SD Grantmakers In Depth:
Due Diligence

This SDG IN DEPTH online monthly publication is developed, in lieu of a printed newsletter, by San Diego Grantmakers to keep you informed about special topics of interest to grantmakers. Feel free to forward, print out, and/or refer to it later as desired! In addition to IN DEPTH, we also publish SDG Update, a monthly member online newsletter. Our mission is to connect, educate, develop, and inspire a diverse group of foundations and corporations to stimulate effective philanthropy in the San Diego region. For more information, visit www.SDGrantmakers.org.

Mark Your Calendars

Funding Education: The Many Facets of San Diego's Educational Needs
June 6, 2006, 8:30-11:00am

Speakers: Dr. Carl Cohn, Superintendent San Diego City Schools; Dr. Paula Cordeiro, Dean of the School of Leadership and Education Sciences, USD; Richard Thome, Assistant Superintendent, San Diego County Schools
Location: Mission Federal Credit Union
Sponsored by: Mission Federal Credit Union

Click here for more information. Click here to RSVP.

Due Diligence

The term "due diligence" has been adopted from the world of business into grantmaking to describe the process by which funders research organizations to guide grantmaking decisions. Needless to say, this is not a one-size-fits-all process. Grantmakers for Effective Organizations has developed several tools to help your grantmaking organization conduct due diligence:

1) The Due Diligence Tool: Applying Pre-Grant Assessment to Improve Your Grantmaking, written by Liza Culick, Kristen Godard and Natasha Terk of La Piana Associates. This publication is an extensive guide for funders in providing due dilgence for new grantees. This publication includes work sheets and interview questions funders can integrate into their own due diligence processes. Click here for a link to download the full publication of "The Due Diligence Tool"--and see below for an excerpt.

2) Tool for Assessing Startup Organizations: A due diligence supplement for grantmakers. This is designed for use by funders assessing a grant application from a startup nonprofit and focuses on indicators of organizational — rather than programmatic — health and capacity. The tool comes into play in the proposal review process after the funder has completed the initial due diligence process and determined the organization has a mission that is closely aligned with the funder’s program goals and is the right organization to take on the work. Click here for a link to download.

Excerpt from "The Due Diligence Tool"

Foundation program officers are faced with multiple challenges in assessing whether to recommend a grant to their board or decision-making committee. First, they must ascertain whether and to what extent the proposed activity coincides with the foundation’s guidelines and priorities. Next, they must assess the worth of the proposed activity itself — does it advance the field, provide needed services or generate new learning? If the proposal survives this initial scrutiny, it must then be weighed for its relative merits beside many other worthy proposals. This process requires a great deal of skill and sensitivity.

Due diligence protects a foundation’s investments and reputation and advances its mission and overall strategy. While the idea contained in a proposal might be a strong one, there are still many questions to consider. For instance: Does the organization have a successful track record? Does it operate under an appropriate governance structure? Is it financially and operationally sound? An over-reliance on the strength of the ideas presented in a proposal, without ferreting out these organizational strength factors, can lead to funding a project that does not succeed in producing expected results.

The Process of Due Diligence
When a program officer receives a proposal on his or her desk, the first step of proposal review is generally a consideration of the alignment of the applicant organization and proposed project with the organization’s guidelines and interests. If this initial review is positive, due diligence typically commences with broad research and information gathering to provide a good understanding of the prospective grantee, how it fits into the field and the way in which this project will advance the organization’s strategy. The funder might also contact colleagues for their view of the grantee and its work. Then, the funder moves on to get to know the applicant on a deeper level, including interviews with some combination of the executive director, board chair, other board members and staff members key to the proposed project. The basic steps in a due diligence process are laid out below.

1. Review grant proposal, budget and supplemental documents. Review the proposal for its fit with your organization’s mission, guidelines and strategy. Familiarize yourself with the basics of the proposed project and the organization. Review supplemental materials, such as strategic plans, financial reports, marketing materials, staff bios, etc. Assess the strength of the project focus and design. Consider viability of the project budget and overall financial health.

2. Conduct additional preliminary research. Ask your colleagues (funders and other experts in the field) for their input. Review the organization’s Web site. Seek out other available data and information relevant to the project.

3. Conduct interview(s) with the organization’s leadership (site visit or phone). Get to know the executive director, key program staff and board leadership. Explore the organization’s health and capacity, including track record, governance and executive leadership, vision and strategy, staffing partnerships, communications and finance. Delve more into the proposed project, focusing on planning, outcomes and evaluation.

4. Conduct additional follow-up research as needed. Probe areas of concern that arise with the applicant organization through additional research and discussions with colleagues and staff or board leadership.

5. Analyze and apply your due diligence findings. Consider “red flags” and assess the risk they pose to the success of the project. Weigh the factors important to your organization; determine if there are any “deal breakers.” Consider different options for structuring the grant, and ultimately make a decision about the grant.

6. Synthesize information and present to others. Record your due diligence findings and the resulting decision. Craft funding recommendations and present to staff and board for review.

Getting to Know the Applicant
Successful due diligence relies heavily upon a funder’s ability to listen beyond the applicant’s written or spoken words. This process is an opportunity to seek the “truth” about an organization — that is, to go behind that which is presented on paper. The interaction between the funder and potential grantee in the due diligence process sets the tone for the future relationship. This may be the first contact the prospective grantee has had with your organization, and it is your opportunity to lay the groundwork for a positive, open relationship that will benefit your future work together. If it is not the first interaction, and the relationship has been less satisfying than you would like, now is the time to begin moving it onto the right track.

It is also important to be clear about the application process upfront — what you look for, what the applicant can expect — and be consistent in your actions. Grantseekers, like grantmakers, talk to each other and compare notes. So, be aware that your actions may be observed by a network of community members with whom you have a stake in building a good relationship. Honesty and consistency are cornerstones to that relationship. Another way you will build a trusting relationship is by clarifying roles, responsibilities and expectations at the outset of the proposal review process. “This is what we hear from you, why we are interested in your proposal, and here’s what we need from you.”

Applying Your Due Diligence Findings
It would be terrific if your investigations led to a consistent set of findings — either all great or all bad. However, this is generally not the case. In reviewing your due diligence findings, you may uncover some issues that lead you to a favorable impression of the organization and others that cause you concern. You may also have identified red flags. It will be your challenge to determine how to move forward with funding decisions in light of any identified red flags.

In determining how to address problems surfaced by the due diligence process, here are some key factors to consider:

• Size of grant — Is it large for your organization? If so, you will want to be sure about your decision to fund. A different level of analysis is needed for different sizes of grants. You know what is “large” for your organization, and when you are considering a high level of investment, or a long term investment, your due diligence process will likely be more exacting and intense.
• Size of grant relative to the applicant’s budget — Will this make a large impact on the prospective grantee’s annual operating budget? If so, it will be critical to pay attention to the health of the applicant organization and its capacity to manage a large infusion of money.
• Recent leadership changes at the applicant organization — If there has been a recent leadership change, you may choose to spend additional time exploring the reasons for the change and trying to understand how the organization is managing the transition. Times of leadership change can be challenging, and may warrant additional support or a decision to postpone new projects.

What Are Your Options Moving Forward?
If you have decided that you definitely want to make a grant to the organization, there are a range of options for the structure of the grant that you might consider, depending upon the level of risk represented by the deficiencies uncovered during due diligence. These include:

1. Fully fund the proposed project, with no stipulations.
2. Fully fund the proposed project, with stipulations — Make a program grant as requested. Require the grantee to remedy the deficiencies and report back within a prescribed time frame. Tie future grant payments to these stipulations.
3. Give an experimental grant — Make a program grant for one year only, negotiating specific, reasonable objectives, and monitor the grant closely. Consider additional funding later when agreed-upon benchmarks are achieved.
4. Give an exploratory program grant, coupled with organizational assistance — Consider offering consulting or training assistance as part of the grant package if the applicant appears to have substantial or complex capacity issues. Make a program grant only for one year, negotiate specific, reasonable objectives, tie grant payments to achievement of benchmarks, and monitor the grant closely.

Finally, we encourage you to incorporate ongoing learning about nonprofit management and governance issues into your own work. The more familiar you are with the organizational side of nonprofit work, the better equipped you will be to not only to conduct sound and thorough due diligence, but also to offer resources and ideas to the organizations with whom you work.

Click here for a link to this article.

Upcoming SDG Programs

Forum Advocacy Teleconference Series Part 1: "Foundation Support for Advocacy - An Introduction"
May 23, 2 PM EST
Please click here to register and to receive call-in information. Cost of this call is $25.

A Call to Action: San Diego’s Nonprofit Leadership Challenge
Co-sponsored with the University of San Diego,
The San Diego Foundation, the Jewish Community Foundation and LEAD San Diego
May 31, 2006, 7:30-Noon
Location: University of San Diego, Institute for Peace and Justice
Breakfast Included, $25, Please RSVP directly to USD, 619-260-7442

Advocating for Change
Presented by the California Endowment's Center for Healthy Communities
May 31, 2006, 9:30am-4:00pm
Location: Town & Country Hotel

Forum Advocacy Teleconference Series Part 2: "Mission Possible - Evaluating Advocacy Grants"
June 8, 2 PM EST
Please click here to register and to receive call-in information. Cost of this call is $25.

The Conrad Hilton Foundation & the City of Los Angeles Initiative to End Chronic Homelessness: A Collaborative Approach
Jeff Schaffer, Senior Program Officer
June 12, 2006, 10:00am-12:00pm
Location: Alliance Healthcare Foundation
Breakfast Provided

Outcomes Thinking & Management for Grantees   
Sponsored by NMS and The Foundation Center
Presented by the Center for Outcomes at The Rensselaerville Institute
June 15, 2006, 9:00am-4:00pm
Location: National University Spectrum Building
Lunch Included, $195, RSVP at www.npsolutions.org or the Foundation Center at 800-424-9836

Outcomes Funding for Grantmakers  
Presented by the Center for Outcomes at The Rensselaerville Institute
June 16, 2006, 8:30am-10:00am
Location: United Way

Keeping San Diego’s Children and Teens SAFE
Laura Spiegel, First 5; Sandra McBrayer, The Children’s Initiative; Roseann Myers, The Commission for Children, Youth and Families
June 22, 2006, 8:30am – 10:30am
Location: Market Creek Plaza Conference Room 401 
Breakfast Included

N2: Networking at Northern Trust
A FEW 4th WEDNESDAYS
June 28, 4 - 5:30pm
August 23, 12 - 1:30pm
September 27, 4 - 5:30pm
October 25, 12 - 1:30pm
Location: Northern Trust
Network with and learn from your SDG member colleagues!

Keeping San Diego’s Children and Teens HEALTHY
Laura Spiegel, First 5; Sandra McBrayer, The Children’s Initiative; Roseann Myers, The Commission for Children, Youth and Families
July 13, 2006, 8:30am – 10:30am
Location: UCSD Preuss School
Breakfast Included

San Diego Grantmakers Annual Conference: 
Grantmakers as Change Makers
October 4, 2006
8am-3pm
Location: NTC Promenade

Distinguished Speaker Series: Mayor Jerry Sanders
A Philanthropic Lens for San Diego’s Future
November 1, 2006, 11:30am-1:00pm
Location: TBD
Lunch Included

All programs are free for SDG members except where indicated. To RSVP, please call (619) 744-2180 or email programs@sdgrantmakers.org.

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