The Hidden Cost of Underfunding Capacity—and How to Avoid It

Imagine training for months to run a marathon. You’ve got the stamina, the commitment, and the willpower. But when race day arrives, you’re handed a pair of flimsy flip-flops. You can run, sure—but every step is slower, more painful, and riskier. Chances are, you won’t finish as strong as you could have.

That’s what underfunding capacity feels like for nonprofits. Organizations are fueled by passion and vision, but without the right infrastructure—data systems, staff capacity, training, and technology—they’re running the race in shoes that just aren’t built for the journey.

The result? Burnout, inefficiency, missed opportunities, and diminished impact. Let’s break down the hidden costs of underfunding capacity—and how to make the case for funder support so you can swap the flip-flops for running shoes built to last.

1. The Productivity Drain

Nonprofits are masters of stretching resources. But there’s a breaking point when underinvestment in capacity starts to eat away at productivity.

• Staff members spend hours manually piecing together spreadsheets instead of using streamlined reporting tools.

• Grant deadlines loom larger because proposals take weeks of work that could be automated.

• Key data gets siloed across different platforms, leaving leaders without a clear picture of what’s working.

The Data: Nearly 1 in 5 nonprofits (19.3%) cite lack of time and/or staff as their greatest challenge to grantseeking success. That’s not a small hiccup—it’s the top reported barrier.

The Ripple Effect: Every hour spent duplicating effort is an hour not spent serving clients, improving programs, or telling your impact story.

The Fix: Fund capacity requests around staff training, technology, or evaluation tools that free up time. Framing these investments as “time multipliers” helps funders see the ROI.

2. The Missed Funding Window

Here’s the cruel irony: organizations that most need capacity building often can’t access the funding because they lack the very systems required to compete for it.

• Funders increasingly want sophisticated impact reporting—broken down by demographics, geography, or outcome area.

• Without the right tools, nonprofits struggle to meet those requirements, leaving money on the table.

Scenario: A youth-serving nonprofit misses out on a six-figure renewal because its reporting system can’t disaggregate outcomes by race and gender—something the funder now requires.

The Fix: Embed capacity requests in every proposal. Even a modest allocation for infrastructure (5–15%) can close these gaps and ensure you’re positioned for the next grant opportunity.

3. The Burnout Factor

Underfunding capacity doesn’t just strain systems—it strains people.

• Staff wear multiple hats, often without the support or training to balance them.

• Leaders spend more time putting out fires than planning strategically.

• High turnover drains institutional knowledge, further weakening programs.

The cost isn’t just internal. When staff are exhausted, service quality declines. That’s not only a human cost but also a reputational risk with funders and the community.

The Fix: Advocate for leadership development, staff training, and wellness initiatives as legitimate capacity-building requests. Position them as investments in organizational resilience, not perks.

4. The Ripple Effect on Impact

When nonprofits can’t invest in capacity, entire communities feel the impact. Programs stagnate, fewer people are served, and opportunities for innovation slip away.

But when capacity is funded, the story changes.

Case Example – Real Options for City Kids (R.O.C.K)
R.O.C.K, a San Francisco–based nonprofit, struggled with labor-intensive data collection that made it hard to understand student outcomes. Through participation in our Bay Area Cohort, a capacity-building program funded by five local grantmakers, R.O.C.K. gained access to tools and peer learning that helped them streamline their impact measurement.

• They identified the most important data points to track.

• They built frameworks to better evaluate their programs.

• They improved their ability to tell a clear, compelling story to funders.

The result? Stronger programs for students and a more confident fundraising strategy.

5. The “False Economy” Trap

Some funders hesitate to support capacity because it doesn’t feel as tangible as program dollars. But underfunding infrastructure is a false economy. It might save a few dollars today, but it costs far more tomorrow in lost productivity, missed funding opportunities, and diminished outcomes.

Metaphor Extension: Running a marathon in flip-flops might get you across the finish line once—but the blisters will sideline you for the next race. The smarter move is investing in shoes built for the journey, so you can run farther, faster, and more sustainably.

Practical Steps for Nonprofits

Nonprofits can’t afford to keep capacity out of the conversation. Here’s how to start:

1. Educate Your Funders
Share research and real-world examples of how capacity investments lead to stronger program outcomes. Show them capacity = impact.

2. Build Capacity Into Every Proposal
Even if it’s just 10% of the total ask, normalize including capacity funding in your budget. Funders won’t consider it if you don’t ask.

3. Leverage Collaborative Models
Programs like Collaborative Cohorts offer funder-backed capacity support, plus the added benefit of peer learning and shared storytelling. Position these opportunities as a way for funders to maximize their investment across multiple organizations.

4. Track and Share ROI
Measure things like staff hours saved, reduced turnover, improved reporting time, or expanded reach. The more concrete your outcomes, the stronger your case for future capacity support.

Practical Steps for Funders

Nonprofits can’t shoulder this alone—funders play a pivotal role in shifting the paradigm. If you’re a grantmaker, here are practical steps you can take to ensure your dollars go farther and deliver sustainable impact:

1. Normalize Capacity Funding
Treat requests for infrastructure, staffing, and systems as essential—not “nice-to-have.” Build capacity into your standard grant structures.

2. Provide Multi-Year Support
One-year dollars create instability. Multi-year grants give nonprofits the stability to plan, evaluate, and grow strategically.

3. Increase General Operating Support
Flexible funding empowers nonprofits to adapt to real-world needs. It’s not about giving up accountability—it’s about trusting grantees to know where resources will have the greatest impact.

4. Encourage Collaboration
Support programs like Collaborative Cohorts, where your investment strengthens multiple nonprofits at once by providing access to shared tools, peer learning, and collective storytelling.

5. Ask About Capacity Needs Proactively
Don’t wait for grantees to make the ask. Open the door by asking: “What infrastructure or capacity support would help you succeed long-term?” That simple question can transform the dynamic from transactional to transformational.

6. Measure Impact Differently
Look beyond short-term outputs (number of participants served) and consider long-term outcomes (staff retention, improved data quality, or stronger systems). These are the signs of resilience that drive future success.