Study: Nonprofits Grow Large by Focusing on Concentration of Revenue Categories

A new study conducted by The Bridgespan Group explores the funding strategies of large US-based nonprofits and surfaces two key findings: one, that over 90 percent of these “really big” nonprofits raised the bulk of their money from a single category of funder, and two, that an increasing percentage of these organizations now rely on philanthropy as their primary source of funding.

According to Darren Isom, Bridgespan partner and co-author, “Nonprofit leaders often grapple with the question of how big their organization will need to get to have the impact they want to achieve. Then they have to strategize on where the money will come from to support that growth and impact.” Titled A New Look at How US Nonprofits Get Really Big and published on SSIR.org, the study builds on Bridgespan’s 2007 research on the same topic, shedding light on the overall funding landscape for nonprofits seeking significant scale.

The report says that the number of nonprofits founded since 1990 reaching the $50 million mark in annual revenue rose from 144 in 2007 to 297 in the current analysis, reflecting the overall growth of the social sector in recent years. “Even with all of the changes over the last 17 years,” says co-author and Bridgespan Partner Ali Kelley, “our findings remained consistent. Over 90 percent of the organizations in our study had a dominant revenue category such as corporate or government that accounted for at least 60 percent of the organization’s total revenue.” This was also the case in Bridgespan’s 2007 research.

“It is particularly interesting to see how similar to the previous study our current findings are,” says Kelley. “For many, this idea of not pursuing every possible resource is counterintuitive. We understand the desire to minimize the risk of any one funding relationship. But with that, we suggest diversifying within a category of revenue, not across three or more categories.”

One difference in approach in the new study is that the authors also took account of the racial and ethnic identities of the leaders of the large nonprofits they studied and found that 27 percent have a CEO or executive director who identifies as a person of color. According to Isom, “Though still underrepresented as a leadership group, we see these as organizations that have made headway against the racial bias in philanthropy faced by leaders of color.”

The three most prevalent funding categories identified in the study were government, program services/earned revenue, and corporate funding. Notably, philanthropy emerged as a dominant funding category for a meaningful share of large nonprofits, accounting for 12 percent of the organizations in the data set, up from 2 percent in 2007.

To help nonprofits raise the necessary funds for significant scale, the study emphasizes three important practices:

• Focus on concentration in one or two revenue categories: Within that category, organizations will often pursue multiple sources of revenue—for example, government funding, but potentially from different agencies.
• Seek funding that is a “natural match” with your organization's work: For example, of the organizations in our data set with a dominant funding category, “government”—federal, state, or local—almost half are in education or human services, representing a “natural match,” whereby governments contract with or provide grants to nonprofit agencies for services that government typically funds but does not always provide itself.
• Build dedicated capabilities and infrastructure to tap into the chosen revenue categories: Organizations should get clear on what activities will bring in their natural match funding, then hire, recruit, and contract for the capabilities needed to accomplish these activities.

The authors qualify that most nonprofits do not strive for annual revenue of $50 million or more. For those that seek to sustain operations at a smaller scale, it still may be beneficial to focus on one or two main revenue categories and build the capabilities needed to achieve that focus.

Organizations that do seek to get “really big” share both a belief that greater scale is critical to achieving their goals and the good fortune to tap into major funding categories (like government, which is the dominant revenue category for 40 percent of the nonprofits in the data set). “Some aspire to grow more, others seek to sustain their current size, and a few tell us that a slightly smaller level of annual revenue might ultimately be more sustainable than where they are now. Though this article is mainly about how nonprofits grow large—the why will always be a critical question for leaders,” says Isom.

Read the full study here.

Source: Bridgespan Group

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