Why donors should focus on funding capacity building while investing in NGOs

India's development sector has an opportunity like never before–to be a serious partner in driving systemic change across various social domains. But, is it equipped to do so?  A recent analysis by Sattva Consulting reveals a stark reality: only around 20 NGOs had budgets exceeding ₹100 crore in 2021-22. 

Two aspects are worth reflecting here: one, why, in our eighth decade of independence, do we have such a weak social sector? Two, what will it take to ensure that every domain has at least a few well-equipped leaders and organisations who can effectively partner with governments and civil society to drive transformation at scale?

We believe that a large part of the answer to both questions lies in the lack of investment in the organisational capacity of NGOs. Donors have historically largely focused on programmatic investments, and NGOs have used their highly limited funding to stretch their direct impact. Consequently, unlike in the corporate world, the core of NGOs has been starved of investments that would help them grow the impact of their work and drive systemic change. At the same time, most of them have been left struggling with resilience and vulnerability to shocks of any kind. 

How most falter

Our latest white paper on ‘How strategic investments can fuel NGO fundraising success & resilience’ reinforces a critical reality. Without investment in organisational capacity, even the most impactful NGOs struggle not only to sustain but also to scale their work. For example, unlike in corporates, where building the corporate/treasury/HR/marketing/research and other functions is a core activity supported by the business plan, in NGOs, donors often hesitate to support these areas, looking at them as "overheads" rather than impact-driven investments. When is it that we walk into a store and ask the overhead cost of making a shampoo or a car? Yet, we limit this share to as low as 5% when making a donation or grant, not trusting the NGO to do the right thing for addressing the cause that it serves.

Asking the right question

Our study on ‘How strategic investments can fuel NGO fundraising success & resilience’ confirms that funding capacity building is one of the most effective ways to drive long-term impact. One of the best ways in which this can be done is by investing in the fundraising capability of an NGO. In FY21, a reputed mid-sized education-focused NGO in our study was forced to temporarily shut down operations after one of its largest funders withdrew support due to Covid. Facing severe financial distress, the organisation leveraged targeted grants to hire dedicated fundraising personnel. Within two years, it demonstrated a 57% budget growth, expanded its donor base fivefold, and achieved an 82% donor retention rate. 

This is not a one-off case. Our white paper analyses investments made in 11 NGOs over 3-4 years between 2013 and 2024 to strengthen their fundraising capabilities. Ten of the 11 NGOs were mid-sized, while one was a large NGO. This diverse group had a median budget of ₹4.2 crore, a median age of 17 years, and representation across various sectors. The findings were striking. The median budget growth of the five leading NGOs was 39%, materially above-average in the sector. The period that they could sustain operations without new income increased to 15 months, with the five leading NGOs even touching 20 months. The median donor base expanded by 2.5 times. Donor retention improved significantly, increasing from a median of 50% to 70%. The median grant ticket size grew by 59%, reflecting stronger donor trust. Importantly, with dedicated fundraising personnel, NGO founders reduced their fundraising involvement from 60% to 40%, allowing them to focus on strategic priorities.

How can donors enable transformation? 

The example of the results of investing in one aspect of capacity building, i.e. fundraising, demonstrates that if donors truly want to enable social impact at scale, they must rethink their approach to funding NGOs. We have five recommendations for our fellow donors:

1. Allocate up to 20% of grants to organisational capacity building: This funding can be allocated for strengthening fundraising, leadership, operational infrastructure, marketing, research, technology, advocacy, collaboration with government / others, and ensuring long-term sustainability.  

2. Offer multi-year funding: NGOs should not be treated like ICU patients–they need stability to address difficult issues, for which they need to build robust internal capacity. Short-term, restricted grants will limit their ability to plan and invest in long-term growth. A commitment of at least 2-3 years will help achieve this.

3. Adopt a patient & flexible capital mindset. Building capacity is not an overnight process—there will be hiring challenges, learning curves, and the need to pivot strategies based on what works. Donors must provide NGOs the flexibility to refine and adapt to strategies. For example, two NGOs in our study initially hired senior fundraising professionals but found that donor engagement was stronger when led by the founder. One pivoted by hiring associates to support fundraising activities, which proved more effective. This underscores the need for donors to allow experimentation and iteration and not be deterred by failure.  

4. Co-create success metrics with NGOs: Instead of imposing rigid reporting requirements, donors should collaborate with NGOs to define meaningful, context-specific indicators of progress. For example, for fundraising, we looked at increased donor base expansion, fundraising efficiency, financial runway growth, etc.  Also, unrealistic targets dictated by donors can be detrimental to NGOs. At the recently concluded Dasra Philanthropy Week, both donors and NGOs emphasised that co-creation and trust are fundamental to building successful, long-term partnerships.

5. Advocate and influence sector-wide change: Donors who have witnessed the transformative impact of capacity-building grants must actively share these learnings and encourage NGOs they support to do the same. Promoting collaborative funding models will create a ripple effect in the sector.

Call to action

If we want NGOs to be partners with governments and civil society to drive sustained, scalable impact, we must invest in their ability to raise and manage resources effectively. It is time for donors to do their part and move beyond funding just programs and start funding the very foundations that allow NGOs to thrive. By being mindful about this, we can help NGOs not just survive, but flourish as partners in a Viksit Bharat.

Views are personal. Authors are from A.T.E Chandra Foundation