The Funding Crisis Facing Nonprofits
Days into President Donald Trump’s second term, his administration issued a memo freezing all federal grants. That memo was later rescinded amid multiple lawsuits, but nonprofits that depend on the funding remain in a state of profound uncertainty. We talked to Andrea Levere ’83 and Alexandra Sing ’20, CEO and COO of Capitalize Good, about the state of the social sector and the increased urgency of their work working with funders and nonprofits to move toward a model of stable, long-term capital.
A rally near the White House on January 28, 2025.
What is the role of federal funding for nonprofits?
Andrea Levere: Since we’ve been doing this work, one of the constant themes we hear from philanthropy, despite how much philanthropy has grown, is that what they are able to do to address key issues doesn’t come close to matching the spending of the federal and state and local governments. We are working with a whole range of organizations that are providing essential services for communities that are highly dependent on federal funding. So addressing this issue has become an urgent problem.
Can you give an example of the kind of organization we’re talking about, and where in the federal government the funding comes from?
Levere: I chair two community development financial institutions and vice chair a third. One of these, ROC USA, is expanding affordable housing by helping residents of manufactured housing communities buy their communities and turn them into resident-owned cooperatives. A second, Rochdale Capital, is funding cooperative and community-based businesses in highly underserved neighborhoods around the country. And a third, Scale Link—co-founded by an SOM alum—is helping to create a secondary market for microloans and to secure premiums from banks that purchase these loans for CRA [Community Reinvestment Bank] credit and then pass that on to microlenders to improve the economics of lending to the smallest companies.
Each of these organizations relies on funding from the Treasury Department through the CDFI Fund. That funding is provided in the most valuable way—as unrestricted funding that goes directly into net assets. In addition to this, because ROC USA is now competing against private equity to do this work, they are getting funding at the state and local levels to help support the purchase of manufactured housing communities at a price the residents can afford. We are now relying on multiple sources of funding, and each of these is at risk. What we don’t know is what degree of risk we face , but we are keenly aware that the ability of each of these CDFIs to succeed and grow is now a question.
Can you talk about the situation that nonprofits in general are facing at the moment?
Alexandra Sing: A lot of the organizations we provide technical assistance to have significant revenue that comes from public sources, whether that’s federal, state, or municipal. In many cases it could be 40% or upwards. If that funding is delayed or suddenly goes away, that’s 40% of the operating budget those organizations are going to have to make up from philanthropy or from other sources. To create an earned revenue generation strategy overnight is not possible. So it’s going to take a long time for organizations to fill in that revenue gap. And even if it’s just a liquidity issue, many of these organizations do not have the reserves to be able to make payroll beyond a few months. So there’s a significant gap that they’re facing. This year, a lot of the organizations we work with are really focused on liquidity and survival, and it’s not clear what the solution to that is going to be.
Levere: We work with organizations with missions to serve communities that have not had access to services and capital, especially in communities of color. A major challenge—which depends greatly on geography—is how explicit they continue to be in their missions and what penalties or costs that might have, which is still to some degree unknown. But what is most heartbreaking is that we have organizations that have developed into extraordinarily effective and, most importantly, trusted advocates in these communities to help with everything from homelessness and food insecurity to small business development and advising. And their ability to be absolutely clear about who they serve and how they serve them is under threat.
What is the immediate task facing these organizations?
Sing: First and foremost, it’s securing funding to meet their financial obligations for the year. The second thing that a lot of these organizations are going to have to do is hire legal expertise to deal with some of the threats around the language they’re using to describe their mission and specific programs they have. That expertise can be quite expensive and difficult to identify, but it’s technical assistance they cannot do without because the very core of their mission is under threat.
Levere: This really gets to what we see as our value proposition. At Capitalize Good, our fundamental mission is grounded in what we learned in our SOM finance classes: that matching sources and uses of funds is the key to financial strength. As we look over much of the practice of philanthropy, it is doing the exact opposite. We have organizations with long-term missions that require patient long-term funding. We know from everything we’ve learned about private capital investment that for-profit businesses cannot succeed without equity and, often, without the oversight and support that equity holders offer to those companies. When we think about the nonprofit sector, we know that they need this kind of flexible equity-like funding even more than for-profits because they’re solving problems the market cannot solve. Yet most of them have the opposite—short-term funding, highly restricted, with limited overhead allowances.
Our mission is to scale equity-like funding and to provide aligned financial technical assistance. If we thought this was important before this moment, given what’s happening nationally, we really feel this is an urgent need for philanthropy. We cannot waste time relying on old philanthropic practices to solve current problems.
Would you please talk about the two sides of the coin: about how funders need to think differently and how the nonprofits who receive funding need to think differently?
Sing: Philanthropy moves very slowly and funding practices are not nearly as creative or innovative as they have been in the for-profit investment space. The biggest problem in philanthropy is that you have a lot of people working in the sector who don’t necessarily understand how to read financial statements—they’re issue area experts, but they don’t have the expertise to diagnose the true cost of solving the problems they care about. So when they fund organizations, they’re often looking for unicorns—they’re looking for organizations who can solve monumental problems like the racial wealth gap or climate change or workforce development, whatever the issue is. But they don’t necessarily understand that the way they structure their funding has enormous implications for the impact outcomes they care about. The biggest distinction they don’t understand is the difference between revenue and capital. So even funders who provide general operating support, which is flexible funding, are just providing short-term funding that helps organizations meet their budget.
The largest single funder of the social sector is undergoing massive disruption. That’s the federal government. A lot of the enterprise support organizations that provide technical assistance to nonprofits are also funded by public sources. So there are layers and layers within the social sector ecosystem that are losing major support.
Enterprise capital is funding that goes directly to the balance sheet and can be invested in building the infrastructure and strengthening financial sustainability of these organizations. If you look at organizations that were able to navigate COVID, those were organizations that had significant liquid unrestricted net assets.
And it’s the same thing right now. There’s anxiety everywhere, but nonprofits that have significant liquid unrestricted net assets aren’t nearly as worried about organizational sustainability because they know that even if their funding decreases over this year, they’re still going to be able to meet their obligations. Organizations that don’t have significant liquid unrestricted net assets are the ones panicking right now.
Levere: As we began to work with several of our funder partners, whether it was the Citi Foundation, the Winthrop Rockefeller Foundation, or others, we were acutely aware that many of their nonprofit grantees were constrained by the scarcity mindset. If the way you’ve learned how to raise money is that a grant today is no guarantee of a grant tomorrow, it affects the way you use funds that you receive and what you’re willing to ask for. Another practice we saw with our nonprofit partners was they would ask for what they thought they could get, not for what they needed.
So our work includes conducting an objective and comprehensive financial assessment that identifies financial strengths and weaknesses and assesses their growth trajectory to provide nonprofits with the financial intelligence to ask for what they need.
Each of these organizations has gotten enterprise capital from our philanthropic partners. As they understand the power of that funding, it helps to change their mindset from scarcity to abundance.
Sing: The other big thing we care about is reframing how funders think about risk. Too often funders think about risk in terms of their grantees, the communities they serve, or the issue areas they focus on. But our argument is that the greatest risk any organization faces, regardless of tax status, is their capital structure. If the funder gets the capital structure wrong, then it doesn’t matter how great their programs are; it doesn’t matter who they’re working with—the organization isn’t sustainable. The quality of the funding and the quality of the balance sheet matter much more than we realize, and those two factors have enormous implications for impact outcomes.
Levere: Last year, Alexandra and our summer intern, Chloe Kidder, SOM class of 2025, helped to create a risk scorecard to add to our financial assessment, which looks at these factors: What is the quality of your funding? What is the commitment of your funders, and what is the risk that the macroeconomic environment may bring? We didn’t know what was going to happen in November when the scorecard was created. But it is another way to flip both funders’ and nonprofits’ ideas about where risk comes from.
What is the risk to the support system in all kinds of communities that nonprofits help maintain? Even if things change in the future, are we at risk of losing a lot of that infrastructure that we have today?
Sing: Yes. The largest single funder of the social sector is undergoing massive disruption. That’s the federal government. So you have a large market participant that’s either exiting or is on the sidelines right now. A lot of the enterprise support organizations that provide technical assistance to nonprofits are also funded by public sources. So there are layers and layers within the social sector ecosystem that are losing major support. To me, that’s the macro risk.
Levere: We don’t know the short-term implications. People have been stepping up very, very powerfully. Most organizations that are leaders in this space have been well-capitalized and are being very careful to safeguard that capital. So I think this is a question to come back to in six months when we know more about the results of these lawsuits and other factors. But what we saw in the pandemic is that the most fragile organizations and the most under-resourced communities are going to feel the greatest impact of these actions first.
What would you suggest to individuals like me who give money to a few organizations every year? How do you think they should be thinking about this moment and where they should be focused?
Levere: I would say unequivocally to give to organizations that are providing direct services, to organizations that are deeply embedded in the community, and to give in a completely unrestricted way. That to me is the best use of your donations.
I’d also ask, is there an issue or topic that you care most about? Find an organization doing that and provide them with multi-year funding.
Sing: If you’re not in a position to increase the size of your gifts or the number of organizations you support, making introductions to other people in your network who can be helpful is still very valuable. And if you have time to volunteer on a board, or there are other ways that you can support organizations you care about, your experience and expertise can be valuable as well.
Levere: Your assistance is particularly valuable when organizations are in the growth phase and their internal financial capacity lags their financial needs. The composition of startup board may be very different from the competencies of a board that can help an organization navigate growth successfully. These boards need people with the type of financial expertise that an SOM grad would have.
Read Blueprint for Enterprise Capital, a 2021 report authored by Andrea Levere and a team of Yale SOM students including Alexandra Sing, which inspired the founding of Capitalize Good.