Due Diligence

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Every donor wants to direct their limited charitable resources to organizations that will use the funds effectively and make a positive social impact. So how do you make sure the nonprofits you’d like to fund are aligned with your values and philanthropic priorities? You conduct due diligence.

The term due diligence comes out of the business world and refers to the information gathering that a reasonable person is normally expected to conduct before entering into an agreement or contract with another party. What constitutes “reasonable” due diligence in the charitable sphere will naturally vary depending on both the information publicly known about the nonprofit’s work and the donor’s orientation toward trust and faith in long-term but potentially unknowable outcomes. The size of the donation and the donor’s intention to establish a sustained relationship with the nonprofit may also be major factors in assessing the appropriate level of due diligence. Every donation involves a certain leap of faith, but it’s best to look first.  

Why Due Diligence Is Necessary

There are countless causes and individual nonprofits that could be worthy of your donation, so it’s important to have clarity about your own views regarding positive social change in the world. It may be about specific numbers of people receiving essential human services or it may be about harder-to-quantify movement-building toward your shared vision for the future. The most basic level of due diligence is simply asking yourself if the nonprofit’s mission is really a good fit with your perspective. 

If an organization's mission sounds right, the next basic level of due diligence is to verify that it is a nonprofit in good standing — meaning it is a registered nonprofit that is up to date with its financial reporting. There are a lot of signs of efficiency that donors look for in nonprofits’ 990 IRS forms, audits and annual reports, and simply having those items available is a good starting point for better understanding an organization.

Then, if you are planning on giving a large sum relative to the size of the organization’s budget and you want to know how, exactly, your donation will be put to use, it is reasonable for you to establish direct communications with staff of the nonprofit to understand how the donation will be used in a particular period and how it would increase the nonprofit’s impact. 

Key Considerations

Some level of due diligence is always warranted, but what is the right balance of trust and verification? Things to think about as you’re doing due diligence on potential grantees: 

  • A vision for change can be hard to quantify. Keep in mind that it’s hard to measure the good work most nonprofits do with simple metrics. Unless they are providing direct services that can be easily measured, a nonprofit’s progress or positive impact might be evaluated in more qualitative ways, and that’s okay. The organization may be advancing public understanding or policy changes that will ultimately have impact but are subject to unpredictable factors. 

  • Adapting due diligence to the organization’s size and track record. You might be more inclined to conduct due diligence with a smaller or newer organization. Intermediaries are potentially a great resource here (see below), as they have already identified and vetted small and emerging groups doing important work. Intermediaries can be especially helpful if you want to fund grassroots, front-line, and/or local community groups. For larger, established organizations with a strong track record, your focus might be more on how well their work aligns with your values and your philanthropic priorities.

  • Time burdens. Take as much time as you feel comfortable doing online research and reading the organization’s publicly available information. But if you feel you need to ask individualized questions, be mindful of staff time. You want the nonprofit to spend most of its time on programs and operations, not fundraising, right? If you are considering a major donation, it’s sensible and appropriate to spend some time in discussion with staff members and to request information from them. If you’re making a smaller gift, consider how much staff time you’d like to see devoted to you (or any other donor) versus to the work that is at the heart of the organization’s mission. If there are things you can easily learn from a website, annual report or strategic plan, look there first. 

Taking Action

There are a number of ways to approach philanthropic due diligence, from working with consultants and other experts in the field to conducting your own research.   

  • Start with the basics. You can verify that an organization is a registered nonprofit and has filed recent IRS 990 forms at sites like Guidestar, Charity Navigator or the Better Business Bureau’s Charity Review. It’s also a good sign if the organization has on its website things like audited financial statements, annual reports, mission and values statements and strategic plans. 

  • Dig into organizational strategy. Using the information on the organization’s website, personal connections you have with the organization or direct communications with staff, these are some of the questions that can help you decide whether a nonprofit is effective and in line with your values and priorities. 

    • What is the nonprofit’s mission and vision? 

    • What is its theory of change? (A written or illustrated description of how a given intervention, or set of interventions, is expected to lead to specific outcomes/social change.)

    • How does the nonprofit measure its impact?

    • Who else is funding this nonprofit?

    • Who is in leadership at the organization? Is the leadership diverse? Do leaders have strong track records, vision and proven management skills?  

    • What is their relationship to the community they work with? Are the organization’s leaders part of the community? If not, do they have a relationship of trust and accountability with the community?

    • Is their financial house in order? Do they have strong budgeting processes, regular independent audits, reasonable transparency regarding finances? 

    • Does the organization collaborate with other nonprofits? It’s nearly impossible to make real change in isolation. How does the organization work with others in the field or build support for its work across usually siloed movements? 

  • Check secondary sources and news coverage. Search Inside Philanthropy coverage of the nonprofit and of funders who give in the areas where you want to give. These funders may also mention nonprofits they support on their websites or in media coverage. Google the nonprofit. Media coverage may help you get a better sense of the organization’s values and the people involved, as well as any scandals or conflicts. Talk to people you know who have contributed to or worked with the organization.

  • Check foundation giving. Most private and community foundations conduct extensive due diligence; it is literally their job on behalf of their donors. You may want to check out the foundations that fund issues that interest you to see where they are directing their resources. Many of them have grantee lists and case stories of grantee effectiveness. 

  • Consider using an intermediary. If all these due diligence ideas sound like a lot of work, you may want to donate to an organization that already has an established reputation for distributing grants to effective organizations working on the issue you care about. There are intermediaries, or regrantors, dedicated to just about any community or cause you can think of. These experienced grantmakers know the nonprofits in their area of expertise. They have done the research and built relationships with trusted organizations. For example, if you want to give to grassroots groups working on climate issues around the world, you could give to a nonprofit like Global Green Grants, which has already identified and vetted front-line organizations led by local people. Want to support the movement for reproductive justice? Intermediaries including the Groundswell Fund and the Third Wave Fund have been giving in that area for decades and have well-researched, strategic plans to move money where it can be used most effectively.  

  • Join a funder group. Another way to learn about effective nonprofit work in the subject area you care about is to engage in donor peer learning opportunities. A community foundation or organized giving circle (for individual donors) or donor collaboratives, funder affinity groups and regional associations of grantmakers (for institutional donors) can provide a way to research nonprofits together with like-minded donors.

  • Volunteer. There is perhaps no better way to form a meaningful relationship with an organization than to volunteer to help carry out its mission. Some organizations need to have highly professionalized staff in order to effectively carry out their work and don’t present many volunteering activities. But if they do, volunteering for an organization to which you’re considering donating can provide insights that no other method would. 

  • Set up a meeting with the nonprofit. If you are considering making a major gift or getting deeply involved with an organization, you may already have met with staff. Getting to know the people at the nonprofit can give you insight and information about how they do their work. Especially if you are discussing substantial support, a site visit or meeting is recommended. The nonprofit will likely invite you to set something up.

  • Be aware of your biases. Everyone has them, but biases in due diligence procedures can get in the way of support for worthy organizations. A common form of bias is favoring renowned organizations over lesser-known ones. This is related to size bias and a tendency to fund long-established organizations over newer or movement-based organizations that are more likely to have leaders who are women, people of color, immigrants or LGBTQ. Donors are also biased in favor of organizations with which they already have connections, and for people coming from considerable wealth, that bias can color perceptions of effective strategies. Working with an intermediary or funder group can help donors question their own biases and ask questions of themselves, in addition to due diligence aimed at potential grantees. 

As you get started with your own due diligence process, think about how every step will help, hinder and impact the nonprofits you intend to support, and think about how they will experience your questioning. As the philanthropic consulting firm Bridgespan Group wrote in a recent advisory, “Diligence can provide helpful insight, but grantmaking for social change always involves uncertainty and, therefore, some degree of judgment. Learn to ‘trust, not prove’ — in other words, use the process as a way to build trust with those who are closest to and know the work best.”