This article originally appeared in the Harvard Business Review.
Far too many great 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, which 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 most 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 most serious concern. If an organization can’t reach sustainability, which I define as reliably raising around $2 million in annual revenue, the chances are high that it will eventually stagnate or fold.
I wanted to know, what are the organizations that break through the $2 million barrier doing right? Is there some 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 also 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, government grants, and earned revenue. Such a portfolio management approach would seem to mitigate the risk of relying too heavily on one or another major source. But while that seems eminently logical, research shows that it’s not the approach of the most successful organizations.
William Foster and his team at The Bridgespan Group conducted a study that revealed that, of the 144 nonprofit organizations created since 1970 that have grown in size to $50 million a year or more, each has relied particularly heavily on one particular source: something Foster and his coauthors call the “natural match.” For example, the Sierra Club relies primarily on membership fees, while Susan G. Komen has concentrated its fundraising intensively on its race events. The organizations that succeed typically don’t begin to narrow their focus to a dominant funding source until they’ve grown to about $3 million in annual revenue. In the period leading up to that point, they test a range 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 shown great flexibility and creativity as they tested a wide range of ideas. I also found that they were so open to discovery that they were willing to significantly alter their whole business model if that seemed 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 dream of many social entrepreneurs eager to get off the fundraising treadmill, founder Jessamyn Rodriguez initially believed the organization could 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 also gained vital wisdom about developing her services. “I realized that there is actually a huge benefit that comes from philanthropic funding,” she told me, “because it allows us to do more for the women we serve.” She was able, for example, to add child care during 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 team continue to test sources, such as government partnerships, in pursuit of an optimal model.
Prototyping Isn’t Only for ProductsIn their funding experimentation, many organization leaders are following the human-centered design process of conducting research with end users and then rapidly testing simple, low-cost prototypes. With fundraising, this involves research with donors in place of end users. That could start small, with even a couple of current donors, asking for 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 wanted to create an organization devoted to increasing literacy rates among low-income kids by training their parents to better support them, he had no idea how he was going to pay for the program. He threw himself into researching possibilities, including calling as many superintendents and principals as he could to see how much they might be willing to pay for such a service. A number responded that they would be interested if he could 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 former teacher who started Wishbone, a crowdfunding site that provides money for low-income high school students to pursue a career passion through a summer experience such as a camp or workshop. She didn’t start fundraising by launching an expensive website. Instead, she simply photocopied some of the top essays her students had written about their career dreams and sent those essays to her family and friends, asking for 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 helped to focus on an optimal solution, but often many disappointing, and costly, surprises appear. Take the example of an organization I cofounded, Spark, which engages Millennials in new forms of philanthropy to support 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 failed 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 against the grain of the conventional wisdom of fundraising, with its emphasis on highly polished media campaigns. But the new generation of social innovators is showing that experimentation rather than formulaic diversification is the best route to mitigating risk in developing a funding stream.