If you have joined an advocacy organization board meeting, you have heard some form of a conversation on funding diversification. Typically it starts with a board member member pointing to a heavy reliance on a particular type of funding, for example, from foundations, and expressing concern that the reliance on one revenue category threatens the organization’s financial sustainability. A discussion then follows about the best alternative funding categories such as major individual gifts, small-dollar online fundraising, or corporate donors.
While the instinct to diversify funding sources is understandable, the best evidence suggests that the most successful fundraising nonprofits do the opposite. They focus on getting very good at a particular type of funding source and growing the number of donors within that type. While the study I’m citing from the Bridgespan Group is a decade old and should not be taken as gospel for multiple reasons, it should give advocacy nonprofit boards pause. Next time someone brings up the need for additional types of funding sources, it’s worth bringing up the the available research and interrogating whether it makes more sense to pursue additional funders from the type of source your organization already excels at rather than new kinds of donors.
The Bridgespan Study
Back in 2007, Bridgespan picked out a group of 144 nonprofits founded after 1970 that had since grown to over $50 million in revenue. Of the 110 organizations Bridgespan obtained solid data from, 90 percent had a single dominant source of funding. On average, that dominant funding source accounted for 90 percent of their funds. Rather than seek multiple types of funders, Bridgespan found that the fast growing nonprofits did three things: 1) concentrated on one type of funding source; 2) matched the funding type with their mission and beneficiaries; and 3) developed their organization around that particular funding model. Using these strategies the most successful nonprofits diversified heavily within a given type of funding. In other words, the nonprofit might have almost entirely corporate donors, but was supported by a lot of different corporations.
There are a few reasons why focusing on one type of funding can lead to more revenue. First, different funding sources require different skill sets to succeed. For instance, to secure government contracts you need people and systems that can navigate complex processes and comply with many rules. In contrast, knowing how to build an online list of donors requires a totally different staff structure, skill set, and software. Second, funders of similar types will often spend time together at meetings and events creating network effects. If you build relationships with major gift donors or people who know them, you may have an easier time showing up at their functions and meeting wealthy individuals. Finally, because of the first two points, the returns on investment to time spent on new sources of funding are quite low relative to what you already know how to do. Learning the complex and time consuming process for foundation fundraising may not yield many resources if you already excel at small-dollar individual gifts.
The Types of Funding Common to Fast Growing Nonprofits
In addition to identifying the overall strategy that led to high revenue growth, Bridgespan identified the types of funding sources most common among the fastest growing nonprofits. Their results suggest some caution for organizing or advocacy groups. The most common sources of funding in the Bridgespan study in descending order were government funding, service fees, and corporate donations. All present challenges for political advocacy organizations, particularly those seeking to demonstrate an independent voice untainted by undue financial influence. While organizations that receive a lot of government revenue do advocate for policies, their interests sometimes focus narrowly on delivering funding for a particular program. Further, the nonprofits work needs to revolve around the service the organization is delivering for the government contract, rather than advocacy work itself. In other words, it’s not a model that fits with the mission and work of many policy or organizing nonprofits.*
Building an organization around service fees, while apparently effective, also requires structuring the work around something other than advocacy. Many think tanks do receive corporate donations, but invite questions about undue influence on their policy positions. While your board may be comfortable with some corporate funding including safeguards to keep your political decisions independent from your donors, setting a strategy around corporate donations as the primary source of funding will undermine your overall influence.
The final two funding types are tellingly less common among the largest nonprofits, though sometimes a more natural fit for advocacy organizations. Nonprofits focusing on individual donors made up 6% of the fastest growing group in Bridgespan’s study, and interestingly small dollar donations proved most effective for achieving scale than major gift donations. To take advantage of small dollar donations groups typically needed to have a clear compelling message and focus on issues of interest to middle class donors including health care and the environment. In fact, study authors do note examples of civic associations with local chapters who employed effective individual donor models. Finally, foundations appeared to focus more on developing pilot projects rather than scaling successful programs and were the preferred funding source for less than a handful of the largest nonprofits. Similar to corporation philanthropy, multiple recent books question the influence of major individual donors including through family foundations.
The upshot for advocacy nonprofits is that individual donors, particularly small donors would appear to be the best source for groups seeking scale. To do so, you’ll need a clear message and something that speaks to people with enough resources to make political donations. Having a volunteer model where people also participate may help encourage donations, though it’s not clear from this study alone. If you don’t meet these criteria, you’ll need to look to other financial sources. Major gift donors and some foundations do fund advocacy groups, but you will likely not be able to grow as large as with individual donations. Corporate donors may provide another source, though it can also bring concerns about independence.
Caveats and Takeaways for Advocacy Organizations
Not only do the types of funding used by fast growing nonprofits not always translate to advocacy organizations, but there are other reasons not to uncritically apply lessons from the study. If you can raise money from multiple sources, as many organizations do, by all means, don’t stop. Many large think tanks rely on a combination of large donors, foundations, and corporate supporters. Established civic associations largely supported by membership dues will frequently work with foundations. Since foundations face limitations on funding lobbying activities, advocacy groups funded primarily by foundations often need other sources of revenue to perform direct lobbying. In this case, putting extra effort into finding a new type of donor can pay off even if the search process is inefficient because the new resources allow the organization to engage in mission-aligned activities.
Moreover, growth is not an end in itself. Structuring your organization around funding sources like government contracts that provide opportunities to grow big may not align with the mission and strategy of many advocacy organizations. It is just fine to choose a path that leads to a smaller organization with funding sources that align to the advocacy mission. Finally, the study occurred prior to the rise of social media and I would be very curious for an analysis to see if online fundraising has changed any of the lessons learned. I suspect it has increased the reach and scale of small-dollar individual donor programs, but not changed the underlying dynamic of needing a clear message and focusing on issues that matter to people with at least some disposable income.
The caveats noted above suggest that advocacy organizations should not take the study results as an ironclad law, particularly since some of the largest sources of funding for nonprofits may not fit well with actual advocacy work. However, next time you are in a board or team meeting focusing on diversifying fundraising it is worth bringing up this research as a cautionary tale to the conventional wisdom to seek out new types of funding. The burden of proof for deciding to pursue new funding categories should be much higher than it typically is. Often your organization should decide to reduce your reliance on one or a handful of funders by pursuing additional funders of the same type – for example moving from reliance on a handful of foundations by building relationships with more foundations. Only after carefully weighing the costs and benefits, with a clear-eyed analysis of the time and resources required should you set out to develop a new revenue stream.
* There are of course large large direct service organizations that develop powerful advocacy arms such as Planned Parenthood. Many advocacy nonprofits, however, do not have the expertise to deliver direct services, nor would it make sense to build out such a program.