Why Funders Must Build Capacity for Nonprofit Innovation

Nonprofit organizations tackle society’s most complex challenges, from climate change to economic inequality. Yet, they often lack the resources needed to innovate. Without access to the latest tools and the freedom to experiment, nonprofits can struggle to adapt to the evolving needs of the communities they serve. Funders and grantmakers are in a unique position to address this issue by investing in nonprofit innovation. Innovation isn’t just about adopting new technology—it’s about rethinking systems, fostering inclusion, and ensuring equitable impact.

By focusing on building capacity for nonprofit innovation, funders can empower organizations to create long-term, sustainable change. However, innovation requires more than short-term grants. It demands investment in leadership, experimentation, and infrastructure—elements that help nonprofits thrive in a constantly shifting world.

The Growing Need for Nonprofit Innovation

The challenges nonprofits face today are complex and urgent. Post-pandemic, many organizations saw increased demand for services, especially in areas like health and education. Simultaneously, economic pressures, such as inflation and reduced funding, have made it harder for nonprofits to meet these growing needs. The world is changing rapidly, and nonprofits must adopt innovative strategies to stay relevant and effective.

Additionally, technology has become a critical tool for nonprofits. Organizations are now expected to engage with communities digitally, analyze large amounts of data, and offer new kinds of services through virtual platforms . Innovation in these areas can make nonprofits more responsive and capable of addressing inequities in new ways.

Barriers to Nonprofit Innovation

Despite the need for innovation, nonprofits often face several challenges:

• Limited Flexible Funding: Many grants come with strict requirements, leaving little room for experimentation.
• Risk Aversion: Nonprofits often fear that failure could jeopardize their reputation or future funding.
  
• Skill and Technology Gaps: Many organizations struggle to access the latest tools or attract staff with innovation-related expertise.
  
• Short-Term Funding Cycles: Grantmakers often focus on short-term outcomes, making it difficult for nonprofits to invest in long-term capacity building.

These barriers highlight the importance of funders adopting new approaches to philanthropy—ones that allow nonprofits to innovate freely and grow sustainably.

Shifting Dynamics: New Ways Funders Engage with Nonprofits

In recent years, there has been a shift in how funders engage with nonprofits, creating the perfect environment for building innovation capacity.

1. Trust-Based Philanthropy: Funders are moving toward more trust-based models, where nonprofits receive flexible, multi-year funding. This shift empowers organizations to invest in long-term innovation strategies instead of focusing only on short-term outcomes .
2. Capacity Building as a Priority: Rather than funding individual projects, many grantmakers are now supporting broader capacity-building efforts. This includes investments in leadership, technology, and operational infrastructure, giving nonprofits the tools they need to develop innovative solutions .
3. Collaborative Learning with Grantees: Funders are increasingly adopting a posture of humility, working alongside nonprofits and learning from their work in real time. This approach fosters deeper partnerships and allows funders to co-create innovative solutions with the organizations they support.

These shifts in philanthropy reflect a growing recognition that meaningful, sustainable change comes from within communities—and that nonprofits need the freedom and support to innovate inclusively.

How Funders Can Support Innovation Capacity Building

1. Invest in Digital Transformation and Technology

Technology plays a key role in nonprofit innovation. Funders can support nonprofits by offering grants for adopting cloud-based tools, automating processes, or developing data analytics capabilities. For example, investing in a nonprofit’s ability to use AI for community needs assessments can improve service delivery and ensure more equitable outcomes . With the right tools, nonprofits can become more agile and responsive to shifting demands.

Importantly, tools like LaunchPath can provide innovation culture "in a box". Funders can provide their grantees with a digital tool that walks social innovators through every step of the innovation process, including the ability to use AI to find additional funding opportunities for their game-changing ideas.

2. Support Leadership Development Focused on Innovation

Innovation starts with leadership. Funders can provide grants for leadership training programs that teach nonprofit executives how to manage change, encourage risk-taking, and foster inclusive innovation. Programs that focus on equity-centered leadership ensure that innovation efforts align with community needs and drive systemic change.

It's also important to note the benefits don't need to stop with a specific leader within a grantee organization. As a funder, you have the ability to drive a sustainable change in fostering innovation culture. Practices and ideas shared with your grantee can help the organization rethink how work gets done. LaunchPath's "Innovation Culture Assessment" can be a great starting point for measuring baseline and change in nonprofit innovation culture of grantee organizations.

3. Create Safe Spaces for Experimentation and Risk-Taking

Innovation requires experimentation, which means nonprofits need the freedom to try new ideas without fear of failure. Funders can provide grants specifically for pilot projects and cover the cost of unsuccessful attempts. This support helps organizations build a culture of innovation where learning from failure is embraced.

4. Facilitate Knowledge Sharing and Learning Communities

Collaboration accelerates innovation. Funders can invest in creating learning networks where nonprofits share best practices, insights, and tools. These networks foster inclusive innovation, allowing nonprofits to learn from one another and co-develop solutions that address shared challenges. Cohort-based programs like fellowships and accelerators can be cost-effective models, and build community between grantees as they explore similar challenges together.

The Impact of Nonprofit Innovation on Communities

When funders invest in nonprofit innovation, the benefits extend beyond individual organizations. Innovation capacity allows nonprofits to address systemic inequities and create lasting change. For example, some organizations have developed hybrid service models post-COVID, expanding access to underserved communities through both in-person and virtual offerings . Others are using data-driven strategies to better understand and respond to community needs, ensuring their programs are effective and equitable.

Innovation capacity building also creates a ripple effect: as one nonprofit succeeds, others are inspired to adopt similar approaches, creating sector-wide improvements. Ultimately, funders that prioritize innovation are helping build more resilient, adaptive communities capable of meeting future challenges.

Take Action

To drive sustainable, equitable impact, funders must embrace their role as champions of nonprofit innovation. This means moving beyond traditional grantmaking and investing in the capacity nonprofits need to thrive—technology, leadership, experimentation, and collaboration. By fostering inclusive innovation, funders can empower nonprofits to develop creative solutions to society’s most pressing challenges.

The time to act is now. Funders must reimagine their role, not just as financiers but as partners in nonprofit innovation. With the right support, nonprofits can create transformative change, ensuring that communities not only survive but thrive in an ever-changing world.