Hats off to Nell Edgington at the Social Velocity blog for a post titled “The Critical Alignment of Mission, Money and Competence,” which kicked off an interesting conversation between Nell, me, Sean Stannard-Stockton who writes the Tactical Philanthropy blog, Nathanial Whittmore who writes the Social Entrepreneurship blog for Change.org, and Kjerstin Erickson, the CEO of FORGE.
My first observation is that this discussion happened very quickly thanks to Twitter. So I’ve realized that Twitter is here to stay for me, and that even if I’m not ready to commit to more than a 1-2 Tweets/day, Twitter enables very useful conversations that I’d miss if I gave it up. So, if you’re interested in following, you can find me @sashadichter
On the substance of the discussion, there are two threads that I found particularly interesting:
1. The first thread centers on the risk many nonprofits run of their revenue model compromising mission. The stark example is when a nonprofit ends up chasing funding dollars and makes small programmatic contortions for each subsequent grant (more on this here). As I suggested to Kjerstin, your only hope as a nonprofit is if you start with a bright line that says you absolutely will not compromise mission at all to get funding…since even with this much clarity, you will still make the occasional compromise. But if you start saying that some compromises are OK, you’ll be so far off mission in a year or two that you won’t recognize yourself or your organization.
2. The second thread was somewhat more subtle, and it centered around what it takes for nonprofits to have a “sustainable revenue model.” When I read that phrase it implies “earned income,” which worries me because there are tons of nonprofits out there that do not and should not have a model that itself generates a significant revenue stream. Which I why I commented that, “I sometimes feel like there’s an implicit notion in the (sometimes too theoretical) discussions of nonprofit funding models that downplays the fact that philanthropic dollars can beget philanthropic dollars; that there are very powerful network effects that come from the creation of strong communities of supporters/friends/advisors/Board members; and this itself can be a “sustainable revenue model.”
Put more simply, to me a sustainable revenue model is one that gives the organization and its donors a high degree of confidence that 1,2, 5, and 10 years down the line, the nonprofit will continue to exist, will continue to focus on its current mission (or the next iteration of that mission), and will have the capital on hand that will allow it to engage in long-term strategic planning and execution.
There are a LOT of ways to get here, and we shouldn’t forget that most “sustainable revenue models” center around creating an energetic, passionate tribe of donors who want to give and who are fervent advocates for your organization (no matter if they make $10 or $10 million donations.)
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I think George Overholser, in his must read paper “Building is Not Buying” defined “sustainable revenue” (what he called “Ordinary Revenue” as opposed to “Invested Growth Capital” and “Other Extraordinary Revenue”) best:
“Ideally, the Ordinary Revenue line would correspond to all payers who seek to exchange their money or in-kind donations for products and services rendered by the nonprofit firm. However, given the psychological reality that many funders do not think in terms of “buying” products and services, it is more practical to think of this line as containing all funders who are either repeatable or replaceable using the nonprofit’s existing methods of attracting revenues. This includes, for example, fee for-service payers, as well as all recurring or “regular” unrestricted donors. Less obviously, it also includes “one time” grant-makers, so long as a case can be made that other, similar “one time” grant-makers can reliably be found to replace them in future years. Also less obviously, it includes customary grants that are earmarked to replenish capital items such as vehicles or computers that must be replaced from time to time as part of maintaining operations at a continued level of quality and scale. Finally, it includes the usual array of restricted grants which, collectively,
contribute towards covering the full cost of producing the nonprofit’s goods and services, as well as the ongoing efforts to develop or enhance individual programs.
The topic of program innovation deserves special mention. Just as product development is an ongoing “cost of doing business” for a for-profit company, program innovation is an ongoing function for a healthy nonprofit enterprise. For this reason, most program innovation grants are best categorized as repeatable/replaceable Ordinary Revenues, despite the one-time feel of any particular grant. Think of it this way: Growth Capital is an “enterprise” concept, whereas most program innovation grants occur at the “project” level.”
You can read the full paper here.
Sean (and I guess, in principle, George), thanks for this comment. From the trenches this strikes me as truly interesting and also very challenging to implement. How do I figure out who is a “one time” grantmaker (ideally I’d like none of these…the one-time grantmaker by definition hasn’t decided if she will give again)? More broadly, I have two questions:
1. At the highest level, all donors are giving because they believe that a service of value will be rendered by the nonprofit firm.
2. And what do we do with unrestricted gifts, which as a sector I think we need to recast as: “I, the donor, trust you, the nonprofit, to use your experience, wisdom, and good judgment to allocate this capital for its highest and best use.”?
But on a more pedestrian level, I just think this approach would be plain old hard to implement.