Saying Goodbye: Strategic Exits for Family Funds

The phrase “exit strategy” came to the philanthropic world from the world of venture capital after a brief stint in the military. Venture capitalists look to sell a fledgling enterprise or take a company public, exit strategies that guarantee a return on their investments. Similarly, venture philanthropists help a nonprofit secure additional funding or build earned income in order to guarantee a social return on their investment.

Philanthropists who don’t consider themselves venture philanthropists will nonetheless change funding direction over the course of their charitable endeavors. Every day, family funds embark on new adventures with new grantees in new places. Similarly, whether by policy or preference, they will end their funding of some initiatives, nonprofits, and communities.

What can today’s giving families do to get their grantees to the “next level?” What does the future hold? What does success look like? Where are the exits? When things go as expected, how do we move on? When things don’t go as we had hoped, how do we move out? How do we make these transitions gracefully and with a view to our shared goals? What makes for a strategic exit as well as an exit strategy?

This article offers tips on how to negotiate these charitable exits – how your family fund might make successful, sure-footed exits in the course of your philanthropy.

A Strategic Exit

For any number of reasons, family funds may have to end a funding relationship with a grantee or program area. Perhaps, it’s because the grants were successful – needs were met, people were helped, and now it’s time to do it all again. Perhaps, things didn’t go quite as planned, and it’s time to make the best of a bad situation. Perhaps, you’re concerned about reducing dependency and limit the number of consecutive years a grantee can be funded, building an exit into your grants from the beginning.

Amid a growing concern for forming and maintaining respectful, responsive, and effective grantor-grantee relationships, philanthropies are looking at how they might effect a “Strategic Exit.” Since we don’t always know what the future holds or haven’t always defined an exit strategy at the beginning, it’s important to know how to depart successfully when it becomes clear that parting ways is the best course of action.

NCFP President Virginia Esposito contends, “Successful strategic exits should cover a legitimate change of course, a communication strategy, a grantmaking strategy, and an advocacy strategy”:

A legitimate change of course. When family funds shift gears, it’s important that the decision is grounded in fund policy and your considered sense of the best use of charitable dollars. No one is well served if your giving appears to be based on mere whim. While there should always be room for the creativity and responsiveness that families bring to philanthropy, that vitality is best guided by sound policy – in clear mission statements and funding guidelines. These policies answer questions like: what do you fund? How do you fund? Do you offer matching and challenge grants, general operations, project funding, capital campaigns, and/or program-related investments? What kinds of nonprofits and projects do you fund? Where? Why? To what purpose? For how long?

A family can avoid a number of entanglements and in some cases bad press by clearly articulating the reasons for their decisions and publishing the policies that guided them. When your goals and expectations are clearly expressed and shared, working together is that much easier, and so are the transitions.

Example: A foundation has a policy of only funding in communities where family members live. A family member has recently moved from New York to South Carolina. Several New York grantees close to that family member will no longer be funded. The foundation points to long-standing foundation policy to fund only where family members live, a principle that originated with the donor who wanted the family to give where it lived.

A communication strategy. A change of course may be perfectly legitimate and the most effective thing for a fund to do, but if these choices aren’t well-communicated, it can leave a bad taste in everyone’s mouth. If a grant isn’t working out, give the grantee time to talk with you about problems before withdrawing funding. The first time they hear about your dissatisfaction shouldn’t be when you’ve already made your decision to move on. When and if you do decide to change course, inform the grantees individually.

With some grantees whose grants were relatively small or short-term and with whom the foundation isn’t particularly close, you might send a letter informing the grantees of the fund’s plans and asking them to contact you if they have questions. If you’ve been working closely with a particular grantee for a long time and decide to move on, consider an in-person meeting to explain your decision and discuss options beyond the current grant period.

Example: A philanthropy has decided to spend down. All grantees are informed of the decision via letter. Meetings are scheduled with several grantees in the middle of multi-year grant commitments, and with a few grantees with whom the donor was close to discuss possibilities for the future. The philanthropy publishes notice of its decision on its web site and sends out a press release.

A grantmaking strategy. When you’re especially close to some nonprofits, you might consider some sort of transition grantmaking that gives the nonprofits the space and capacity to shift gears as well. If your philanthropy was involved in a particular project, consider general operations funding that gives the nonprofit the capacity to plan for transition, to fundraise and access new funders. If your fund was already contributing to general operations, consider a matching or challenge grant that encourages new funders to step up. You might also consider how you might help a nonprofit build earned income or access financing in the form of program-related investments or loans.

Example: A family fund has shifted its focus from the environment and youth development to simply youth development, the result of a recent retreat focusing on where the fund advisors thought they could make the most difference. The fund advisors meet with several of the grantees in the environmental program that were particularly successful to discuss some general operations support and matching grants in order to ensure that these programs are in a strong position to move forward even if the fund will no longer be involved.

An advocacy strategy. The final piece of the puzzle is simply the recognition that your relationship with your grantees is not totally financial. You can help nonprofits succeed beyond funding by volunteering, serving on nonprofit boards, publicizing their successes on your website or in newsletters, or simply talking up their successes to fellow funders and nonprofits. Goodbye needn’t mean goodbye forever. It can mean that your relationship has simply changed.

Example: A foundation had a number of successes with several grantees before a downturn in the stock market pushed the foundation to narrow its grantmaking support for several years. The foundation was forced to change the nature of its support for a number of grantees whose programs had to be put on hold. The foundation became a local spokesperson for these grantees until investment performance changed for the better.

Changes and transitions, entrances and exits, are a part of the adventure of family philanthropy. Some initiatives are successful; some under-perform. Family members move. Investments fluctuate. Program goals change. Leadership passes on to a new generation. All of these events bring change, and sometimes exits. When you see a change on the horizon, take time to discover what would make a change in course legitimate, and lay out your communication, grantmaking, and advocacy strategies that will make your strategic exit as successful, meaningful, and effective as possible.

Exit Stage Right

Whatever the nature of your philanthropic exit, whether it’s the result of a changing landscape or of a considered plan for the future, keep the following general principles in mind to ensure that when you do exit stage right, you do so with a flourish.

Remember that it’s about more than just a grant. In the same way that you and your family members are not just colleagues but family, remember that sometimes you’re not just colleagues with your grantees either. You’re partners in human services, in conservation, or in some other common endeavor. You may even have formed significant friendships over time. The deeply emotional character of family giving is one of its greatest assets. If you must leave a grantee behind and move on to new adventures, remember that there’s more at stake in these transitions than grants. Discuss coming changes with your family, advisors, and grantees. Discuss what motivates you and animates your giving. Discover what drives your grantees and what they hope to accomplish with or without your support. Determine how you might help shape their vision even though you might not always be in the picture. Above all, share your time and your talent as well as your treasure with others; and let others do the same for you.

Don’t forget that it’s about a grant, too. Have you accomplished everything you set out to achieve when you walked this road with a grantee? Has the grantee done all it had hoped to accomplish? What can you do to help the grantee succeed without you? Consider transition money, general operations money, or matching and challenge grants for effective grantees.

Psychologists note we remember first impressions and final impressions best. All the good you’ve done can be quickly forgotten or remembered forever, for better or for worse, depending on how you exit. Be sure that your exit is as generous as your entrance.

Additional Resources

For another take on exit strategy from the perspective of venture philanthropy, consult:

  • Kim Alter, Paul Shoemaker, Melinda Tuan, and Jed Emerson, When Is It Time to Say Goodbye? Exit Strategies and Venture Philanthropy Funds (Virtue Ventures LLC, Social Venture Partners, and The Roberts Foundation, 2001).
  • Center for Venture Philanthropy, Defining Virtue: Five Key Elements of Venture Philanthropy and Five Years of Documented Results (Menlo Park, CA: Peninsula Community Foundation, 2004.)