Challenge grants can be good things or extremely bad for morale depending upon how they are set up. If a challenge grant is an all or nothing scenario, i.e. you either match the challenge or the grant is denied, an institution finds itself in the position of having spent employee or volunteer hours and also having spent money trying to fulfill the grant requirements, only to fall short of the mark and receive nothing. This obviously is bad for morale, bad for the bottom line, and future challenge grants will be perceived as not worth the effort.
Challenge grants that are more lenient, i.e. matching funds raised, or paying at certain specified goals during the challenge, guarantee that even if the institution doesn't fully match the challenge, they will not walk away with nothing. This seems to be a much more desirable scenario.
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William D. Eggers and Paul Macmillan of Dowser write about the social entrepreneurs slowly and steadily dirsupting the world of philanthropy. According to Forbes, philanthropy disruptors are those that believe “no one company is so vital that it can’t be replaced and no single business model too perfect to upend.”