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Many nonprofit executives spend a lot of time fundraising but have no clue how to secure funds over the next five years. But their vision for the organization’s initiatives for the next five years is frequently keen. The catch is that maintaining and expanding such initiatives requires thoughtful income generation.
Small nonprofits may frequently achieve their budgets by motivating a few contributors, grabbing unexpected financing possibilities, or combining funding sources. Charismatic leaders often convince potential investors. Personal connections and catch-as-catch-can seldom suffice for large-scale fundraising demands.
We wrote “How NGOs Get Big” for the Stanford Social Innovation Review in spring 2007, based on BridgespanGroup data on nonprofits created since 1970 and generating $50 million in yearly income. Only 144 NGOs (excluding hospitals and universities) were cut, illustrating the difficulty of large-scale fundraising. The 144 challenged conventional thinking by obtaining most of their funds from a single source (businesses or governments) that matched their objective. Aside from that, they developed professional organizations to meet those demands.
We followed up with “Ten Nonprofit Funding Models” in the spring 2009 edition of the Stanford Social Innovation Review. We found ten nonprofit financing methods, proving that growth is not quirky but deliberate.
Since these pieces were published, many charity leaders have contacted Bridgespan and the Stanford Social Innovation Review. We describe the financing model as a rigorous and standardized approach to developing a solid income basis to support an organization’s core activities and services. But many of the leaders wanted to know how we might help them find and establish the best financing approach. On the one hand, it’s great to hear that Susan G. Komen for the Cure is an excellent example of the Heartfelt Connector financing strategy, which taps into a vast grassroots individual contributor base emotionally invested in the cause. Pursuing the Heartfelt Connector as a fundraising mechanism for your organization is different.
This essay addresses the “how” of funding models—the fundamental ideas that help organizations understand and evaluate their long-term financing possibilities before deciding on and implementing them. Our research and consulting expertise with hundreds of charity clients seeking development and financial sustainability led to these concepts.
A Funding Model for When?
Funding models aren’t a fast buck. They usually take a long time to take hold. Many non-profits are just not ready. A charity that isn’t in imminent financial trouble and can concentrate on long-term fundraising is an excellent choice. They must be able to invest in the employees and infrastructure needed to support the financing model, not just keep the doors open.
Size matters. A fundraising model is beneficial for organizations with at least $3 million yearly revenues. Smaller groups may frequently get away with unconventional fundraising strategies, so don’t become too strategic unless you need to.
An organization’s finance mechanism must also be transparent about its programming aims. Will it promote fast growth? Gain financial security while maintaining the same scale? Adding a new program? Each of these goals will likely need a unique financing source.
Rare, a worldwide conservation non-profit, set out to build a finance strategy in 2010 to drive expansion. A successful program model for running social marketing campaigns to assist conservation initiatives had been devised by the $12 million organization. Rare’s top management team was poised to expand into new markets. This article will track Rare’s progress.
The Advantages of a Funding Model
Finding a finance mechanism is not an easy task. Even the best-fit model may not fulfill the nonprofit’s financial goals. So why do we encourage so many firms to create one?
We think that a nonprofit’s funding strategy is as crucial as its programming effect. An organization usually has two roles, each having external stakeholders. One position is to find recipients and help them with programs. But recipients seldom pay the bill—or not entirely. So the second task is to cultivate a specific funding group. Building and growing financial assistance are as complicated as determining programming dimensions.
Finding and building a financing strategy takes time and patience, but we think it’s worth it. Instead of assuming every financing lead is excellent, evaluate each one carefully. Stop pondering where and how to invest in development skills (and typically spending too little on many).
We’ve developed recommendations based on years of research and work with various NGOs to help them find and create the financing strategy that works best for them. First, locate yourself. Second, learn from your peers. Third, balance income potential with expenses. Fourth, pave the path.
1. Identify Your Location
With financing models, looking back is the first step. An organization should evaluate its present and past financing strategies. This understanding will help develop a financing plan that capitalizes on strengths and avoids deficiencies.
An organization may think it understands a lot about fundraising, yet it may be mistaken in certain areas. Consider the example of an education non-profit that felt tours of its diagnostic learning clinics would help raise funds. The group was so persuaded of the value of site visits that they spent a lot of time planning them. It also sought to expand clinics to generate revenue better. When the researchers looked at the proportion of overall financing from contributors motivated by clinic visits, they discovered it was shockingly low. The organization abandoned plans to establish additional clinics and redirected funds to other projects.
We advise organizations looking for a financing strategy to concentrate on three key areas: funding sources, donor motivation, and fundraising skills.
Sources of funding: Analyzing historical data may assist an organization defines existing income streams and future goals for the board, staff, and potential investors. To obtain a clear picture, go back five years. Concerning continuing expenditures, how much is paid by renewable financing sources expected to last 3–5 years? How many donors are there? An organization’s income should come from three or more sources, allowing it to survive the loss. How much money goes to non-core operations and programs? An organization is considered vital if no more than 30% of finances are allocated to non-core operations.
Rare’s study indicated that wealthy persons on the board or closely related to board members were driving financing. The receipt or non-receipt of a contribution from any of these persons might significantly impact Rare’s financial situation. Thankfully, these long-time supporters had no limits on their gifts. Other sources of support for Rare, such as governments and foundations, have risen in recent years but remained small.
Understanding why donors donate might help a charity forecast future donors. The idea is to find a natural financial fit between a program model and prospective contributors’ current motives. “Are donors driven by an organization’s track record, the particular demographic it serves, or personal ties with senior leaders?”
Rare’s principal funders were wealthy environmentalists attracted by the organization’s concentration on community-level conservation and demonstrated environmental results. Although Rare thought there was room to grow its donor base in the future years, the leadership team feared hitting a limit with this donor group.
This means being honest about what funding sources it can reasonably expect to acquire and what organizational investments will be required to accomplish so. A single person (CEO or a board member) generates most of the money, or is fundraising more institutionalized? The development team’s present capabilities? Diverse financing sources may need unique A good fundraiser may not be able to prepare complex government grant bids.
Rare’s executive team recognized that personal contacts with president and CEO Brett Jenks accounted for the overwhelming bulk of donations. While the development team was helpful, Jenks was typically the cornerstone in collecting individual financing contributions.
2. Get Ideas from Your Peers
Savvy charity executives learn from their colleagues. However, many charity executives argue that their organization is unique and deserves a distinct fundraising mechanism. It is conceivable to create a new finance model, but it is more complex and uncertain.
What is a peer group? Somewhat comparable in concern and income magnitude. If expansion is desired, peer-to-peer financing options may be more instructive. Choosing bigger peers reveals more successful fundraisers.
Rare began by researching the most well-known worldwide conservation NGOs, such as Conservation International. Rare then recruited smaller partner groups like the African Wildlife Foundation. Several prominent environmental groups, such as the Natural Resources Defense Council, rounded out the group (NRDC).
A quick search for a peer group will usually provide recognizable names, but exploring outside the typical suspects may frequently yield new possibilities. Their similarities and differences should be adequate. Consider groups that work on separate topics but share funds, target beneficiaries, or geographic areas. Those with specialized programs may have fewer natural peers to study with. In such a situation, choosing atypical peers may be beneficial.
Rare needed to discover groups that were good at getting money from rich people. Rare also featured Teach for America and Opportunity International. Both groups have created effective individual fundraising strategies.
Once the peer group is chosen, each organization’s financing approach must be examined closely. Two components are crucial to grasp. 1st, the overall funding mix. The goal is to learn how many distinct funding sources the peer organization employs, what those sources are, and how it cultivates them. This information will give insight into the organization’s financial strategy, including key decision-makers and the organization’s funding base.
The second factor to comprehend is the programmatic, budgetary, and governance disparities. In addition to new fundraising skills, new reporting and reporting capabilities, program design, and delivery competencies may be required. The likelihood of success may be reduced if the new skills are too far removed from the existing ones. AAAA non-profit should identify significant distinctions that may hinder replication in studying peers. These include organizational structure, board size and prominence, age and brand awareness, development resources, and outcome data.
Any peer group may reveal a range of financial actions. Those with solid financing models? It is critical to understand a funding model’s three distinguishing characteristics—the primary funding type(s), the funding decision-maker for each significant funding kind, and their motivations. (See right for funding model characteristics.) Look up those three traits in our prior study and SSIR post to see whether they line up. These aren’t the only models, and smaller NGOs have more options, but they’re an excellent place to start.
Rare discovered that several of its counterparts had clear financing structures. For example, Conservation International used the Big Bettor fundraising mechanism (where most support comes from a small number of individuals or family foundations). The African Wildlife Foundation, matched the Public Provider financing approach (providing services perceived as a core government responsibility). The small donations marketing initiative at NRDC fits the Heartfelt Connector financing model (the same one used by Susan G. Komen for the Cure, which relies on donors who have a personal connection to the cause).
The features may potentially represent a new financing mechanism. The strategy must be sustainable and reproducible. Chances are, it isn’t a financing model.
Once identified, peer financing models should be compared to the organization’s features and capabilities or those that may be obtained. Three key points to consider:
• Compatibility with a finance model’s three distinguishing characteristics: Will the organization’s program model enables it to effectively appeal to the relevant funding decision-makers, tapping into the same motives that underpin their sponsorship of peer organizations? Would it be necessary to modify current programs, create new ones, serve additional beneficiaries, or expand geographically? Will it make those changes?
Fund development capabilities: Can the organization reach suitable funding sources? Could it solicit wealthy individuals or handle government contracts?
Will the financing mechanism enable the group to fulfill its goals? Can it, for example, grow the organization to the desired size? (If all peers are smaller than the aim, the financing approach may not assist an organization to grow.)
Rare’s peer group favored two financing models: a public provider and another (not one of our 10) based on affluent people networks. Both deserved further research. Rare’s peer group included Big Bettor and Heartfelt Connector, although less often. Rare dropped both models after a close inspection found a poor fit. Martha Piper believes removing models wasn’t the most helpful exercise because of Rare’s senior vice president of strategy and growth.
3. Balance Revenue Potential vs. Costs
A financing model’s costs and advantages must be weighed. The income a charity may anticipate from a specific financing strategy must be adequate to justify the program, employee, and system expenditures. To assess a financing model’s income potential, one must first examine its primary funding sources, the total amounts provided yearly via each, and the intensity of competition for those monies.
Rare also attempted to understand the affluent environmental donor sector better. They cited the IU Center on Philanthropy’s “Million Dollar Roster,” a list of donors who have given over $1 million. They added to the data by interviewing peers. These studies revealed intriguing pockets of affluent people beyond the restricted geographic region where Rare’s present contributors gathered.
Of course, getting such funds costs money. To find a financing strategy, an organization must make significant changes. The investment is essential when choosing a model since complex tasks frequently carry a more substantial risk of failure.
We’ve seen it in the companies we’ve dealt with: programs, staff, IT systems, and communications.
Programs: It may be essential to modify an existing program to fulfill funding source requirements or create a new program to serve a different target audience. Nonetheless, the most successful firms concentrate on their strengths.
Personnel: Developing and managing new financing models frequently requires new talents and staff time. Create and fill new jobs, restructure the CEO’s time to meet the new financing model’s expectations, hire additional people when limited capacity, or give extra training.
Tech requirements increase as new financing sources emerge, notably in performance assessment. Existing systems may not be able to handle increased funder reporting needs or offer the data required to govern a growing organization. Greater focus on individual contributors may need a more effective online donor management system.
External relations and marketing may demand high-quality communication materials depending on the financing type. Perhaps a more appealing yearly report will help cultivate individual contributors, or greater news attention will be required.
It’s impossible to predict whether a funding model will work or how quickly it will work. When state funding is cut, a nonprofit that has identified state funding as its growth engine may still find itself coming to market. The risk assessment must be included.
4. Pave the Way
Identifying one’s fundraising technique and history, learning from peers, and calculating the anticipated costs of change are critical elements of developing a financing model. When it comes time to trial and deploy the most viable financing options, a strategy is crucial.
Take note of the promising funding models. Adding more than two increases the risk of overburdening management and development. A financing model’s success rests on developing its unique funding sources. Therefore, spreading employees too thin would inevitably backfire. Few of the 144 nonprofits profiled in “How Nonprofits Get Really Big” rely on multiple funding sources. Almost no one had three.
So why not choose a single funding model now? The problem is doubt. A charity may not know which model will perform best at this time, so testing the two most promising possibilities may be beneficial.
Existing financing sources should not be relinquished while seeking a new funding paradigm. These established additional funding sources may help moderate the original funding source’s ups and downs. While Susan G. Komen for the Cure relies heavily on modest contributions, corporate sponsorships provide a valuable additional cash stream for its breast cancer walks. The new sources will drive future growth, while older sources may stay stable or even shrink in the percentage of the organization’s expanding financial base.
Rare’s management team was confident that a funding strategy centered on public funders would be successful. They also realized they lacked the development personnel to implement this concept successfully. Rare’s leadership team and the board opted to combine their long-standing individual giving approach with the Public Provider financing model over the next three years. Rare’s leadership planned to boost the organization’s short- and long-term perspective by investing in existing and future capabilities.
Take-up time for new financing mechanisms is usually 2–3 years. A robust implementation strategy will help the company pave its new path. Employees and the board will have a shared vision of the organization’s future. Defined milestones and a learning agenda make tracking progress and course adjustments simpler.
We believe that a robust funding model is essential for programmatic success and that a weak funding model can undermine even the best program model. Rare has hired three more fundraisers to expand fundraising efforts beyond Jenks. Each represents a distinct area of the US where foreign conservationists congregate, and each has a team of current large funders and board members.
Rare is also exploring public financing.. Rare has learned a lot from its implementation efforts, and its management team is adjusting its strategies. This includes shifting public financing priorities to develop promising sources identified during the first year of piloting Public Provider.
“Clarity is key when operating a nonprofit,” Jenks reflected. Choosing a viable revenue plan was one of our most freeing and precise decisions. I understand leaders who question (or are asked) why not membership, online donations, government funding, or fee-for-service? It has already improved our bottom line.”