Far too multiple fantastic ideas for solving pressing social problems are not being applied at the scale they deserve, because thousands of nonprofit organizations are teetering on the brink of collapse. Of the 300,000 nonprofits in the United States, two-thirds have an annual budget of $500,000 or below, that does not allow them to expand their operations or scale their solutions. Fundraising is by far the biggest challenge for the sector, even for the best successful organizations. In a survey I conducted of the leaders of over 200 top-performing social entrepreneurships, 81% of them identified access to capital as their best serious concern. If an organization can’t reach sustainability, that I define as reliably raising around $2 million in annual revenue, the chances are high that it will eventually stagnate or fold.
I wished to know, what are the organizations that break over the $2 million barrier doing right? Is there a few secret recipe for fundraising success? As I delved into the stories of the success and failure of a host of organizations, I discovered the answer is yes and no. I further found that the conventional wisdom about fundraising is largely off base.
The traditional advice is that organizations should diversify their funding sources, aiming for a roughly even mix of foundational and individual donors, authority grants, and earned revenue. Such a portfolio management approach would seem to mitigate the hazard of relying too heavily on one or an additional major source. But although that seems eminently logical, research shows that it’s not the approach of the best successful organizations.
William Foster and his group at The Bridgespan Group conducted a study that revealed that, of the 144 nonprofit organizations created after 1970 that have learnt in size to $50 million a year or more, each has relied specifically heavily on one particular source: something Foster and his coauthors call the “natural match.” For example, the Sierra Club relies primarily on membership fees, although Susan G. Komen has concentrated its fundraising intensively on its strife events. The organizations that succeed typically don’t begin to narrow their focus to a dominant funding source until they’ve learnt to about $3 million in annual revenue. In the stretch leading up to that point, they test a scope of fundraising approaches, not following preconceived formulas.
To learn more about how successful leaders engaged in this experimentation, I interviewed over 100 of them, and I found again and again that they had portrayed fantastic flexibility and creativity as they tested a large scope of ideas. I further found that they were so open to discovery that they were willing to significantly alter their whole company model if that appeared advisable.
Consider the case of Hot Bread Kitchen, a training program for low-income women who want to work in the food industry in New York City. Chasing a vision of multiple social entrepreneurs eager to get off the fundraising treadmill, founder Jessamyn Rodriguez originally believed the organization can become self-funded by earning income from sales of its bread. She tested a variety of approaches, from sales at an on-site café to impressive larger-scale arrangements, such as selling to JetBlue and Whole Foods. When those sales weren’t adequate, she realized she needed a hybrid model that would rely partly on earned income and partly on philanthropic sources.
By being receptive to foundation support, Rodriguez not only achieved financial stability but further gained vital wisdom about developing her services. “I realized that there is actually a huge benefit that derives from philanthropic funding,” she signified to me, “because it allows us to do more for the women we serve.” She was able, for example, to include child care concurrently the cooking classes. As of now, Hot Bread Kitchen is bringing in about 65% of its income from earned sources and 35% from foundations and individual donors, and Rodriguez and her group continue to test sources, such as authority partnerships, in pursuit of an optimal model.
Prototyping Isn’t Only for Products
In their funding experimentation, multiple organization leaders are following the human-centered design process of conducting research with completion users and then rapidly testing simple, low-cost prototypes. With fundraising, this involves research with donors in place of completion users. That can start small, with even a couple of current donors, wanting no-holds-barred feedback about existing efforts and new ideas to try. Small-scale launches of recommended approaches can then be tested.
When Alejandro Gac-Artigas decided he wished to create an organization devoted to increasing literacy rates among low-income guys by training their parents to ahead backing them, he had no idea how he was going to pay for the program. He hurled himself into researching possibilities, including calling as multiple superintendents and principals as he can to see how much they might be willing to pay for such a service. A number responded that they would be curious if he can prove that students’ reading improved as a result of his program. To make the case, he launched a pilot program at a single school. The results were impressive, and Springboard Collaborative now runs training classes nationwide, with the bulk of its $7 million annual budget coming from fees paid by schools.
Another founder who followed the method is Beth Schmidt, a past teacher who started Wishbone, a crowdfunding site that provides money for low-income high school students to pursue a career passion over a summer experience such as a camp or workshop. She didn’t start fundraising by launching an expensive website. Instead, she simply photocopied a few of the leading essays her students had written about their career dreams and sent those essays to her people and friends, wanting donations. She received thousands of dollars and realized that she was onto something. Only then did she begin the process of launching a formal platform.
In both of those cases, experimentation quickly aided to focus on an optimal solution, but often multiple disappointing, and costly, surprises appear. Take the example of an organization I cofounded, Spark, that engages Millennials in new forms of philanthropy to backing gender equality. Early on, we invested significant resources in soliciting corporate sponsorships, developing a pitch package, working with our members to develop relationships with their companies’ foundations. After a couple of years of unsuccessful efforts, we realized that corporate sponsorships weren’t optimal for our organization’s model, and we doubled down on raising money from our members, who happily supported Spark’s work.
Interviewing donors and performing quick, inexpensive test runs goes from the grain of the conventional wisdom of fundraising, with its emphasis on highly polished news campaigns. But the new generation of social innovators is showing that experimentation rather than formulaic diversification is the best route to mitigating hazard in developing a funding stream.