The Power of Unrestricted Funding
Anna Korzeniewska in a discussion on the Power of Unrestricted Funding with Pamala Wiepking, PhD, Stead Family Chair in International Philanthropy, Associate Professor of Philanthropic Studies at Lilly Family School of Philanthropy, Indiana University Indianapolis. Professor of Societal Significance of Charity Lotteries, Center for Philanthropic Studies, VU University Amsterdam.
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Since 2020, MacKenzie Scott has donated over $17 billion in unrestricted gifts to more than 2,300 non-profits[1]. Unrestricted, meaning the organizations had no limitations on how to allocate the funds and faced minimal reporting requirements, if any. According to the Center for Effective Philanthropy, which studied the effects of MacKenzie Scott’s large, unrestricted gifts, her approach has been transformational for the organizations that received this funding. Research[2] by Pamala Wiepking and her colleagues confirms that unrestricted funding practices positively impact nonprofits and the results they generate.
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Anna Korzeniewska (AK): Pamala, could you clarify what exactly Unrestricted Funding is? Is it the same as Trust-Based Philanthropy?
Pamala Wiepking, PhD (PW): Unrestricted funding, also known as flexible or unconditional funding, is one element of Trust-based philanthropy, which is a broader concept. In Trust-based philanthropy, those in power, who control the money, transfer some of that power – using MacKenzie Scott’s words – onto those receiving the funding, without attaching explicit conditions to how the money should be spent. Funders trust that the organizations know what issues are at stake and how to best address them. Trust is super important.
With Unrestricted funding, organizations have the freedom to decide how to use these resources. For funders, it is a way to address societal challenges in a more systemic way. What’s interesting, Unrestricted funding is not a new concept – when we studied a history of unrestricted giving, we found documentation of this practice going back at least a hundred years.
AK: When did this concept really gain momentum?
PW: That depends on the country. In the U.S., MacKenzie Scott has certainly shifted the funding paradigm, at least to some extent. She hasn’t had many followers, unfortunately, but when she started giving with no strings attached, it definitely shook up the whole funding world. In Europe, the Dutch Postcode Lottery has been providing unrestricted funding since 1989. My professorship in the Netherlands to study the unrestricted grantmaking practice is funded by them. Other funders also use this approach; the Ford Foundation and the MacArthur Foundation in the U.S., for example, have been doing so quite substantially.
But still, the typical way of funding nonprofit organizations is through project funding.
One thing I really want to do through my research is encourage people to rethink how they fund. Instead of just going with project funding because “that’s how it’s always been done,” funders should think about their theory of change. What problems are they trying to solve? Is project funding really the best way to do that? When tackling big, systemic issues, unrestricted funding can be a better tool.
AK: What motivates funders to give unrestricted funding? What makes them trust more? Or is it the nonprofits that are able to convince their donors to change their funding paradigm?
PW: I think it’s a mix of both. Take the Dutch Postcode Lottery, for example. The person who started it had worked at nonprofits his whole life and was frustrated with how they were funded, especially with the short-term focus of funding. So when he came up with the idea of a charity lottery, which became hugely successful and raised a lot of money for charities, he made sure the funds were given long-term without restrictions. The trust came from the fact that the organizations receiving the money were vetted, and it was clear they were doing good work. So they received the funds and were free to decide how to use them. In this case, the funder was the driving force.
But it can definitely work the other way around too. I encourage people working in nonprofits, especially those involved in institutional fundraising, to have conversations with their funders about what unrestricted or even less restricted forms of funding could mean for their work. If you can show how much more effective you could be without constantly chasing short-term projects and instead spending more time on the cause rather than on fundraising and reporting, that can make a real difference. That’s a powerful argument.
But again, trust is key. Building relationships over time, where both the grantor (funder) and the grantee (nonprofit) understand what the other is doing and feel comfortable addressing issues as they come up – that’s essential.
AK: What defines funders who choose to give unrestricted funding?
PW: They’ve clearly thought about how they can have the most impact, and they’re willing to deviate from the typical paradigm in the sector. They’re willing to follow their own path.
AK: Are you saying that they are willing to take more risk?
PW: Yes, I would say they are taking risks. We know that funders often perceive unrestricted funding as more risky because they don’t feel they have the same level of control as they do with project funding. But that’s not really true. You can still do due diligence before giving the funding and there can still be reporting, but unrestricted funding is more about the process and collaboration.
The challenge is that people on Advisory and Supervisory Boards tend to be very conservative as they feel responsible for the funds. Since they often don’t have a direct connection to the grantees, it’s easier for them to ask for clearly defined projects with clear conditions. But I think that’s a false sense of security. We need more visionary people on boards who are less risk-averse and who understand how investments work.
AK: Ok, but given that trust is often limited at the beginning, how can funders learn to build that trust over time?
PW: I would suggest taking smaller steps and experimenting. Start by selecting one organization with which you feel really comfortable and provide them with a small, unrestricted grant. Once that proves successful, you can consider extending it further to longer term and more substantial unrestricted funding.
We view unrestricted funding as a gradient on a scale (Graph 1 below). At the extreme ends, there are two types of funding models: restricted Project funding and completely Unrestricted funding. In the middle, we have Unrestricted project funding and Unrestricted program funding. In a completely Unrestricted funding, an organization might receive, for example, one million dollars, and it is entirely up to them to decide how to use the money.
Graph 1: Funding Models in Philanthropy, Adapted from Wiepking, De Wit, and De Jong, 2023
AK: When does a project end, and a program start? Could you please explain that?
PW: Essentially, a project is a single initiative, while a program is a collection of related projects. For example, a program might focus on environmental issues and include various projects like tree planting or advocacy for nature. Unrestricted project funding supports a specific project, allowing the organization to decide how to use the funds within that project. Unrestricted program funding supports a broader program that includes multiple projects. The organization decides how to allocate the funds among those different projects.
Typically, project funding is short-term, while unrestricted funding is long-term. Short-term unrestricted funding generally does not make much sense; multi-year unrestricted funding is considered highly valuable.
However, some funders do provide one-year unrestricted funding. This is often because they seek flexibility – committing to ten years can restrict their ability to allocate funds to other initiatives. Despite this challenge, it can still be very meaningful for organizations.
AK: When you say long-term, what number of years do you have in mind?
PW: I would say that five years is a very good long-term perspective. This is what the Dutch Postcode Lottery does when they fund their grantees. They typically offer five-year grants, and these grants are usually renewed. The minimum amount they provide is 100,000 Euros per year, with grants going up to 18 million Euros annually. This represents substantial support for the organizations that receive it.
AK: I assume funders may need some kind of proof that unrestricted giving is more efficient and impactful, and that requires reliable data. Where can it be found?
PW: We developed a conceptual model predicting the effects of unrestricted giving, which was published in Nonprofit Management and Leadership[3]. We argue that unrestricted giving has a positive effect on seven clearly defined nonprofit capacities, from financial management, by far the most important one, to innovation, strategic planning, etc. Our interviews with grantees from the Dutch Postcode Lotteries provide support for this model.
It’s also worth looking at the research conducted by the Center for Effective Philanthropy[4] which studied the effects of MacKenzie Scott’s giving.
AK: Is that enough to convince the funders?
PW: I think it is important that funders consider whether their funding strategy aligns with the impact they want to see. Short-term project funding won’t eradicate poverty. Our goal is to inspire funders to consider different funding strategies to achieve their missions. And it seems to resonate with them because they are often intrinsically motivated to make a difference. When they really stop and think, when they take the time to reflect, they often realize that their current funding strategy might not be the most effective to achieve their mission.
AK: What about regions like Central and Eastern Europe? Are we likely to follow U.S. and Western European funding practices? What lies ahead?
PW: I think that changing the funding paradigm in the region may be more challenging, mainly due to the lack of general trust. However, trust is built between people, and behind every decision, there is a person. If individuals representing funding organizations and nonprofits in Central and Eastern Europe know and respect each other, and have positive experiences working together, there is no reason why the unrestricted funding approach could not be successful there. Nonetheless, it will be even more crucial than in the U.S. to develop interpersonal and inter-organizational relationships. Progress will likely be gradual; it will not happen overnight, but showcasing successful examples will certainly help shift the norm.
AK: Thank you for your time Pamala.
PW: Thank you.
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The interview was conducted on August 19, 2024 at the IU Lilly Family School of Philanthropy (Indianapolis, USA).
[2] https://www.grantmakingresearch.nl/wp-content/uploads/2023/10/Practitioner-note-Unrestricted-funding-and-nonprofit-capacities-Wiepking-De-Wit.pdf
[3] https://onlinelibrary.wiley.com/doi/10.1002/nml.21592
[4] https://cep.org/report-backpacks/emerging-impacts-the-effects-of-mackenzie-scotts-large-unrestricted-gifts/