Diversified funding is a nonprofit nemesis.
It’s time to bust the myth, because multiple fundraising sources are not how you get big
Here’s a hard truth nobody is talking about. Diversified fundraising helps you survive early on. But it’s not how you get really big.
Yet your board members insist that “raising money is like investing in the stock market — a balanced portfolio will ultimately lead to financial success,” says Jamie Bearse.
They’re wrong.
Let this sink in.
The Bridgespan Group found this secret formula in a study of 200,000 nonprofits over 40 years. They call it The Myth of Diversification. And their evidence contradicts a lot of conventional (but inaccurate) wisdom in our sector. Especially because foundations alone rarely fuel significant growth.
What are the most common funding sources?
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40% of nonprofits with budgets of $50 million get most funding from government grants.
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Program services/earned revenue and corporate donations are the next most prevalent funding categories.
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While just 12% of big nonprofits get the bulk from foundations and individuals, this is the fastest-growing source.
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Only 3% of big nonprofits rely on small gifts of under $10,000 as the lead source of income.
“Small- and mid-sized nonprofits seeking to grow can benefit from identifying a primary funding source early in their life cycle, which can be aligned with their program model. This will lead to investment in a funding strategy — for example, building deep expertise in government grantmaking processes — that can better attract the resources needed to fuel programmatic growth. It is a strategy that also avoids spreading resources thinly across a variety of funding opportunities.”
THE BRIDGESPAN GROUP
In other words: if you want to grow significantly, you have to eventually muster the courage to put all your eggs in one basket. And engage all those eggs in that one basket.
Additionally, you must create a professional organization that meets the requirements of that primary funding source.
To be clear, we’re not talking about relying on a single donor. That’s too risky. Instead, we’re saying you must engage and grow a single type of donor, of which many in that category are funding you.
Most nonprofits — egged on by board members and consultants — try to grow through diversification by ignoring three limits, says Jamie Bearse.
- Limited knowledge: it’s next to impossible for a nonprofit to have professional staff with a high-level understanding and the capability to execute all the strategies and tactics that go into each revenue stream.
- Limited time: there’s always trial and error required to improve a skill, including honing an organization’s strength in generating revenue.
- Limited resources: even if a nonprofit finds what may become a perfect revenue stream, chances are there are not enough resources to invest to take full advantage of it.
Why focusing on a single revenue stream works, Bearse explains:
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Clarity & efficiency
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Strong brand identity
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Scalability & predictability
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Leveraging deeper engagement
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Resource allocation & efficiency
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New opportunities & innovation
“Each funding source is its own business model. No org can simultaneously run five business models at once. Boards can pressure leaders to pursue diversification. I would ask Boards to… encourage the right kind of diversification — more funders in a primary source.”
JANE LEU, SMARTER GOOD
So why aren’t nonprofits more focused?
Fear.
In the early years, reaching $500k or even $5M requires being scrappy and taking whatever you can get. Foundations, high-net-worths, individuals, and even CSR. Small gifts, big grants. Do what it takes to stay alive.
But to break through the valley of death and truly maximize funding? Wave goodbye to traditional diversification beliefs. It’s not about casting a wider fundraising net. The data says to be selective. Say no to say yes.
Build a brand that turns off as many donors as it turns on. Because it’s nearly impossible to communicate (well) with multiple types of funders at once.
In positioning strategy, this means you must narrow your priority audiences. Nonprofits say they target individual small donors, high-net-worths, foundations, government partners, beneficiaries, media, industry, and more. But it’s not possible. You must pick three audiences. Max. Because yes, you can customize your messaging a bit depending on the medium. But you ultimately have one brand.
The bottom line?
Break the myth. Say no in order to grow.
“When nonprofits are small, they often raise money from a wide variety of sources. That’s because there are many potential donors who are able to give small amounts of money, and because a particularly inspiring executive director can stand out from the crowd and convince these small donors to give. But when very large sums of money are involved, the picture changes.”
THE BRIDGESPAN GROUP
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