Summary.    Foundations, corporate philanthropy, and donor-advised funds grant more than $140 billion annually and have become far more strategic in their grantmaking efforts over the past decade. This emphasis on strategy shifted the field’s focus toward asking grantees...

Diversification is the time-tested strategy fund managers and individuals use to balance investment portfolio risks. Among other benefits, this approach enables the investor to seek out lesser-known, new, and innovative companies that may outperform the market while simultaneously maintaining positions in generally stable opportunities. While this approach applies to investment portfolios, it’s also well suited to grantmaking.

Foundations, corporate philanthropy, and donor-advised funds grant more than $140 billion annually and have become far more strategic in their grantmaking efforts over the past decade. This emphasis on strategy shifted the field’s focus toward asking grantees to be intentional about measuring their outcomes and building sustainable programs. As a consequence, the added attention to strategy has resulted in philanthropy becoming more risk averse, leading nonprofits to focus on easier-to-achieve outcomes so they do not fail. Innovation, in turn, takes a back seat to securing funding, and transformational change becomes harder to achieve.

For some grantmakers, a pre-pandemic diversification mix may have been 20% operations/60% growth/20% risk. During the pandemic, however, priorities (and in turn, diversification strategies) shifted for most funders. At Cedars-Sinai, for example, we doubled our operations contributions while shrinking growth commitments by half in order to maintain the functions of organizations that were fulfilling vital community needs. At the same time, we remained committed to innovation and did not alter our risk-oriented investments that drive change. As the community now returns to greater normalcy, Cedars-Sinai and other funders will need to continue shifting their funding mixes to address new realities, needs, and opportunities.

This is an example of how portfolio diversification plays a role in thoughtful grantmaking. Without intentionally diversifying one’s grantmaking portfolio, funders miss out on maximizing their social return — and frankly, will underperform in relation to meeting the community’s evolving needs. Here’s how grantmakers can best achieve diversification through a balance of grant types organized into the operations, growth, and risk categories.

Operations – Stabilizing and Sustaining

Nonprofits rely heavily on raising funds for their core operations. This is hard work that requires continuous effort. Neither individual donors nor institutional funders are easily convinced to provide these types of sustaining funds. That’s why techniques ranging from direct mail and Giving Tuesday campaigns to annual galas and runs/walks have emerged as levers to generate income to fund ongoing operations.

While operational funding may sometimes appear mundane to a donor, it’s a low-risk investment that can be considered the lifeblood of a nonprofit and crucial to an organization’s long-term ability to meet its core mission. Every grantmaking portfolio should maintain some focus on sustaining the operations of its partners and leaders. If not, organizational stability will suffer, undercutting the very cause for which a funder seeks to make a difference.

Even grantmakers that implement a philosophy of “trust-based philanthropy,” which provides funds to organizations without restrictive objectives, should consider a diversification approach that funds the category rather than the specific details of operations. This will better balance their own portfolio while simultaneously sustaining key organizations and their operations in times of heightened need. As the Covid-19 pandemic began, many funders moved from helping nonprofits build upon their programs to simply helping them survive the crisis. This was particularly important for organizations that were addressing basic human needs like food insecurity and housing as well as access to medical and mental health resources.

Growth – Scaling and Spreading

Growth is the area where a significant number of strategic grantmakers seek to thrive because funding for this purpose drives effectiveness, quality, and innovation within an organization. Nonprofits that are finding success by driving internal change pursue these dollars to expand or improve their services.

Growth funding can be considered a medium-risk investment because expansion, growth, and scale all challenge existing programmatic structures and put pressure on operations. Additionally, it requires a significant level of depth and knowledge from an organization’s professional leaders as well as its board of directors. A strong example of meaningful growth funding over the past few years is the shift toward embedding screening for social determinants of health (such as economic stability, housing, education, and access to health care) into community-based nonprofits. By investing grant funds into the early pilot stages of these programs, organizations have been able to transform their approach to services, establish sustainability models, and ultimately deepen their support for the community.

Risk – Seeking Catalytic Change

Risk capital is the area that demands greater attention by the philanthropic community, given that many of the nonprofit sector’s straightforward offerings require more complex and multilayered solutions. Fewer grantmakers seek to proactively lead or partner to fundamentally change a field or solve a major societal problem.

While catalytic change is often considered intimidating territory, it can be accessible for funders of any size and scale. For instance, Cedars-Sinai’s recent multimillion-dollar grants addressing homelessness returned 10 times in additional philanthropy in just 12 months. The collective efforts generated public and private dollars from the initial group of grants that developed a scalable plan and programming focused on older adults and their needs within Los Angeles. Smaller-sized investments in startup programs through nonprofit incubators, accelerators, and venture philanthropy can also yield catalytic results that challenge the status quo. Furthermore, this is true of targeted leadership programs where short-term dollars are invested in the long-term hope of fundamentally changing a specific field.

Funding catalytic change is inherently high risk with a potential of high reward — or no return at all. Diversification, however, balances that risk.

As a grantmaking strategy, diversification requires significant forethought. Because the approach works in diverse areas ranging from medical research and social services to education and the arts, funders can meaningfully determine an allocation model that is simultaneously true to their vision and supportive of grantees’ goals. Consideration of internal factors (such as grantmaking experience or capacity to conduct due diligence) as well as external factors (such as environment or a community’s readiness for change) will ultimately influence what the “balance” looks like for a funder’s portfolio.