07/01/2014 | 3.5 mins

Attending to the “Unsexy” Side of Scaling: Sustainable Funding

07/01/2014 | 3.5 mins

Remarkably, the scaling of high-performing nonprofit organizations seems to have taken on a certain glamor. In our sector, we are typically eager to talk about such exciting topics as the design of promising interventions, the development of sophisticated organizational capacities, and, perhaps most alluring of all, the raising of growth capital from "investors" to fuel a program or organization's expansion or replication.

Yet there is a sobering reality, an "unsexy" side to scaling that we too frequently avoid: with each upward ratchet in size, as a nonprofit expands facilities and hires more employees, it also increases the amount of money it must raise each year simply to maintain its operations. And if it can't do this, it can no longer build scale.

Accordingly, I was pleased to see the recent Social Impact Exchange Conference on Scaling Impact devote a significant chunk of time to the need to develop revenue models that enable growing nonprofits to thrive at each level of size attained. At the conference, I had the privilege of facilitating a plenary session on "Financial Sustainability at Scale" with several experts, who together provided foundational answers to four of the biggest questions on the subject:

What are sustainable revenues? Antony Bugg-Levine, CEO of the Nonprofit Finance Fund, in his keynote address offered a simple and practical definition: reliable and repeatable funds that are used to cover ongoing operating expenses. These funds can come from a variety of sources, not just earnings and fees, but must be clearly distinguished from various types of capital that—for you accountants out there—go on the balance sheet rather than the income statement.

What are the main sources of sustainable revenue for nonprofits? Happily, we have data! I referenced a 2007 Bridgespan article in Stanford Social Innovation Review called How Nonprofits Get Really Big, which I believe is one of the most important articles in our sector in the past decade (And updated in 2012 as Why More Nonprofits are Getting Bigger). The original article studied 200,000 nonprofits started between 1975 and 2008 and revealed several key insights:

  • Only 201 (0.1 percent) had reached annual revenues of $50 million or more
  • Of these, 90 percent had a single dominant source of funding, which on average accounted for just over 90 percent of the organization's total funding
  • The dominant source represented just four main types of funders: government (40 percent), followed by earned income (33 percent), corporations (19 percent) and individuals (6 percent)

Astonishingly, foundations turned out to be the dominant funding source for only 2 percent of these $50 million-plus nonprofits.

How can nonprofits determine what's right for them? Drawing on her experience with growing nonprofits, Amy Celep, CEO of Community Wealth Ventures, highlighted the need to be clear on what impact a nonprofit is seeking and to look for funders that are tightly aligned with its mission. She then emphasized the importance of regularly assessing the potential value a nonprofit may offer particular funding sources based on its distinctive assets—i.e. what the organization has, does or knows. Finally, she advised that nonprofits consider the search for sustainability to be an ongoing journey, ideally built around a series of experiments over time, rather the discovery of the one big answer.

What role can foundations best play? Acknowledging that foundations generally shouldn't be anyone's dominant long-term revenue source, Craig Reigel, the CFO of the Nonprofit Finance Fund, emphasized the unique and critical role foundations should play in supporting the efforts of nonprofits to build truly sustainable revenue models. Most important, foundations can provide bridge funding while an organization develops other revenue sources and help organizations build their internal capacity to identify, qualify for, and nurture more "reliable and repeatable" sources on which they must ultimately depend as they grow.

Anyone who has led a nonprofit organization understands all too well why it's so tempting to focus attention on the more glamorous aspects of nonprofit scaling—building a truly sustainable supply of reliable, repeatable revenues is very difficult to do. While conference sessions like this are just a start, they are an important one, and these insights must be operationalized and built upon if the sector is to make significant progress in realizing the promise of the scaling movement.

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