversify funds that arenât usually considered so maybe âfar more counterfactuallyâ seems too strong.
I think thereâs an important nuance here regarding what truly constitutes a âhealthy sanity checkâ when it comes to funding. Simply having a non-EA funder interested in your project doesnât necessarily validate its impact. For instance, if a funderâs motivation is based on personal affinity, like finding the team charming or being impressed by the organization for non-impact reasons, this might not confirm that the project is the best use of resources.
To me, a real sanity check comes from the support of funders who prioritize impact and apply a high bar to their investments. If a highly discerning funder with a strong emphasis on impact independently chooses to support the project, regardless of whether you accept their funding or not, thatâs a stronger endorsement than diversification for its own sake.
Yes I would probably agree with all that. I think the endorsement is stronger from an EA donor and thatâs great, but the end value of the money itself seems more likely to be far stronger from a non aligned donor.
Yes, reasonable points. I do think that there is a mediating size variable here. E.g., for organizations with sub-$1m budgets, having the knowledge that others would/âcould donate if you need it might be more optimal than diversifying, due to the time costs of doing so. I do think the x2 time is a lower bound, as some funders might take ~x10 more time, and you are more likely to put up with them if you are seeking 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.>>
Couldnât you just take (some of) the funding and regrant?
(This could be discretionary rather than through application processes and presumably wouldnât take you much time, given that you have lots of informed views about different orgsâ needs and potential anyway. E.g. could mostly be to incubatees. Although I imagine maybe there are some dynamics youâd prefer to avoid there in terms of your relationship with them.)
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 âwell aboveâ 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 funderâs individual estimate for any charity has an measurement error term. However, a funderâs estimation errors are also reflected in its funding bar (because the bar is built on the funderâs estimates). Thus, if the funder is 50% too optimistic on average, its funding bar will be likewise inflated 50%. In other words, thereâs 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 charityâs cost-effectiveness is likely to be some sort of median/âmean/âother measure of central tendency of funder evaluations. In this model, seeking to be âabove the bar of what [the charityâs] most permissive funder would acceptâ makes a lot of sense. Thereâs a high risk that the charityâs 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 charityâs 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 âstop growing when a ~majority of funders would not find your growth cost-effective relative to the barâ 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 âwell above the counterfactual bar.â
This analysis is based on an assumption that funders are pretty good at what they do.
This is likely to vary by cause areaâfor example, the counterfactual value of providing additional monies to GiveWell top charities is relatively easier to understand.
I think the suggestion here makes sense, although I likely have a more pessimistic model of funder (and charity, for that matter) rationality. E.g., I expect a charismatic but equally talented charity founder to have ~2x the fundraising ability, even in EA. This creates a bit more noise in the system and makes me inclined to set higher bars to compensate for it.
Thanks for sharing this interesting and (at least to me) novel argument. It strikes me as a way of mitigating Winnerâs Curse issues.