How Nonprofits Can Become More Attractive to Funders
Running a nonprofit is inherently more complicated than running a traditional enterprise (of a comparable size). In a regular business, the relationship is a lot more clear cut. There is a product or service that the business offers, and a customer that pays for it. The customer receives value from the business, and in return pays a monetary sum. In a nonprofit, there are a few more layers. There is an agency that provides a service, which is usually not an actual product. There is a constituency that benefits from that service, but rarely do they pay for it directly. There are also the customers — the donors — who do not directly benefit from the service, but rather indirectly through goodwill and humanitarian reasons. That added layer of complexity represents all the difference in the world between a traditional nonprofit service and a traditional business service. There is a customer that a nonprofit is selling their services to, but then a separate beneficiary that is receiving those services.
Because of that, nonprofit service agencies are an inherently dependent business model. They depend upon the kindness of others — donors, philanthropists, Foundations, Corporations, etc. — who may never benefit directly from that service. In order for this model to succeed, the agency must sell their vision to a customer, but oftentimes they must tailor that vision to the whims of the customer, who may want to fundamentally alter the service by dictating that it only serve a segment of the beneficiary population, or that it can be used only for a defined purpose. A traditional business provides the product or service, usually at a set and agreed upon cost, and the customer either purchases it or does not. But in the nonprofit model, the customer can choose how much money they want to put in, and how it will be directed, and they can even choose their desired outcome.
When viewed through that lens, it is easy to understand why so many nonprofit services are in a difficult situation. They are dependent upon the whims of individuals and groups who may change their mind every year, or may raise their demands to unsustainable levels. They struggle every year to determine who the customers are going to be, and how many beneficiaries they can serve because of that.
That is why the most effective nonprofit services are able to able to structure their enterprises to act more like traditional businesses. They are still providing a service to a defined, underserved constituency, but there are several key factors that shift the paradigm in their favor. It is essentially like creating a marketplace for philanthropists that mimics traditional investment markets.
All the patterns in philanthropy suggest that there is a wave of new philanthropists who want to change the way nonprofits are evaluated and funded. They services to behave more like capital markets. This means a renewed focus on a) investments, b) impact, and c) measurable outcomes. The new industry leaders coming out of finance and entrepreneurial ventures are more disciplined and more focused on data and figures. They care less about the warm and fuzzy feelings of making a donation, and more about program outcomes and funding models. Similar to a market portfolio, they want to know about benchmarks, data, and Return on Investments, as compared to other possible investments.
This can have the added benefit of creating a better outcomes and stronger service models, but it also puts more pressure on the agencies to deliver.
In order to appeal to a new breed of philanthropists, the modern service agency can do several things to adjust and be an attractive funding model.
1. It is time to drop the word “nonprofit” from the sector. It is an ugly word that is limiting and completely undersells an organization. A CEO shouldn’t be underpaid or poor because they run a “nonprofit.” There is lots of value in educating a child, or feeding the homeless, or saving the rainforests, or whatever it may be. These are important services that provide real impact. There is profit in that.
2. There should be a way to measure the impact that an organization provides. Something tangible, like a unit of social impact. This is more than just saying a program was “evidence-based” or provided outcomes. Can you measure those outcomes? Do you know the cost-per-outcome? How can you measure that effectiveness? And can you compare that until to similar service organization? Essentially, find a way to standardize social outcomes, and market that to investors.
3. Stop talking about grants and donations, and instead talk about investments. The best philanthropists are essentially no different than venture capitalists. They will seed fund a lot of early ventures, and the models that show the most promise and provide the most value will receive larger investments over time. There is no reason the social sector can’t act in the same manner. Sell the long term vision, and seek partners that can commit long term.
I don’t know if the social service sector can ever behave inherently like the for-profit capital markets, for reasons I mentioned earlier. The business models are fundamentally different, which creates a big disparity. Perhaps the social entrepreneurs will fill that void, as they build ventures that are essentially profit models — selling a product or service directly to the customer — but with a built-in social component.
However, the social sector can help itself by learning the language of the new philanthropist. They speak in terms of social outcomes, and the ability to measure and predict said outcomes. They want to invest in proven, innovative models that can be leveraged and scaled. That takes a lot of work. Not all organizations can provide that type of infrastructure, just as not all markets can support that type of growth.
In the capital markets, not all organizations are created equally. A few grow rapidly and eventually lead to IPOs or liquidity events. The majority of start-ups fail or cycle out after a couple of years. That same pattern will follow in all sectors, including the nonprofit sector. The organizations that can sustain themselves and thrive every year will have a defined mission, a strong and long term vision, and a great service model that will attract better investments of time and treasure.