Conducting Philanthropic Due Diligence

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Philanthropist's Field Guide

Conducting Philanthropic Due Diligence

For a strategic philanthropist, conducting due diligence is an essential practice when assessing whether to invest in potential grantees or collaborators. Before making a financial or any other kind of commitment to an organization, it is wise to gather deeper insight into its financial health, operating capacity, and mission alignment. 

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How should a philanthropist conduct due diligence?

At its most basic level, due diligence is simply gathering information and insight. As such, the most effective due diligence is conducted via multiple methods and sources. You can utilize a range of resources to gain a deeper perspective of potential grantees, including:

  • Desk research: What information can you find about the organization online or in other publications? If possible, venture beyond their website. CandidCharity Watch, or Charity Navigator each provides an independent perspective on many nonprofits.

  • Site visits: If feasible and appropriate, it helps to visit an organization to meet with staff and get a firsthand view of how it handles day-to-day operations.

  • In-person or virtual interviews: Ideally, getting to know an organization won't be limited to a single conversation. Instead, think about how to establish a regular cadence of communication with its leadership to build a lasting rapport. In these relationships, emphasize equity between parties so that discussions are candid, constructive, and mutually beneficial. 

  • Consult with other funders in the same issue area: If you know of other philanthropists who are working toward similar objectives or funding organizations focused on related issue areas, reach out to see whether they can offer their perspective on your organization of interest. A good way to seek this information is via funder learning networks

  • Volunteer: Volunteering for an organization can provide firsthand insight into its programs, operations, and leadership. While offering your services, you can learn more about the nonprofit and determine whether you wish to make a financial commitment. 

What should you know before engaging in due diligence?

Take note of the following in regards to conducting due diligence on nonprofits:

  • Match your due diligence to the size of your financial contribution. Due diligence requires a degree of effort, but it should be commensurate with your charitable gift. A thorough due-diligence process is recommended before making a large philanthropic investment and before supporting an organization for the first time. 

  • Be mindful of inherent biases. No one is exempt from inherent biases, but there are ways to mitigate them when selecting recipients for philanthropic investment. For instance, affiliation bias occurs when someone favors renowned organizations more so than lesser-known ones. A conflict of interest bias is when someone prefers an individual or group that has a connection to them. Be aware that these kinds of partialities exist, and work to ensure that your philanthropic investments go to organizations that best align with your charitable objectives rather than your personal preferences. 

What due diligence questions should you ask?

Lines of inquiry should reflect your priorities as a philanthropist and the criteria you deem most relevant. Key considerations include:

  • Accountability. You should ensure that your assets are being used responsibly and effectively towards achieving a stated goal. In selecting an organization, your lines of inquiries can include the following:

    • Strategy and planning: Is the organization's strategy consistent with its mission and resources? Does it align with my philanthropic purpose?

    • Milestones and monitoring: How does the organization track progress?

    • Management: How is the organization managed, and what do its day-to-day operations look like? Is the organization's leadership competent in providing strategic direction and oversight? Does the staff have the requisite experience, skill sets, and capacity to execute on the organization's stated mission?

    • Financial sustainability: Is the organization poised for success even without my funding?

    • Infrastructure: Does the organization have the required infrastructure in place (technology, real estate, equipment, etc.) to pursue its work effectively, including scale, if applicable?

    • Community engagement: Does the organization have deeply rooted ties to the communities it serves?

  • Collaboration. Organizations working alone cannot achieve social change. Collaboration is critical to making lasting, transformative progress. To evaluate a nonprofit's capacity for collaboration, consider the following:

    • Does the organization create and leverage opportunities to share knowledge, both within the organization and with other relevant communities?

    • How does the organization work with others who are focused on similar issues?

    • What kinds of strategic partnerships does the organization pursue to advance its mission?

  • Effectiveness. A nonprofit should be able to articulate how it carries out its mission and stated priorities in both qualitative and quantitative data. Unless it is a new organization, a nonprofit should share its strategic achievements and track record to both prospective and current funders. Consider the following questions in determining the nonprofit's effectiveness:

    • What is the organization's track record, particularly when it comes to carrying out previous grants or funding programs? How is the organization learning if it falls short on its higher-risk programs?

    • How is the organization setting, tracking, and evaluating its performance goals?

    • What do others (i.e., beneficiaries, news media, other nonprofits, other donors) think about the nonprofit's ability to achieve impact effectively?

Are there data sources to help with the due diligence process?

Organizations routinely produce documents and reports to record their activities and comply with legal requirements. These documents contain useful data to help evaluate the organization's needs and capacity. Not all of the materials listed below may be publicly available, but the following documents can aid the due diligence process: 

  • Strategic plan

  • Operational plan

  • Budget

  • Organizational chart

  • Staff bios and/or job descriptions

  • Governance bylaws

  • Board meeting minutes

  • IRS Form 990

  • Financial audit reports

  • Program portfolio

  • Event materials

  • Annual reports

  • Press articles

Additional Resources:

Published September 23, 2020