The Grant-Substitution Reflex

This year’s State of Nonprofits survey asked 380 CEOs how they are responding to the federal funding cuts. None of the options it offered was a different way to earn money.

The Question Nobody Asked

In February 2026, the Center for Effective Philanthropy surveyed 887 nonprofit leaders for its State of Nonprofits report. 380 responded, a 43% response rate.[1] The panel covers U.S. nonprofits funded by at least one foundation that gives $5 million or more a year, and CEP generalizes its findings to that group only. One question asked which financial actions their organizations were considering. The report’s Figure 9 shows the twelve actions the survey listed. Some cut costs. Others drew on money the organization already held or could borrow. Not one named earned revenue, fees, a corporate partnership, or investments. Nine percent of CEOs chose an action not on the list. The report does not say what they wrote.[2]

The most-chosen option was “Pursuing funding from new funders/donors,” at 88%.[3]

I want to be precise about what this shows. The survey cannot show CEOs rejecting alternatives it never offered them. That is my point. A survey built to measure how nonprofits respond to the cuts did not list the response that would change their position. Its list mirrors the field it surveys.

Diversification, in Their Own Words

The open-ended answers tell the same story. Forty percent of respondents named fundraising as their most important action. Almost half of those leaders stressed diversifying. One CEO described what that means in practice: “We have started to prioritize diversifying our funding streams as much as possible. This includes identifying and applying for novel grants, working to expand our individual donor base, and pursuing opportunities through funding co-ops.”[4]

Read the list again. Every item on it is the same instrument. More grants. More donors. A shared pool of the same money. The leader calls it diversification, and in the sector’s vocabulary it is; however, in terms of risk, it is not.

The Grant-Substitution Reflex

I call this the grant-substitution reflex. A funder leaves. The organization replaces it with another funder of the same kind. The board approves the plan. The strategy document calls it diversification. The exposure does not move.

Nobody in that chain acts in bad faith. The reflex feels like prudence, as it uses the skills the team already has, the relationships the board already holds, and the language funders already reward.

By grant I mean contributed money in any form: an award, a gift, a donation. The source changes. The instrument does not.

Two federal grant programs and a foundation renewal are not three different risks. They are one risk, counted three times. All three depend on the same thing: someone else deciding, this cycle, to give you money for your mission. They can fail for the same reason, in the same year.

One distinction matters here, so I will state it once. Diversifying sources means adding funders who use the same mechanism. Diversifying mechanisms means building structurally different ways money arrives. The first adds names; the second changes exposure.

Reduce Toward What?

The CEP data holds one more signal. Thirty-four percent of CEOs are considering reducing their reliance on government funding. Nineteen percent are considering reducing their reliance on foundation funding.[5] The survey records the wish to move away. It records no destination. An organization can trade government grants for foundation grants. It has then reduced its reliance on one funder, not on the instrument. Reducing reliance on the instrument requires something else to stand in its place.

The Same Pattern Abroad

The pattern does not stop at the U.S. border. In 2025, the International Foundation for Electoral Systems heard from 125 democracy and governance civil society organizations headquartered in 42 countries; 84% lost funding that year to foreign aid cuts. 87% received some new support, yet only 5% said it was mostly offsetting the losses.[6] Most respondents who received new funding said it came from international NGOs. Few respondents named philanthropy or the private sector as new funders.[7]

In Geneva, CAGI heard from 108 international NGOs in November and December 2025 about where they most needed support. 84% named fundraising strategy and donor diversification. 45% named partnerships with the private sector. 35% named innovative financing models.[8] These are support needs, not actions taken, but they still tell us something. When the alternatives are on the list, a third to half of respondents name them as priorities for support. Donor diversification still leads.

Capacity, Not Character

None of this reflects a failure of character. The reflex is rational inside the architecture we built. Despard and colleagues, in a 2017 study of 170 NGOs in Kenya and Nigeria, name the constraint, drawing on earlier work by Elbers and Arts. Building a new revenue type can require “an up-front investment NGOs do not have.” And “if existing funders are shortchanging the NGO, the NGO will not have the financial resources to develop new revenue streams.”[9]

CAGI’s 2025 survey points to the same constraint. Organizations’ “capacity to innovate is constrained by reduced staffing, financial pressure and limited internal resources.”[10]

The conclusion runs to funders and boards as much as to executives. Another grant application draws on skills and staff the organization already has. A new mechanism demands a business case, new skills and capital up front. Telling leaders to diversify without funding the capacity to do it guarantees the reflex. A funder who asks a grantee to depend less on grants, and then funds only programs, asks for a result it declines to pay for. I am developing these questions further in a longer paper now in preparation.

The Eighteen-Month Test

Ask yourself one question. If your two largest funders each cut their support in half tomorrow, what would your organization look like in eighteen months?

If the honest answer is “severely diminished” or “closed,” your organization is not diversified. It is exposed, and dressed as diversified.

Run the test with your CFO and your board chair in the room. Do not count the grants you hope to win. Count the mechanisms you already own: revenue that arrives because someone buys a service, signs a contract, or invests, not because someone decides to give.

I’m okay with grants. I’m not okay with grant dependency.

A new funder is a new name on the same risk.

Notes

[1] Center for Effective Philanthropy, State of Nonprofits 2026: What Funders Need to Know (2026), p. 5: “In February 2026, we surveyed 887 nonprofit leaders and received responses from 380 organizations, representing a 43% response rate.” The sample comes from CEP’s Nonprofit Voice Project, a panel of U.S. nonprofits receiving funding from at least one foundation giving $5 million or more annually; CEP did not use a probability methodology to build it. The report states that the research “is generalizable only to the subset of nonprofits in the U.S. that get foundation funding” from such foundations, and notes nonresponse and closure limitations (pp. 28–29). https://cep.org/wp-content/uploads/2026/05/CEP_State_of_Nonprofits_2026_FNL.pdf

[2] CEP, State of Nonprofits 2026, Figure 9, “Financial Actions Nonprofits Are Considering Taking” (N=380), p. 23. Listed actions: pursuing funding from new funders/donors; engaging existing funders/donors; refraining from planned staffing cost increases; using reserve funds; reducing programming or services; reducing reliance on government funding; using AI tools to reduce operational costs; reducing reliance on foundation funding; applying for or using lines of credit; decreasing or eliminating office space; using a higher-than-typical amount of endowment funds; selling assets to maintain operations. Figure note: “Nine percent of CEOs reported that they are considering an action not otherwise listed here. Percentages add up to more than 100 because respondents could select all that apply.”

[3] CEP, State of Nonprofits 2026, Figure 9, “Financial Actions Nonprofits Are Considering Taking” (N=380), p. 23. “Pursuing funding from new funders/donors”: 88%; “Engaging existing funders/donors”: 77%.

[4] CEP, State of Nonprofits 2026, p. 22: “Forty percent of nonprofit leaders say that actively fundraising has been the most important action their organization has taken in response to the current context. Of these leaders, almost half underscore the importance of diversifying their organization’s sources of revenue.” The respondent quotation appears on the same page.

[5] CEP, State of Nonprofits 2026, Figure 9, p. 23: “Reducing reliance on government funding,” 34%; “Reducing reliance on foundation funding,” 19%.

[6] International Foundation for Electoral Systems (IFES), Assessing the Impact of Foreign Aid Rollbacks on Civil Society: Surveying the Global Democracy Sector (August 2025), Key Findings, p. 3: “84% of respondents lost funding in 2025 due to US and/or other governments’ foreign aid cuts”; 87% are receiving some new financial support; “however, only 5% say that the new support is mostly offsetting the losses.” Methodology, p. 5: distributed to approximately 740 organizations in 70 countries; 125 responded, headquartered in 42 countries; survey open April 30 – May 14, 2025. The findings describe responding democracy and governance organizations, not civil society as a whole. https://www.ifes.org/publications/assessing-impact-foreign-aid-rollbacks-civil-society

[7] IFES, Assessing the Impact of Foreign Aid Rollbacks on Civil Society, “New Funders Stepping In?”, p. 23: “The majority reported receiving this new funding from international NGOs. Despite recent calls on certain institutions to increase investments in the sector (e.g., philanthropy and the private sector), they were not reported as new funders by many respondents.”

[8] CAGI (Centre d’Accueil de la Genève Internationale), Navigating Uncertainty and a Rapidly Changing Global Context: A Survey of NGOs in International Geneva (April 2026), p. 4 (survey sent to 374 Geneva-based international NGOs registered with CAGI; 108 took part; November 27 – December 15, 2025) and p. 12: “An overwhelming majority (84%) identified fundraising strategy and donor diversification as a priority, followed by partnerships with the private sector (45%) and the development of innovative financing models (35%).” Respondents were asked where they most need support. https://www.cagi.ch/wp-content/uploads/2026_SurveyNGO_results_report_ENG.pdf

[9] Mathieu R. Despard, Rhoda Nanre Nafziger-Mayegun, Bernice Korkor Adjabeng and David Ansong, “Does Revenue Diversification Predict Financial Vulnerability Among Non-governmental Organizations in sub-Saharan Africa?” Voluntas 28, no. 5 (2017): 2124–2144, discussion section (p. 16 of the authors’ accessible version), summarizing Elbers and Arts (2011). https://doi.org/10.1007/s11266-017-9835-3 Accessible full text: https://gsdi.unc.edu/wp-content/uploads/sites/1264/2017/03/Despard_..Adjabeng_Ansong_2017.pdf

[10] CAGI, Navigating Uncertainty and a Rapidly Changing Global Context, p. 12: “organisations’ responses suggest that their capacity to innovate is constrained by reduced staffing, financial pressure and limited internal resources.”

References

Center for Effective Philanthropy. State of Nonprofits 2026: What Funders Need to Know. Cambridge, MA: CEP, 2026. https://cep.org/wp-content/uploads/2026/05/CEP_State_of_Nonprofits_2026_FNL.pdf

Centre d’Accueil de la Genève Internationale (CAGI). Navigating Uncertainty and a Rapidly Changing Global Context: A Survey of NGOs in International Geneva. Geneva: CAGI, April 2026. https://www.cagi.ch/wp-content/uploads/2026_SurveyNGO_results_report_ENG.pdf

Despard, Mathieu R., Rhoda Nanre Nafziger-Mayegun, Bernice Korkor Adjabeng, and David Ansong. “Does Revenue Diversification Predict Financial Vulnerability Among Non-governmental Organizations in sub-Saharan Africa?” Voluntas: International Journal of Voluntary and Nonprofit Organizations 28, no. 5 (2017): 2124–2144. https://doi.org/10.1007/s11266-017-9835-3

Elbers, Willem, and Bas Arts. “Keeping Body and Soul Together: Southern NGOs’ Strategic Responses to Donor Constraints.” International Review of Administrative Sciences 77, no. 4 (2011): 713–732. https://doi.org/10.1177/0020852311419388

International Foundation for Electoral Systems (IFES). Assessing the Impact of Foreign Aid Rollbacks on Civil Society: Surveying the Global Democracy Sector. Arlington, VA: IFES, August 2025. https://www.ifes.org/publications/assessing-impact-foreign-aid-rollbacks-civil-society · PDF: https://www.ifes.org/sites/default/files/2025-09/IFES%20Surveying%20the%20Global%20Democracy%20Sector%202025-ForReview.pdf