The Challenge of Challenge Grants

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Editors’ Note: This article was first published as the cover story in the

April 2002 newsletter of the Association of Small Foundations, and was designed to encourage those funders who are fond of challenge grants to think about their impact on the recipients. Its fundamental purpose hasn’t changed. For nonprofit executives and development departments, it’s an article that can be shared with donors so that donors better understand the value of progress made on a project as compared to progress made on fundraising for the project.

The idea for this article came to me after a phone call with one of my long-time grantees. She had more than $120,000 in pledged grants, approved but unclaimed. She needed to get $20,000 in the door to convert those grants from pledges to cash, and thus get a terrific project going. Our Board was more than happy to be the first cash in the door since the more than 6:1 match would ensure that the project was fully funded (through a nice mix of state and local government programs, first-time foundations, and individual donations).

From a foundation trustee’s perspective, there are a number of benefits to challenge grants. Challenge (or matching) grants can be great tools for stretching a foundation’s grant dollars, helping a group diversify its donor base, and testing the attractiveness of a project or program for other “investors.” For any given project, a challenge grant can also give a foundation the sense of security that comes from requiring that someone else bestow a stamp of approval by being the first funder in the door.

Many nonprofit executives aver that the challenge grant process can be exasperating for all involved. Sometimes it seems that a foundation is funding just a piece of a project so that the foundation’s decision-makers don’t have to make the tough choices about what to fund, and the foundation can stretch its dollars further at an individual project’s expense. Sometimes, grantees feel that partial funding, or requiring another funder to come in first, is a dispiriting vote of low confidence in the organization on the part of the funder. And sometimes, a successful, attractive project is stymied by an abundance of challenge funds raised, but not executed.

My grantee’s dilemma that January day was typical of why grantee organizations often view challenge grants as more of a problem than an opportunity. Often, it seems to work like this: When a grant proposal for $70,000 is reviewed by Foundation A, the Board members decide that they can’t fund the whole project. But they like the project and hope other funders will help them ensure that it gets off the ground. So they tell the grantee, “The good news is we’ve approved a $20,000 challenge grant. The bad news is that you have to go out and raise $20,000 from someone else before we release our funds.”

So the grantee scouts around and finds a government program that will provide $10,000. But the news is similar. “We won’t release the funds until you’ve found a 3:1 match from someone else.” Now, $30,000 more has to be found. Eventually it is. But, every single funder took “Matching Grants 101” at a workshop last year and so now the entire $60,000 in approved funds needs a final $10,000 in actual cash to get the $60,000 in the door. Now, after months of successful fundraising, the actual work of the project is no further along than it was when Foundation A said yes.

At this point, I should tell you that almost all our grants are matching grants. In most cases the challenge is for the match to come from a new funding source. The difference is that we write the check first. In exchange, we require the organization to raise (at least) a 1:1 match in the coming year. Over the past 15 years, we’ve written nearly 1,000 matching grants. We have had some grants matched more than 10:1 unexpectedly, granted a few extensions, and had fewer than ten match failures. It seems telling that for two of those, we had established the rare requirement that the grantee raise the match first!
We know that it’s hard to stretch our individual piece of the “funding pie.” We know it can be hard to balance the internal priorities of a foundation’s board. We know it can be hard to be the first foundation in the door on a new endeavor. It’s one reason why it’s hard for organizations to launch ambitious new projects. When a foundation can’t fund the whole project, how does its board know that the project will even happen without a requirement that all the funds be pledged before the check is written?

For our part, we like to think we invest in viable projects. We’re willing to take a risk to further our grantmaking goals. We also know that a rolling stone may gather no moss, but a project under way is more attractive to potential donors than one that’s still waiting in the wings. We hope that our willingness to take a risk will help ensure that a grantee’s valuable staff time is spent accomplishing the project goals instead of raising funds. After all, the project’s goals serve our goals as a foundation, too. That’s why we liked the project in the first place.

About the Author

Angel Braestrup has been executive director of the Curtis and Edith Munson Foundation and program director of the Henry Foundation since 1994, and has worked in the world of family foundations for almost two decades. She currently serves on the Board of the Association of Small Foundations and the Ocean Foundation, the first community foundation wholly dedicated to the conservation and sustainability of the global oceans’ resources.