How Nonprofits Get Really Big

Citation: William Foster, Gail Fine (2007) How Nonprofits Get Really Big. Stanford Social Innovation Review (RSS)
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Summary

"Bridgespan identified and studied nonprofit organizations and networks founded in the U.S. in or since 1970 that had achieved $50 million or more in annual revenue by 2003. (Hospitals and colleges, where sources of major funding are well understood, were not included in the study.)"

"we identified three important practices common among nonprofits that succeeded in building large-scale funding models: (1) They developed funding in one concentrated source rather than across diverse sources; (2) they found a funding source that was a natural match to their mission and beneficiaries; and (3) they built a professional organization and structure around this funding model."

Concentrated funding

"organizations that have gotten really big over the past three decades did so by concentrating on one type of funding source, not by diversifying across several sources of funding. Bridgespan obtained solid financial data for 110 of the 144 high-growth nonprofits we identified. Of the 110, roughly 90 percent had a single dominant source of funding – such as government, individual donations, or corporate gifts. And on average, that dominant funding source accounted for just over 90 percent of the organization’s total funding."

"we conducted in-depth interviews with leaders of 21 of these 110 organizations. We found that more than two-thirds of them had not only a dominant source of funding, but also a specialization within that area: for example, not just government funding but also state government funding; not just individual donations but also small individual donations; and not just corporate donations but also in-kind corporate donations."

"Take the examples of youth services and environmental advocacy. When nonprofits in these domains are small, they typically have a diverse set of funding sources, with a large percentage of the money coming from foundations. As these organizations grow to $3 million and $10 million in size, respectively, they diversify their funding sources even more. But as they get larger these organizations increasingly rely on a single funding source – in these cases, government and individual support, respectively. As they reach $50 million or more in size, the concentration of funding from one source increases even more."

"The leaders we interviewed were quite focused on minimizing funding risk. Although most relied on a single source for the bulk of their funding, they did not rely on a single payer. Organizations achieved diversification and mitigated their funding risk by securing multiple payers of the same type to support their work."

Mission match

"Many nonprofits never find a dominant funding source, while others hesitantly drift toward it. This need not be the case. There are natural matches between many organizations and particular funding sources."

• Government "provided most of the money for 40 percent of the organizations" ... "government-funded nonprofits address needs that easily fall within a particular government agency’s set of responsibilities"
• Service fees provided "most of the money for 33 percent of the organizations" ... "Contrary to the current buzz over social enterprises, free-market commercial ventures are not the major generators of program service fees for nonprofits in this study.10 Instead, in 90 percent of the cases for which we have detailed information, the fees had some government connection"
• Corporations are "primary funders of 19 percent of the nonprofits we surveyed" ... " vast majority of corporate support is in-kind donations, not cash" ... "Nonprofits often garner corporate cash when a real market exists for their products or service, but laws or public opinion prevent corporations from entering the market." (eg body parts)
• "Individuals are the primary funders of only 6 percent of the high-growth nonprofits in our study. Interestingly, small gifts power all of the surveyed high-growth nonprofits in this category, even though major gifts account for a large majority of individual giving in the U.S." ... "Issues that directly touch middle-class Americans, such as the environment and health, tend to secure broad individual support" ... "Organizations that receive strong support from individual donors typically have a clear and basic message."
• Foundations were "primary funders for only two of the organizations in our study, or 2 percent" (both health) ... "Though it is impossible to draw conclusions from so few examples, it seems plausible that foundations become dominant funders only when sufficient funding seems to be the major missing ingredient from solving an enormous problem."

Building around growth

"The organizations that grew the most brought in talent and built organizations that support a high-growth strategy." ... and focused on controlling costs/increasing margins.

Limits

Macro factors, eg environmental organizations started after environmentalism got big had an advantage.

"funding for services – be it from government, individuals, or corporations – is more readily available than funding for advocacy. Less than 5 percent of the organizations in this study cite advocacy as their central activity"