"Organizations often point to a lack of appropriate funding as the biggest barrier to investing in an Engine 2. Three-quarters of US foundation giving, and most NGO and government funding globally, comes in the form of restricted grants rather than the type of flexible funding that enables innovation. And research from Bridgespan and Echoing Green shows that Black-led nonprofit organizations have significantly more difficulty accessing capital, whether for existing programs or for innovation.
One nonprofit leader we spoke with, who has spent a lot of time working to get his organization’s Engine 2 off the ground (not either of the organizations discussed here), told us, “I thought it would be easier to raise money for it. Funders said: ‘this new approach sounds interesting, come back in a few years when you’ve demonstrated it works.’ We’ve had a long track record with a lot of funders. I was surprised how few of them wanted to give money to try something different.” (Ultimately, two major funders did support that organization’s Engine 2 pilots.)
While funders could certainly do more to incentivize innovation with flexible and risk-tolerant grants, nonprofits have options. At the time of writing, both VisionSpring and OneGoal had attracted and carved out funding for their Engine 2 innovation that amounted to about 10 percent of their organizations’ budgets, with the remaining 90 percent going to Engine 1 core services.
Moreover, pursuing innovation need not be expensive. A common mistake is assuming that Engine 2 requires a big grant and big team to before getting started. But there is real value in making small bets before making a major investment in an untested new approach. VisionSpring, using what Kassalow describes as a “tinkering” approach, produced some successful innovations before the organization created a more formal budget and process for its Engine 2. It may be possible to run quick, cheap, validation sprints, producing early data points that indicate whether a new approach holds promise (enthusiastic reception by clients, early indicators of outsized results, or engagement from potential renewable sources of funding). This early experimentation can in turn demonstrate enough potential to attract funders to the table with a somewhat larger investment to move to a next stage, which is still not necessarily expensive or elaborate.
Several years ago, VisionSpring created a dedicated fund—drawing dollars from earned income and philanthropy—and a process to develop and test new ideas for scale. However, explains Kassalow, “We don’t build up expensive infrastructure around the innovation until we figure out if it’s a go or no-go.” For those first few experiments that may take a few weeks or months, existing unrestricted dollars could be set aside. In other cases, funding for innovation has come from specialized vehicles such as the Global Innovation Fund, philanthropic efforts such as The Studio @ Blue Meridian (which is a major source of support for OneGoal’s innovation work), or high-net-worth individuals, all of which provide unrestricted dollars and are often more open to innovation and risk than some traditional foundations.
Another way that nonprofits operating on restricted philanthropy grants can fund an Engine 2 is to build a small innovation window into their grant proposals. For example, 95 percent of the funding could remain focused on delivering the desired short-term results through Engine 1, while 5 percent is set aside to invest in the early validation of promising new ideas. In cases where such early investments in Engine 2 reveal strong potential, the case for placing a bigger bet with a bigger investment will become much easier."