In 2005, one of the seemingly most successful nonprofits in the country requested the sector equivalent of a bailout. Communities in Schools, an organization that today serves 1.5 million disadvantaged kids, 91% of whom graduate high school or obtain a GED, approached a fleet of major foundations to show its books and ask for several million in emergency capacity building funds.

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Turns out, the group had spent years accepting the most common kind of payment from foundations, supposedly results-driven grants, which poured money into expanding programs without covering basic institutional needs like staff training, facilities costs, tech upgrades, and the ability to create a cash reserve for unexpected costs.

Eventually, operating costs were stretched so thin that the organization was struggling to keep up its standards and measure success. It was operating in the red, borrowing from accounts that should have gone to one function to cover another.

A few major funders including the Gates Foundation stepped in to assist, offering several million so that CIS could shore up its financials and shift toward only accepting more logically structured grants. But as Michael Etzel, a partner at Bridgespan, a nonprofit consultancy, and Hilary Pennington, a vice president at the Ford Foundation, have discovered, that’s far from a one-off tale of woe. It’s often the norm.

The research duo, who highlight CIS’s struggles in a recent Stanford Social Innovation Review report, have found that poorly structured grants are forcing many groups to funnel the majority of their cash into programming and expansion. At the same time, the only way to thrive in the long run seems to be the opposite: Much like companies offering standard services or products, nonprofits need to build stability, investing in talent, training, R&D, and non-dilapidated offices, while putting aside some cash so they don’t live and die by the next grant cycle.

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