“Unexpected things happen in the world,” philanthropist and psychologist Laurie Michaels, Ph.D. tells Inside Philanthropy. Most nonprofits, though, aren't prepared for the sharp curves that they may meet.
This is a problem, which is why Michaels founded the Open Road Alliance to meet a demand for fast, flexible contingency funding for nonprofits.
Many for-profit businesses budget for emergencies. As one example, the typical contingency budget for a motion picture is 10 to 15 percent. “Yet in philanthropy, we typically have none of that," Michaels says. "It’s really a huge market that has almost no planning for risk and no contingency funding. Most nonprofit budgets are budgeted down to the penny." When a nonprofit faces an unanticipated roadblock, “a project can be slowed, stalled or stopped completely. Both nonprofits and funders should be concerned about accounting for risk.”
Now, if you've ever led a nonprofit, you know that the subject of building a reserve fund often comes up, especially at board meetings. Then it's usually forgotten amid the crush of more immediate spending needs.
In 2015, the Nonprofit Finance Fund’s State of the Sector report revealed that just 23 percent of nonprofits surveyed had more than 6 months of cash in reserve. Most had less than three months of operating reserves on hand.
Yikes, right? Numbers like these explain the sudden layoffs often reported at nonprofits—such as when the ACLU fired 7 percent of its national staff last year. When organizations hit a financial bump, the ax can start falling pretty quickly.
In fact, though, the consequences can be even worse than layoffs.
“A health organization had spent nine months going through an RFP process and got a grant of $250,000 to run a clinical vaccine trial on children in Africa,” says Maya Winkelstein, executive director of Open Road Alliance. “And then four months into that trial, the government changed its regulations. The nonprofit had to go back and redo the trial to be in compliance with law. The organization knew how to do that, but was suddenly faced with $40,000 in additional costs. It couldn’t spend another nine months in an RFP process, and so the entire vaccine trial faced failure.” The kids went unvaccinated.
Michaels founded Open Road Alliance in 2012 after a career as a psychotherapist in Washington, D.C. and Colorado Springs. She has proven that a judicious application of cash at a key time can do enormous good.
Michaels was instrumental in providing critical funding to the Program for Appropriate Technology in Health (PATH) for a project in Burundi. “We had a clinical trial in which we were able to come in and provide the extra money for a trial of iron fortified rice,” she says. PATH’s Ultra Rice blends vitamins and minerals with rice flour and packs them into rice-shaped grains. Organizers planned a trial with moderately anemic school children. “It had to begin at the start of the school year and was highly complicated, because it involved blood draws.”
But government-caused delays set the project back an entire year, threatening the whole study and the loss of millions of dollars. A $75,000 grant from Open Road Alliance allowed PATH to retain its research staff and replenish its supplies. A full year of collected data proved PATH’s Ultra Rice was a cost-effective micronutrient delivery system. It was placed on the USDA commodities list. "A huge boost to any food item is to get onto that list,” Michaels says.
Until recently, Open Road has offered two forms of emergency funding. Charitable grants are intended to overcome unexpected roadblocks that threaten the success of a project. They can also be used to take advantage of an unexpected opportunity to multiply a project’s impact. Since these Open Road grants benefit “catalytic opportunities,” they do not have to be repaid.
Recoverable grants function as loans and are offered at below-market interest rates. “They are usually zero interest, occasionally 1 percent interest,” Michaels says. “They are for organizations that have a revenue stream and might have a cash flow problem.”
Since Open Road opened for business, it has given out $5.6 million to bail out projects worth $37.52 million. Of these, as of the end of February 2016, 50 charitable grants were worth $3.5 million, while 17 recoverable grants totaled $2.1 million.
On March 23rd, Open Road launched a new initiative, The Unexpected Fund (TUF) which is a 50-50 partnership between Open Road and a project’s original backers to get a nonprofit over unexpected hurdles. Michaels sees it as a way to open much-needed dialogue between donors and charities about confronting emergencies in their work. Michaels says, “Incentivizing people to actively engage in a discussion of what went wrong and how contingency funding can help is a lot better than my just writing op-eds about how everybody should do this.”