Don’t Diversify Your Nonprofit’s Fundraising

We all have that one parent who speaks in proverbs: 

• “There are more fish in the sea.” 
• “You can’t have your cake and eat it too.” 
• “Don’t put all your eggs in one basket.” 

It turns out our boards are like that, too. When it comes to revenue growth, most of our members immediately latch on to the latter of those tips, insisting that raising money is like investing in the stock market — a balanced portfolio will ultimately lead to financial success. 

But the advice is flawed. Even farmers put all their eggs in one basket — that's why there are miles upon miles of cornfields when we drive across the country. A growth-minded nonprofit operates the same way. 

3 Limitations of Diversification

A growth-minded nonprofit becomes exceptional at raising funds through one of these income types: foundations, major donors, small gifts, government grants, sponsorships, investments or fees for services. Still, most nonprofits — egged on by board members and consultants — try to grow through diversification by ignoring these three limits.

1. 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. I see it over and over. Comments from a board member might go something like, “It’s terrific that we’re getting all of these foundation grants, but it would be great if we got sponsors too.” They are completely different skill sets.

2. Limited Time

There’s always trial and error required to improve a skill, including honing an organization’s strength in generating revenue. Doing it in more than one income type takes a long time, and our constituents don’t have endless patience to get to a high level. 

3. Limited Resources

Even if a nonprofit finds what may become a “perfect” revenue stream, nonprofits operate in a resource-constrained environment, and chances are there are not enough resources to invest to take full advantage of it. 

Focusing on a Single Revenue Stream Works

Instead, nonprofits are better off focusing on their top revenue category that matches up well with their nonprofit type than building expert capacity around it. There are 34 years of longitudinal data to prove it. The average nonprofit that raises more than $50 million a year gets about 90% of its funding from one revenue stream, and most of those nonprofits get nearly 100% of their revenue from only two source types. Think of a large nonprofit and test it out. 

So why does it work?

Clarity and Efficiency

Align the income source with the mission. When nonprofits prioritize a specific funding stream, they can tailor their programs and initiatives to fulfill the expectations and requirements of that funding source. This focused approach can lead to deeper impact in their core areas. For example, social service groups and environmental organizations like the Environmental Defense Fund are adept at matching the deliverables in a government grant to the mission.

Strong Brand Identity

Concentrating heavily on funding type develops a clear and consistent brand identity. It makes it easier to communicate the mission effectively to a particular set of stakeholders, donors and communities an organization serves. Sports entities and chronic-condition organizations, like the Special Olympics and Susan G. Komen, have fared exceptionally in sponsorships and have amplified a strong brand through product placement.

Resource Allocation and Efficiency

When nonprofits target one resource type, staff can be trained and deployed with specific competencies that align with the funder's needs. It minimizes fundraising and administrative costs and allows more time and resources dedicated to programmatic activities.

For example, Operation Homefront, a top-rated nonprofit dedicated to supporting military families and one of the newer organizations to reach $50 million, has a strategy crafted around small gifts and grassroots fundraising.

Leveraging Deeper Engagement

Organizations, especially ones focused on research like The Michael J. Fox Foundation or Breakthrough T1D (formerly known as JDRF), tend to cultivate deeper and more meaningful relationships with their funders compared to the average nonprofit. This depth of engagement fosters trust and collaboration, as funders appreciate when organizations fully understand their priorities and goals. Major donors often prefer supporting organizations that can demonstrate significant impact in their areas of interest.

Scalability and Predictability

Focusing on five different types of income streams is like trying to predict the weather nine months in advance. Once a nonprofit establishes an income lane as a primary source, it can scale and use its experience to replicate successful initiatives in new regions or demographics. While economic shifts can create a down year for your focused area of fundraising, those economic turns can impact any funding model, as we’ve seen through inflation in recent years and the pandemic that helped cause it. As a result, organizations that have leaned on traditionally strong funding models for their type of organization are now striving.

New Opportunities and Innovation

There’s a concern that organizations may overlook new opportunities for funding by focusing predominantly on one area. However, focusing on a primary source does not preclude the exploration of other avenues. It simply means that the organization prioritizes depth over breadth. Putting research and development in the annual budget is essential to try new concepts and innovate. Building a culture of innovation where staff deliberately spend time together to solve problems and ask each other “what if?” will lead to successful exploration of secondary funding sources, but with a strategic emphasis on the nonprofit’s core mission. 

Matching Your Nonprofit’s Mission to Revenue Stream

The resources and capabilities to be successful in one income category compared to another can be stark. Let’s map out which organizations have historically found successful growth strategies by heavily focusing on which income types. 

Fee for services. This income stream has a high upside for unrestricted and long-term funding but runs the risk of the constituents needing help unable to afford the offered service. Health centers and housing organizations are natural matches. 

Foundations. Consideration for foundation funding is usually an invite-only affair. However, development that can make in-roads with foundations can see success snowball as program officers within foundations often share ideas and networks. Civil rights organizations, museums, food banks and homeless shelters match up well.

Investment income. This is the most challenging primary income stream to make because of the enormous body of funds it takes to pay out 5% annually. However, nothing beats passive income once you’re there, and it’s for any organization (usually foundations) that has been able to bank the funds needed to have an endowment. 

Government grants. About 40% of nonprofits with an annual budget of $50 million get most of their funds through government grants. It’s a good fit for employment services, environmental groups, charter schools and behavioral health organizations. 

Major donors. This is the fastest growing primary income type. According to research from The Bridgespan Group, 12% of super-sized nonprofits get the bulk of their funding from major donors compared to less than 2% 17 years ago. Civil rights groups, organizations committed to social action and medical foundations are good candidates to find success in making major donors their primary income source.

Small gifts. Only about 3% of organizations with revenue more than $50 million make small gifts of under $10,000 their lead source of income. While small gifts, which include online and peer-to-peer donations, are a great way to spur new donor acquisition, using them as a primary diver is only suitable for organizations with focuses in areas like humanitarian and disaster relief with a broad appeal. 

Sponsorships. Utilizing corporate gifts as the main source of revenue requires an organization to be able to meet an array of tangible benefits from many partners. To be successful, a lucrative industry is needed, and the nonprofit must have a sizable audience. Examples of winning combinations include sports charities like the Special Olympics or nonprofits like those focused on chronic conditions because they can tap pharmaceuticals. 

The various types of funding streams that unlock exponential growth will rise and fall through the years, but nonprofits looking to scale their impact must concentrate their efforts on the one where they can best excel, thereby ensuring that their core mission resonates powerfully with stakeholders. 

The preceding post was provided by an individual unaffiliated with NonProfit PRO. The views expressed within do not directly reflect the thoughts or opinions of NonProfit PRO.