Want big money? Inspire confidence

Over the holidays, I got around to reading Vu Le’s blog entitled “Hey, you want nonprofits to act more like businesses? Then treat us like businesses” in which he points out that while funders demand nonprofits act more like for-profit businesses, they don’t invest in them like they do for-profits.

While I wholeheartedly and passionately agree with Vu’s requests from funders – more money, more overhead, faster decision-making, more risk-taking, less micro-managing – I think he fails to fully consider the funders’ criticism.

His blog begins with the inciting incident – funders once again asking nonprofits to behave like for-profit businesses. Vu’s title states his viewpoint – if you want nonprofits to behave like businesses then you have to treat us that way – but I think that’s confusing the chicken with the egg.

Yes, to a large extent, nonprofits are backed into a very tight corner because of the way funders invest in them. And yes, I personally believe that if change is going to happen on this front, that funders will be the ones to truly make it happen.

However, you don’t treat a child like an adult just because the child says that’s the only way he’ll grow up and act like one.

Let’s first clarify something: Yes, nonprofits are businesses. Like for-profit businesses, they strive to produce enough goods and services to meet demand; they need to advertise and promote their work; they need to raise enough revenues to cover the full cost of doing business; and they need to reinvest in improving the efficiency and effectiveness of their businesses. The differences are that

  1. nonprofits exist for the public good, to better society or the world in some way, and as such
  2. their “customers” (or constituents) usually cannot pay enough to cover the full cost of business, which means nonprofits are dependent on a third-party donor or funder to subsidize their work; and
  3. they do not distribute their profits to their investors (as Vu rightly points out in his blog).

But when people say that nonprofits should behave like for-profit businesses, well, I think they’re right. Some people who say this are misguided and don’t understand how nonprofits operate (the three points above). But what many are talking about is the way nonprofits manage their organization, from leadership and planning to operations and revenue generation. Nonprofits are often started or run by smart, passionate people who identify a societal need and take action, but few of them have any business or management experience. And I’ll be honest: it usually shows.

Take this one client I worked with last year. He fit this description – a university professor with a sharp mind, a keen understanding of his work, a vision of how to solve a problem. But when I asked him what his business is, he responded, “Well, I don’t have a business. I run a nonprofit.” And this kind of thinking is why he had no strategic plan, no fundraising plan… and a fully volunteer-run operation without enough funding to pay for staff or expand his efforts.

Here’s the thing: if you want funders to invest in you like they do for-profit companies, you need to inspire confidence. When you come to a me as a funder with a good idea, I’m interested in hearing more. But when you fail to present a clear, thoughtful plan for executing the plan, financing the work, and producing concrete, measurable results, what makes you think I’m going to just throw a large sum of money at you?

Do you think for-profit businesses just walk up to venture capital firms without a business plan? Without proof of concept? Without projected financials and results? Of course not. Start-ups work hard to put forth a solid, convincing plan based on numbers and hard evidence. (And they are more open and up-front about the risk, which makes it easier for investors to take a risk, because it is known and calculated.)

If you want to be treated like a for-profit company, you need to inspire the same kind of confidence that for-profit businesses do. To do this you should have a handle on basic business principles, including:

  • Planning. Most organizations have a strategic plan, but does that plan provide a convincing picture of how you will create impact? Does it show how you will strengthen and grow your organization to achieve that impact? Does it include concrete measurements and evaluation of progress and success? Do you have a financial plan that illustrates how you will raise enough revenue to cover the full cost of doing business (not just program expenses)? Does it consider what will happen in the event you don’t raise enough funds? Do you have a budget that not only shows how you will allocate your resources but that also reflects your strategic goals? And do you have a thoughtful theory of change (the equivalent of a business plan) that describes the system you work in, what it will realistically take to achieve change, and your organization’s unique role in creating that change?
  • Finance. Do you have a system to properly manage revenues and expenses? Do you conduct thorough financial reporting on a regular basis? Are you allocating your resources to maximize your impact and improve your cost effectiveness? Do you have a diversified revenue portfolio that covers the full cost of doing business? Do your financial reports show that you have learned from the past to improve your financial standing? Are you able to adapt to changing financial circumstances (a big grant you didn’t get, an economic recession, insufficient overhead, etc.)?
  • Management. Does your leadership inspire confidence? Are they organized, thoughtful, compassionate, and focused on the mission? Does your nonprofit have a high turnover rate or high retention rate? Does the organization have a clear and logical structure to achieve its goals? Does the organization have a culture that is positive, cohesive, evidence-driven, and supportive of learning and development? Does the organization have a human resources function, with clear policies and infrastructure to effectively manage staff? Do different people and teams within your organization communicate and collaborate effectively? Has your organization successfully navigated through a period of rapid growth?

There are other aspects of an organization that can inspire confidence – a strong brand, solid partnerships, compelling communications, an honest risk assessment and a realistic risk mitigation plan, a history of success or proof of concept, etc. – but the three listed above are critical aspects of an organization that funders will question when making decisions about whether to fund your work or not.

And sure, you can say, “Well, if funders only invest in our program work, how will we ever have the time and money to invest in all this other stuff?” To which my response is: ask for it. If you can demonstrate a need for these things, and the benefits they’ll bring to your organization, it’s not a hard case to make. Most funders know the importance of supporting the nonprofit enterprise and will at least add some funding to a project grant to help you build out those competencies. Program Officers are real people with real feelings, and they genuinely care about helping your organization succeed (even if their bosses and the decision-makers are more interested in a return on investment). Especially if you have solid relationships with existing funders, ask for what you need.

I am passionate about nonprofits and I admit I am as frustrated as anyone with the way the sector is held back and inhibited by current funding practices. And again, it’s a chicken-and-egg scenario: if we want funding practices to change, we need to inspire more confidence, which might mean asking for funding to do it.

In the end, though, it does no good to play the whiny child, complaining that we won’t grow up until we’re treated like grown ups. Demonstrate that you deserve to be treated like one, and it will be much easier to get the respect and support you deserve.

3 misunderstandings about nonprofits that prevent them from succeeding

It’s been six years since “The Nonprofit Starvation Cycle” was published and two years since Dan Pallotta gave his famous TED talk about the financial burdens facing nonprofit organizations. Despite these widespread, articulate, and compelling calls to arms – and a plethora of research, reports, guides, and tools – the sector continues to suffer from financial struggles that have broader impacts on its progress and success at tackling societal problems. In 2013, Guidestar, Charity Navigator, and BBB Wise Giving Alliance started the campaign to end the Overhead Myth, but letters and signatures are meaningless unless we actually put words into action.

What is it that’s stopping us from taking action? Why do we continue to do things the same way when we know there’s a problem and there are solutions at hand?

It strikes me that what drives our behavior is a set of underlying assumptions and beliefs about nonprofits – paradigms that paralyze us from doing things differently. These unspoken paradigms perpetuate the funding and management practices that keep nonprofits from thriving financially and successfully responding to societal problems at scale:

  1. The Misnomer of Non-profit. We associate profit with personal gain and nonprofits with the public good, but nonprofits are businesses, and any successful business needs to earn a surplus. For nonprofits, this surplus isn’t doled out to investors but rather it’s reinvested in the growth and improvement of the organization. Without making a profit, nonprofits live under stressful conditions and cannot expand or innovate to have more impact.
  2. The Overhead Problem. We all know the story: not enough money goes to the nonprofit enterprise – the business side of things that provides for the programs and services we all love and desire, a.k.a. “overhead.” The problem is that the overhead-to-program ratio is seen as an indicator for efficiency, when in fact, it’s actually not, and varies with an organization’s business and business model. We should care less about the overhead ratio and more about important things like effectiveness, or whether the organization is actually solving the problem.
  3. The Restricted Nature of Giving. Unlike the way we invest in for-profit companies, with nonprofits we feel we get to specify how our funding should be used, because hey, it’s our money, right? Unfortunately, this restriction on spending limits an organization’s decision-making and reflects a lack of trust that the organization knows how to spend our money wisely. We should have more faith in the people who dedicate their lives to the causes we care about and the organizations we value so much. (And if we don’t have that much faith in them, should we really be giving them our money?)

There are many different efforts out there to improve nonprofits – how to write better fundraising appeals, how to use social media to attract more support, how to manage volunteers, etc. – but those efforts will only have limited success if the deck is stacked against nonprofit organizations as a whole. Until we get at the root of the problem and change the way we value and invest in nonprofit organizations, everything else is like rearranging the chairs on the deck of the Titanic.

For more on these paradigms – and how funders and organizations can break them by doing things differently – download a free copy of Invaluable today.