Archive for category: nonprofit growth

I am super ambitious. My goal for Iridescent is that it becomes a nationwide program with strong sites in New York, Silicon Valley and Los Angeles. I also believe that it difficult to suddenly wake up one day and think big. If you want to grow and scale, every little daily decision has to be made with that goal in mind. For example, currently we have two core team members who train and observe the volunteering engineers. The core team members observe each session and give feedback to the engineers. Thus this past fall, we could only conduct about 8-10 courses as you can only be in one place at one time. This model would be fine if expansion wasn’t one of our long-term goals. As it is, I am exploring different organization structures that will allow us to grow and maintain program quality. One option is to train a layer of “observers” (potentially Teach for America alumni) who would work part-time with Iridescent, observe 2-3 sessions a week and help the engineers improve their communication skills.

So expansion is always on my mind.

I came across this interesting article on how nonprofits raise enough money to grow really big and here are some of the key points as applied to Iridescent.

Key Findings

The study was conducted by the Bridgespan group and the article was published in the Stanford Social Review in 2007. The study explores how 144 of 200,000 US nonprofits started in the 1970s got big (reaching $50 million in annual revenue).

• They had a single dominant, highly specialized source of funding – such as government (Population Services International), individual donations (Habitat for Humanity), corporate gifts (Greater Boston Food Bank), niche groups like hunters (National Wild Turkey Federation). On average, that dominant funding source accounted for just over 90 percent of the organization’s total funding.
• They found a funding source that was a natural match to their mission and beneficiaries.
  

The first point is a bit disheartening to a young nonprofit like Iridescent as we don’t really know which funding source will be a natural match and can support sustained growth. But the study goes onto say that only a few nonprofits knew from the start where they would find their most promising funding sources. But as these organizations pursued their growth, they realized which sources of funding seemed most promising and were willing to concentrate their efforts on that source, recruiting people and creating organizations that could best pursue that funding source.

Iridescent is at this very stage at the moment. We are trying to find organic, mission-aligned ways in which to generate funding. At first we were thinking we would do well to bring some experts onto the team who would be able to give us the magic formula. But the study also says that the core team is the best informed and qualified to come up with solutions. The key really is to develop ways that are mission-aligned, so all efforts push in the same direction.

Funding sources change from diverse to focused with growth

When nonprofits are small (like Iridescent), they often raise money from a wide variety of sources. That’s because there are many potential donors who are able to give small amounts of money, and because a particularly inspiring executive director can stand out from the crowd and convince these small donors to give. But when very large sums of money are involved, the picture changes. Sizable funding sources are fewer, and their goals are more developed. As a result, the funders’ interests matter more than does the executive director’s charisma.

There are distinct breakpoints during a nonprofit’s growth at which the funding shifts dramatically from one revenue category to the next. After each of these breakpoints, both the average level of diversification and the mix of funding change. Take the examples of youth services and environmental advocacy. When nonprofits in these domains are small, they typically have a diverse set of funding sources, with a large percentage of the money coming from foundations. As these organizations grow between $3-$10 million they diversify their funding sources even more. But as they grow between $10-$50 million these organizations increasingly rely on a single funding source.

This concentration by funding source does not replace the need for diversification and risk management. Organizations achieved diversification and mitigated their funding risk by securing multiple payers of the same type to support their work. Youth Villages, for example, receives more than 90 percent of its funding from state government contracts, but it has minimized its risk by tapping a number of government departments in a number of states.

Sources of unrestricted funds are small but very crucial for long-term growth

Of the 101 organizations that have a dominant funding source, more than 20 percent have a secondary source that accounted for 10 percent or more of their revenue. The Metropolitan Boston Housing Partnership, for example, receives less than 1 percent of its funding from unrestricted foundation and corporate donations that allows it to try out ideas in an area not currently funded by government programs.

What to do next

Nonprofit leaders need to identify and target those funding sources that are most likely to be a natural match with their organizations. Far from being random, large funders’ interests often fall into distinct categories. Corporations almost always offer in-kind support focused on hunger or health issues. And individuals tend to give to issues that cross socioeconomic boundaries – like environmental advocacy – and to organizations that have clear, compelling, and simple messages. State and local governments are most likely to support human services, employment development, and education organizations.

Characteristics of funding sources

Program service fees (NOT EARNED INCOME) are the second most important source of funding for high-growth nonprofits, providing most of the money for 33 percent of the organizations in the study. Service fees are also the second most important source of funding in the nonprofit sector as a whole. Community health clinics, student loan providers, and employment agencies for the disabled are likely to depend on program service fees as their dominant source of funding. The 12 student and housing loan organizations in thestudy likewise rely on fees and interest income.

Contrary to the current buzz over social enterprises, free-market commercial ventures are not the major generators of program service fees for nonprofits in this study.

Corporate giving represents a relatively small share of total charitable giving in the nonprofit sector, but it is a prominent source of funding among these high-growth nonprofits. Corporations are the primary funders of 19 percent of the nonprofits we surveyed. The vast majority of corporate support is in-kind donations, not cash.

Individuals are the primary funders of only 6 percent of the high-growth nonprofits in our study. Interestingly, small gifts power all of the surveyed high-growth nonprofits in this category, even though major gifts account for a large majority of individual giving in the U.S. Although some organizations develop major donors as a significant secondary source of funds, small donations seem to fuel the broadest expansions. This may be because major gifts require greater personal involvement or because the kinds of techniques that generate smaller donations (direct mail and special events, for example) are easier to scale up.

A clear message also helps build a strong brand that resonates with individual donors, as in the case of Habitat for Humanity.

Foundations The least frequent source of funding for highgrowth nonprofits is foundations, which are the primary funders for only two of the organizations in the study, or 2 percent of the high-growth nonprofits. In general, foundations seem to be more focused on their traditional role of starting new programs rather than supporting them at scale.

This last piece of information is intriguing and could change Iridescent’s fundraising strategies for 2009 as we have been spending a lot of our efforts on writing proposals to small foundations. I need to look more into this and see if the finding has enough substantiating data.

What has your fundraising experience taught you?