Due diligence: making philanthropy work for you
Applying a due diligence framework to potential fund recipients ensures that the chosen organisation will be the best fit with the funder’s strategy and have the capacity and capability to fulfil its aims.
Bill Gates recently announced that he intends to give away, through the Bill and Melinda Gates Foundation, most of his $70 billion dollar fortune before he dies. “The money belongs to society, and we will try to invest in breakthroughs and programs that really help the world”, he said.[i]
How does one go about ensuring that an investment in one program or organisation, as opposed to another, will result in ‘helping the world’ and have the greatest impact in the way that you, as a funder, most value?
You get what you give: the art of funding strategically in the first issue of the SVA Quarterly emphasises the importance of being strategic about what and how to fund, rather than taking an ad hoc approach. Due diligence is part of ‘Developing a knowledge base’ to identify the organisation(s) that fit best with a funder’s strategy.
…the following due diligence framework provides a clear process to select the organisation(s) best placed and most able to have the desired impact.
For many funders, however, knowing how to develop that knowledge base and finding the time and resources to do it can be challenging. Based on SVA Consulting’s experience working with corporate and philanthropic donors, the following due diligence framework provides a clear process to select the organisation(s) best placed and most able to have the desired impact.
Due diligence, why do it?
Due diligence is common practice in the commercial sector. It is an investigation or audit of a potential investment which serves to confirm all the relevant facts about that organisation. It supports informed decision-making by providing a systematic process to better understand the organisation and weigh up the costs, benefits and risks of investing.
With one grantee that EMCF had been funding for seven years, the due diligence process revealed that the organisation had a huge financial crisis.
In the non-profit sector due diligence helps support investment decision-making processes by assessing whether the funder and grantee share the same goals. By investigating organisations through a number of predefined criteria including their strategy, impact, governance, financials and organisational capacity, conducting due diligence ensures that funding goes to those that can deliver the benefit the funder is seeking. It also helps to build relationships.
It is a process that can be effectively done by external specialists or in-house staff with the right expertise.
The value of due diligence processes as part of a funding strategy can be demonstrated by the experience of the Edna McConnell Clark Foundation (EMCF) in the US.
EMCF introduced due diligence as a part of a new strategic approach to funding in 1999 to ensure that its fundees shared its goals. Although some organisations assessed in the process were familiar to the Foundation, conducting due diligence gave a new level of insight that had previously not been possible. With one grantee that EMCF had been funding for seven years, the due diligence process revealed that the organisation had a huge financial crisis. EMCF admitted it should have known about the issues years before but didn’t.
For Nancy Roob, the head of the Foundation’s unit charged with undertaking the due diligence, the learnings gained from the process confirmed that relying purely on grant proposals was no longer feasible. Clearly EMCF needed the level of transparency and rigour that due diligence brought.
SVA undertakes due diligence on all organisations it supports as a venture partner or that apply for funding from the social enterprise funds that SVA administers. It is also a service offered by the Consulting team and conducted on organisations that corporate and philanthropic funders are considering for support.
How to do it: the framework
The framework has three clear phases (see Figure 1):
- Phase 1: Review investor’s funding strategy and approach. Here the key components of the investor’s funding strategy are identified along with any preferred approaches.
- Phase 2: Select organisations and assess whether to proceed to due diligence. This involves identifying and refining a shortlist of organisations that match the funding strategy and preferred approach.
- Phase 3: Conduct due diligence. The shortlisted organisations are assessed against specific criteria that fall into five key areas.
Phase 1: Review investor’s funding strategy and approach
The initial phase involves identifying the investor’s core funding goals and any other priorities for the organisation.
It will identify the key social outcomes the investor is hoping to achieve via its investment in an organisation
This phase of research generally involves reviewing strategy documents, the organisation’s theory of change, annual reviews, Board reports, etc.; as well as interviewing key personnel to understand their values and level of desired involvement.
It will identify the key social outcomes the investor is hoping to achieve via its investment in an organisation e.g. increase education outcomes for young people. It will also identify other criteria that are important to the organisation including geography, whether it is a direct service delivery organisation, whether a start-up or established non-profit, marketing opportunities and what the preferred funding approach is, e.g. to invest alone or in partnership, the amount and the term of investment. It may also include what is important to individuals in the organisation.
For one of SVA Consulting’s clients a key criterion was that it wanted to invest in an organisation that allowed staff engagement. Research gave a clearer picture of the type of engagement staff would like, which included the opportunity to facilitate or support volunteer days and provide mentoring and possibly tutoring.
For SVA’s own investment strategy, Phase 1 refers to the requirements of the opportunity. For example, with the investments SVA makes through the Indigenous Social Enterprise Fund (ISEF), in addition to other goals being shared, more than 50% of the organisation’s staff must be Indigenous.
Phase 2: Select organisations and assess whether to proceed to due diligence
This phase identifies potential organisations that appear to fit the investor’s strategy. This can be done by conducting a market scan of organisations working in the relevant field and reviewing publicly available resources. It can also involve talking to organisations in the field to find out whether other organisations exist.
This initial research provides a rough match of appropriate organisations. This can then be refined against the investor’s specific strategy and requirements or preferred approaches.
For the corporate mentioned above 15 organisations were initially identified as providing support to, and improving educational outcomes for, low SES high school-aged students. SVA Consulting then applied the two filters: employee participation priorities and organisational priorities to these 15 organisations.
This process reduced the shortlist from 15 to five organisations, however one of these worked with young people in the justice system. This clarified that the corporate wanted to support an organisation focused on students who are not in the justice system.
For another corporate’s social investment strategy, SVA Consulting shortlisted 57 organisations and gathered detail on both the size and activities of each of these. These were then filtered on some of the funder’s key criteria: the level of government funding received and whether the organisation was a direct service provider or not. As a result, nine organisations progressed for detailed due diligence.
Phase 3: Conduct due diligence
The shortlisted organisations are assessed against specific criteria that fall into five key areas.
- Clear strategic direction
- Evidence of impact
- Governance and leadership
- Organisational readiness
The detail and emphasis placed on each area is tailored to the preferred approach of the funding strategy and preferences of the funders themselves (see an example in Table 1). Each funder will have different assessment criteria.
For example, if the preference is to fund a well-established organisation or program as opposed to a start-up initiative, greater emphasis will be placed on area 1. ‘Evidence of impact’ to be sure that the organisation/program has been effective.
Drawing on these five key areas, specific evaluation criteria can be developed in line with the funder’s objectives, strategic focus and preferred approach (see table below).
Table 1. Example of assessment criteria for organisations
|Clear strategic direction
|Evidence of impact
|Governance and leadership
The questions are answered by assessing each of the organisations through desk research, interviewing the CEOs and or senior managers, talking to their partners and reviewing relevant documentation including financial statements, program plans and evaluations, organisational strategic plans and annual reports. Public media may also be available.
Each program is evaluated against the criteria and scored for each of the five areas using the following system:
- Green – strongly meets criteria
- Amber – partially meets criteria
- Red – does not meet criteria.
This method allows the funder to clearly identify which organisations meet the criteria and to what level.
For example, with the corporate conducting due diligence on four organisations, the assessment identified one rating for each criterion making it clear which organisations would fit the funder’s strategy and intentions.
In the project mentioned above where nine organisations progressed to due diligence, any that scored red for a criterion were eliminated as were those that scored four or more amber ratings.
At the end of the assessment process, three organisations were identified as appropriate candidates for the social investment opportunity (see Table 2 below).
Table 2. Assessment of social investment opportunity candidates for corporate focused on disadvantaged 0-6 year olds & families
|Incompatible strategic focus – the program’s target population is children aged 7-17 years
|Insufficient evidence of outcomes and lack of viability to scale
|Receives some government funding. Has strong leadership, is a proven model and evidence of demand for services and creation of greater social impact through scaling
|Limited capacity to scale due to insufficient market demand
|Does not assist a significant number of children
|Lack of clear strategic direction, strong leadership and does not focus on 0-6 age group
|Less effective at targeting disadvantaged populations
|Receives some government funding, however, has strong leadership, evidenced outcomes and strategic direction. Potential to scale impact through investment is significant
|Receives some government funding. Outcomes are evidenced and organisation has strategic focus but could be clearer. Effectively targets the disadvantaged and has strong potential to be scaled and further impact.
In addition to having a comprehensive profile on each of the candidate organisations and strong rationale for supporting them, the funder also had a documented picture of the early childhood landscape in Australia which, whilst informing the decision at hand, could also be drawn upon for future social investment opportunities.
Organisations that undergo a due diligence process benefit by identifying areas for improvement enabling them to become stronger candidates in the future.
Those of us with funds have a responsibility to use them effectively to achieve real change.
SVA itself takes a very consultative approach to due diligence with its candidate venture partners and applicants for funds. The process is highly iterative and can take anywhere between 2-6 months. Throughout it, SVA gives the candidates business support including referrals to other organisations for assistance.
As a recipient of a grant from the SVA managed WA social enterprise fund, Brothaboy is one of the organisations that went through this due diligence process successfully. Brothaboy is an Indigenous street wear clothing brand that works with Indigenous high school students to help them to transition from school into meaningful careers. According to Joel Prince, Enterprise Development Manager, at Brothaboy,”Personally I got a lot out of the rigorous due diligence process. It was valuable for me to have independent, objective experts pick through our business plan and highlight its strengths and weaknesses.”
“SVA has helped connect us with pro bono experts in fields such as marketing, law and fashion,” said Prince. “They have also connected us with other organisations working in related fields that we can learn from.”
Funders in Australia have a plethora of organisations to choose from. As a result, the onus is on them to make sure their funds are efficiently applied to maximise the result they are looking for. Those of us with funds have a responsibility to use them effectively to achieve real change.
Due diligence is a process that is as relevant to the non-profit sector as it is to the for-profit sector. It builds accountability, transparency and confidence that there is alignment between goals and the ability of an organisation to deliver on them, while building skills in the target organisation.