The foundation power problem: why well-capitalized NGOs are good for the sector
Grant dependency is a power problem the entire sector has agreed to treat as a feature rather than a flaw.
When an organization relies on a funder for the majority of its revenue, the funder holds structural leverage over strategy, staffing, governance, and program design, whether or not the funder intends to exercise it. The organization optimizes for the relationship that provides the main revenue stream rather than the mission. And because the sector has organized itself around this dynamic for decades, the distortion has become less and less visible.
Three recent analyses – by Jan Masaoka in Proximate Press,¹ Stephanie Beasley in the Chronicle of Philanthropy,² and Joanne Sonenshine in independent research survey³ – have converged on this question from different angles. All three examine it from the funder side. None asks the question from the nonprofit side: what does it cost an organization to be structurally dependent on a funder that knows it?
What does dependency actually cost
The cost is measurable. The Nonprofit Finance Fund’s 2025 survey of more than 2,200 organizations found that 64 percent receive less than half their revenue as unrestricted funding. ⁴ More than half have three months or less of cash on hand, and thirty-six percent are running a deficit, a ten-year high. Furthermore, the share of organizations reporting that their funders offer meaningful flexibility has dropped from 57 percent to 40 percent since 2022.
These are the symptoms of a financial architecture that requires organizations to operate on someone else’s terms, not of underfunding. When a funder restricts how its money can be spent, the restriction affects not just a particular grant; it is a constraint on the organization’s ability to invest in its own infrastructure, build reserves, develop new revenue, or make strategic decisions the funder did not initiate.
The compliance burden compounds the problem. A RAND Corporation study documented one organization spending 44 percent of staff time and 11 percent of its budget on grant compliance. ⁵ That is a necessary administrative burden for survival.
And dependency shapes talent. Organizations hire grant management because that is the skill the funding model demands; they design governance around funder requirements because the funder’s reporting timeline is more immediate than the board’s strategic horizon. A peer-reviewed study of 2,541 Habitat for Humanity affiliates found that unrestricted resources are associated with higher operating efficiency, with the strongest effect for small, low-leverage organizations. ⁶ The organizations most dependent on restricted funding pay the highest operational cost for that dependency.
A self-reinforcing trap
The power problem compounds through a loop that the sector has not named clearly enough.
Grant dependency prevents organizations from building the financial architecture – balance sheets, credit history, revenue projections, debt-service capacity – needed to receive non-grant capital. Without that architecture, organizations cannot access the alternative instruments beginning to emerge from the funder side: program-related investments, recoverable grants, below-market loans, equity stakes. The lack of access to those instruments perpetuates dependency and preserves the power imbalance that distorts organizational strategy in the first place.
The evidence for this loop is now documented on both sides. On the supply side, Sonenshine’s survey of 381 philanthropic organizations found that only 115 deploy non-grant capital through verifiable, repeated mechanisms. ³ Among those she evaluated, only about 15 percent use recyclable or recoverable capital. The activity remains concentrated among large foundations and a subset of family offices, and first-mover hesitation – the reluctance to be the first foundation to try something unfamiliar – is a recurring barrier in her findings.
On the demand side, the gap is equally stark. A Canadian survey of more than a thousand nonprofit leaders found that 66 percent had never heard of “social finance” as a term. ⁷ Twenty-one percent of boards said they would refuse a loan outright, regardless of terms. Only 28 percent of organizations consistently run an operating surplus, the baseline required to service any form of repayable capital. A U.S. Federal Reserve study found that 54 percent of nonprofits were not interested in impact-investment-style financing. ⁸
These two gaps feed each other. Foundations that want to offer alternatives find that most of their grantees cannot absorb them. Organizations that might benefit from non-grant capital have never built the capacity to receive it because grants were the only instrument on the table. The Bush Foundation, as Beasley reports, maintains a $70 million portfolio of below-market loans and other investments alongside its grantmaking. But it frequently pairs its non-grant instruments with companion grants, precisely because most organizations cannot absorb a loan on its own. ² The mechanism gap is structural.
A sliver of a sliver
Global wealth now exceeds $518 trillion. ⁹ The United Nations estimates the annual financing gap for the Sustainable Development Goals at roughly $4 trillion. ¹⁰ U.S. foundations distributed $117.15 billion in 2025. ¹¹ The sector has organized its entire financial architecture around a fraction of a fraction of available capital. Even if every foundation optimized its grantmaking – eliminated overhead, removed restrictions, aligned perfectly with organizational needs – the instrument itself is insufficient to the scale of the challenge. Foundation grantmaking represents roughly two-hundredths of one percent of global wealth. There is no lack of funds for social impact investing; this is not a funding crisis but a mechanism gap.
Masaoka’s analysis reinforces this disparity. ¹ Foundations provide approximately 5 percent of nonprofit revenue in aggregate, even after excluding universities and hospitals. Government funding, by contrast, accounts for roughly 30 percent, a ratio independently confirmed by the Urban Institute’s national nonprofit survey, which put government grants and contracts at 28 to 30 percent of revenue for the median organization between 2022 and 2024. ¹² Meanwhile, wealth continues leaving the foundation system. Donor-advised funds alone now distribute more than $64 billion annually, over half of what all foundations give.¹³ The reform discourse dominating the sector’s attention is focused on improving institutions that represent a shrinking share of philanthropic capital. Capital holders have been offered only one instrument for social investment: donation, and this is the constraint this sector has not yet confronted.
When the balance shifts
What does a funding relationship look like when the grantee does not need the grant?
The strongest evidence comes from adjacent sectors. A peer-reviewed study in World Development examined what happened when microfinance institutions transformed from donor-dependent NGOs into regulated, deposit-taking banks. ¹⁴ Portfolio yields dropped by 5.9 percentage points as institutions moved toward more borrower-friendly terms, and at least half ended their reliance on subsidized funds and donations entirely. The relationship with former funders changed measurably because the organization no longer needed them to survive.
In healthcare, Mayo Clinic generates 97 percent of its operating revenue from patient care and research. Philanthropy funds just 2.7 percent of current operations, yet the system raised a record $1.117 billion in a single fiscal year.¹⁵ When an organization does not depend on philanthropic revenue, philanthropy’s institutional function shifts from lifeline to growth capital. The funder becomes a partner in what the organization chooses to build to achieve its mission, not a condition of its continued existence.
In international development, Médecins Sans Frontières finances roughly 96 percent of its operations through private individual donations and has explicitly refused EU funding when the conditions conflicted with operational independence. ¹⁶ MSF’s organizational identity is built on its financial independence.
Among bilateral funders, BRAC’s relationship with the Australian Department of Foreign Affairs and Trade offers a documented case: BRAC built substantial self-financing capacity through its social enterprise operations, DFAT loosened its funding conditions, a measurable shift in the terms of the partnership. ¹⁷
On the funder side, models for different architecture already exist. A Foundation of Philanthropic Funds, a thirty-year-old public charity, restructured the Tenement Museum’s mortgage during the pandemic by purchasing the underlying tax-exempt bond and rewriting the terms, reducing the interest rate to 1 percent and saving the museum $2.5 million in debt service, a transaction independently confirmed by public records from New York City’s economic development authority.¹⁸ Kresge Foundation has deployed more than $640 million in cumulative program-related investments.¹⁹ MacArthur Foundation holds $390 million across loans, equity, and guarantees.²⁰
But these are outliers, as fewer than 2 percent of U.S. foundations use program-related investments in any given year. ²¹ Total PRI deployment is approximately $1.84 billion, roughly 1.6 percent of total foundation giving. ²² PRIs receive a regulatory double benefit: they count toward a foundation’s mandatory 5 percent payout and are simultaneously removed from the asset base used to calculate that requirement. The financial logic favors them, but the institutional inertia does not.
Well-capitalized NGOs are good for everyone
The argument is that the current dynamic makes both parties worse.
An organization that does not need any specific grant can take risks a dependent organization cannot. It can refuse misaligned funding, invest in long-term capacity no funder would underwrite, and hire for growth rather than compliance. These capacities produce better programs, whereas grant dependency suppresses all of them.
A small but growing number of organizations are already pursuing intentional revenue design not in response to the current crisis, but as a structural commitment to independence. The evidence is in its early stages, but the direction is clear.
Foundations benefit from this correction as well. A funder whose grantees have options must design more thoughtful, more responsive partnerships. It must compete on the quality of the funding relationship – the flexibility, the strategic alignment, the additionality it provides – rather than on the grantee’s inability to say no. That competition produces better philanthropy. The foundation that must earn a partnership builds a different kind of relationship than the foundation that knows its grantee cannot walk away.
This is the logic that operates in every other capital market. Lenders compete for creditworthy borrowers. Investors compete for high-performing companies. The parties with the strongest alternatives command the best terms. The nonprofit sector is the only major economic ecosystem in which the capital recipients have been structurally prevented from building alternatives that would give them negotiating power. Correcting that imbalance would make philanthropy strategic rather than just necessary.
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The sector’s obsession with funder relations – how to cultivate them, how to manage them, how to sustain them – is a symptom of structural dependency, not a strategy for organizational health, but there is a cure, a different economic architecture.
Every foundation board should ask itself one question: if your grantees didn’t need your money, would they still want your partnership?
The answer to that question is an honest measure of the value you provide.
Endnotes
1. Jan Masaoka, "Is the Era of Foundation Dominance Coming to a Close?" Proximate Press, July 2026. https://www.proximate.press/latest-stories/is-the-era-of-foundation-dominance-coming-to-a-close
2. Stephanie Beasley, "Why Some Foundations Are Lending, Not Just Giving." Chronicle of Philanthropy, July 24, 2026. https://www.philanthropy.com/news/why-some-foundations-are-lending-not-just-giving/
3. Joanne Sonenshine, "Beyond Grants Research: A Snapshot of Non-Grant Capital Deployed by Philanthropic Funders." May 2026. https://www.joannesonenshine.com
4. Nonprofit Finance Fund, "2025 State of the Sector Survey." NFF, 2025. https://nff.org/wp-content/uploads/NFF-2025-Survey-Report.pdf
5. RAND Corporation / Forbes Funds, "The Costs of Reporting Requirements for Nonprofit Organizations in Pittsburgh." RAND, July 2006. https://www.rand.org/news/press/2006/07/12.html
6. Chao-Chin Hung and Jessica L. Berrett, "Unrestricted Resources and Organizational Efficiency in Habitat for Humanity Affiliates." Nonprofit and Voluntary Sector Quarterly, June 2025. https://journals.sagepub.com/doi/10.1177/08997640251341578](https://journals.sagepub.com/doi/10.1177/08997640251341578
7. Imagine Canada, "Investing in the Public Good: A National Study of the Investment Readiness of Canadian Nonprofits and Charities." August 2020. https://imaginecanada.ca/sites/default/files/IRP%20Report%20English%20August%202020.pdf
8. Federal Reserve Bank of St. Louis, "Investing for Social Impact: An Analysis of Nonprofit Perspectives." January 2017. https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed/files/pdfs/community-development/impact-investing/impactinvesting.pdf
9. UBS, "Global Wealth Report 2026" (17th edition). UBS, June 30, 2026. The report does not present a single headline total for global personal wealth. However, its 2025 global wealth pyramid reports $200.72 trillion held by adults with net wealth above $1 million, $250.59 trillion in the $100,000–$1 million band, $63.16 trillion in the $10,000–$100,000 band, and $3.22 trillion below $10,000. Together, these sum to $517.69 trillion, or approximately $518 trillion. UBS defines “global” here as the 56 markets in its sample, which it estimates account for more than 92% of worldwide wealth.
10. United Nations Conference on Trade and Development, "Financing for Sustainable Development Report 2026." UNCTAD, April 9, 2026. https://unctad.org/publication/financing-sustainable-development-report-2026-implementing-sevilla-commitment
11. Giving USA 2026. Lilly Family School of Philanthropy, Indiana University, June 23, 2026. https://philanthropy.indianapolis.iu.edu/news-events/news/_news/2026/giving-usa-report-2026.html
12. Urban Institute, "Nonprofit Trends and Impacts 2021–2023: National Findings on Government Grants and Contracts." October 14, 2024. https://www.urban.org/sites/default/files/2024-10/Nonprofit_Trends_and_Impacts_2021-2023_National_Findings_on_Government_Grants_and_Contracts.pdf
13. DAF Research Collaborative, "2025 Annual DAF Report." 2025. https://www.dafresearchcollaborative.org/annual-daf-report/2025
14. Bert D’Espallier, Marek Hudon, and Ariane Szafarz, "From NGOs to Banks: Does the Institutional Transformation of Microfinance Organizations Affect Their Efficiency?" World Development. https://ugc.futurelearn.com/uploads/files/dd/01/dd0119a9-bf43-4bb2-ab30-5b04e5d3c781/From_NGOs_to_banks.pdf
15. Mayo Clinic News Network, "Mayo Clinic’s Strong 2024 Performance." March 5, 2025. https://newsnetwork.mayoclinic.org/discussion/mayo-clinics-strong-2024-performance-fueled-by-dedicated-staff-commitment-to-innovation/
16. Médecins Sans Frontières, International Financial Report 2024. MSF International. https://www.msf.org/sites/default/files/2025-05/MSF_Financial_Report_2024_Final_approval%20note.pdf
17. Australian Department of Foreign Affairs and Trade, "Mid-Term Review: Strategic Partnership Arrangement Phase 3 — Bangladesh (BRAC)." July 28, 2025. https://www.dfat.gov.au/sites/default/files/mtr-strategic-partnership-arrangement-phase-3-bangladesh.pdf
18. Build NYC Resource Corporation, Board Resolution: Lower East Side Tenement Museum. 2025. https://edc.nyc/sites/default/files/2025-07/9.%20Lower%20East%20Side%20Tenement%20Museum.pdf
19. Kresge Foundation, Social Investment Practice. https://kresge.org/our-work/social-investment-practice/
20. MacArthur Foundation, Impact Investments: One Acre Fund Fact Sheet (reporting $390.5M as of December 31, 2024). https://www.macfound.org/media/files/c3_one_acre_fund_fact_sheet.pdf
21. Stanford Social Innovation Review, "It’s Time to Unleash the Power of Program-Related Investments." See also: National Center for Family Philanthropy, "Program-Related Investments: Why Aren’t More Foundations Using Them?" June 2018. https://www.ncfp.org/2018/06/03/program-related-investments-why-arent-more-foundations-using-them/
22. Michael Fern / SciRise, PRI deployment analysis (estimating total U.S. PRI deployment at $1.84 billion in 2024). LinkedIn, July 16, 2026. https://www.linkedin.com/posts/mjfern_impact-investing-tells-a-story-of-momentum-activity-7483533718419120129-ZOop
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