This article originally appeared in the September 21, 2009, issue of The Chronicle of Philanthropy.
It's a paradox. Most executive directors spend an enormous percentage of their time and energy on fund raising, yet they typically have little idea how they will secure the money they need over the next five-plus years. Their vision for how their programs will evolve over that time, however, is usually sharp and clear. The rub is that a well-thought-out approach to garnering revenue is essential to sustaining those programs and increasing the difference they can make to society over time. Good programs simply aren't enough; money does not automatically flow to the high-performing organizations. Sooner or later a nonprofit group's lack of focus on a realistic approach to seeking financing is bound to catch up with it and compromise its prospects for achieving a long-term impact on the problems it tries to solve.
Earl Martin Phalen, co-founder of Building Educated Leaders for Life, or BELL, an organization that provides inner-city after-school and summer-school programs, captured the situation well when he shared the following thoughts with a group of nonprofit leaders in 2007: "Our fund-raising strategy used to be 'let's raise more money this year than last,' and we always were unsure of where we'd be. Then we got serious in thinking about our model and identified an ongoing type of government funding that was a good match for our work. While it required some program changes to work, we now predictably cover 70 percent of our costs in any locality through this approach."
So why doesn't fund-raising strategy get as much deliberate attention and planning as program strategy? Among the many reasons are misleading conventional wisdom and the natural inclinations of nonprofit leaders.
Let's start with the leaders themselves. Most leaders don't enter the nonprofit world because the idea of raising money excites them. It's just not where their passions are. Additionally, they are almost by definition optimists. Who would try to solve a major social problem on a shoestring budget if he or she were not an optimist? What emerges is the iconic image of a nonprofit leader that pulls a rabbit out of a hat and somehow makes the budget. Those dynamics just don't lend themselves to deep investment in fund-raising strategy.
Complicating matters are the different timelines that nonprofit groups use for fund raising versus those they use to determine whether they have made a difference. Most groups are not dealing with issues that can be solved quickly. So they do not have two-year strategic plans, but ones that last 10 years or longer. Yet their fund-raising plans are more often focused on meeting the quarter's or year's budget. Which grant makers are we meeting with next month? How much will our annual gala bring in this year? Economic downturns only exacerbate the disconnect because organizations worry about getting money in the door even more quickly.
This strategic imbalance exists because the people who finance programs are usually very different from those who benefit from programs.
In business, customers typically provide a major source of revenue. But nonprofit leaders face the dual challenge of simultaneously figuring out how to serve their beneficiaries and satisfy the objectives of grant makers, government agencies, and other supporters.
Conventional wisdom further muddies the waters, in most cases being unhelpful at best. Consider the following common myths about nonprofit finance:
Diversification is the holy grail of fund raising. In reality, diversification is often not the best path to pursue. It depends on what a group is trying to achieve and how large it is. For example, our research of the 144 organizations that were founded after 1970 and reached the $50-million mark by 2003 showed that roughly 90 percent relied on a single type of supporter (e.g., government, individuals) for the bulk of their support. In short, diversification is by no means a default objective.
Nonprofit groups should look for some source other than government, because government support is shrinking. Government is just as significant a financial source for nonprofit organizations as it was two decades ago. According to The Nonprofit Almanac, government grants and payments have kept pace with the overall growth of America's nonprofit organizations since the early 1980s. Both grew at an average annual rate of approximately 5 percent (adjusted for inflation) from 1982 through 2005. Moreover, the increase in government support for nonprofit groups has outpaced the growth of the gross domestic product, with the latter increasing at roughly 3 percent (also adjusted for inflation) from 1982 to 2005.
Business and other money-making ventures represent a new and better source of support than government grants or private donations. Much of the optimism about nonprofit-run business ventures is unwarranted. Our research has shown that the potential financial returns are often exaggerated, and the challenges of running a successful business are routinely discounted. Most important, commercial ventures can distract nonprofit managers from focusing on their causes, and, in some cases, even subvert their missions.
How, then, can nonprofit groups become increasingly strategic about seeking support?
Our research findings offer three principles that can serve as guideposts for differentiating the approaches that work depending on an organization's size and mission.
Concentration of financial sources is far more the norm than diversification. Organizations seeking large-scale growth are more likely to succeed by focusing on one source of support rather than seeking money from a multitude of places.
Natural matches exist between the causes nonprofit groups pursue and the types of donors who are most likely to support them. For example, many disease-research organizations get $100 checks from wide swaths of America. People tend to have a natural affinity to support those organizations; they often have a relative or close friend who has suffered from an illness still in need of a cure. In contrast, very few human-service organizations get that kind of support.
Capabilities matter. At large organizations, it is almost never the executive director who raises the money; rather, institutional capabilities are required. Consider the National Wild Turkey Federation. This $120-million organization raises its budget through roughly 2,000 special events each year. It has become expert at running the events, with measures to keep costs low including drop-shipping materials directly from China.
The trick lies in finding the approach to financing that embodies those principles and fits best with an organization's objectives. We have identified 10 such approaches, defined by the primary source of money (e.g., government, individuals, etc.), the decision maker (i.e., the person or entity making the decision to provide support), and the decision maker's motivation (i.e., altruism, self-interest, or collective interest). A list of the approaches is available online at http://philanthropy.com/extras.
Among them is one that relies on influencing public policy. Organizations that use this approach have developed novel ways to solve social issues and have convinced government agencies to support them, typically because the solutions are more effective and less expensive than existing programs. Help USA, which provides transitional housing for the homeless and develops low-cost permanent housing for lowincome families, is a good example. Founded as an alternative to New York's approach of paying hotels to house the homeless in so-called "welfare hotels," Help USA's approach gained traction by being both more effective and less costly.
Another approach, with government as the primary source of funds, has the service recipients as the ultimate decision makers. Even though government is the financial backer, organizations essentially operate in a consumer-driven business helping individuals make decisions to choose their services. Charter schools are an example here, as are health-care organizations that cater to the Medicaid population.
In these troubled economic times, it is especially important for organizations to find the right financing approach to support their program goals. Here's some advice to the key players:
For nonprofit leaders: Take the fund-raising side of your organization's work as seriously and as strategically as you take the program side, even if doing so leads to findings and implications you are not happy with. Many areas of nonprofit endeavor do not have a good match for large-scale growth.
For grant makers: If you're not footing the bill for everything it takes for your grantees to achieve their intended goals, be aware of how your money complements or detracts from what their other supporters will do.
The success of your investment is going to depend not just on the grantee's programs, but also on their ability to attract money from others.
For policy makers: Federal investments in innovation can't be a substitute for providing the single largest source of support for nonprofit organizations. Private money will never be able to match the scale of government.
As sources of funds continue to contract in these tough economic times, the natural temptation is to reach out fairly indiscriminately to a wide range of potential supporters.
But such an approach will invariably end up distracting the organization from the fund-raising avenues that hold the most promise of sustaining its work over the long term.
In fact, the importance of taking a rigorous approach to financing a nonprofit organization's work is now more important than ever.
Copyright © 2009 The Chronicle of Philanthropy