The Secret Behind High Growth Nonprofits

This article is a summary of Episode 38 of our Designing Tomorrow podcast. Each episode is a conversation between Jonathan Hicken, Executive Director of the Seymour Marine Discovery Center, and Cosmic’s Creative Director, Eric Ressler.

In preparation for this piece, we did a little research about different fundraising approaches that nonprofits take, and we stumbled upon an article we had actually read before and forgotten about called How Nonprofits Get Really Big by William Foster and Gale Fine. It was published in SSIR — the Stanford Social Innovation Review. 

This article had a lot of really interesting insights about how various nonprofits actually break through and scale.

One of the main things we explore at Cosmic is how some social impact organizations are able to get traction and thrive and reach their missions when so many other social impact organizations can't get that traction — and kind of fail to do so. Funding and revenue generation is a huge reason why a lot of nonprofits spin out.

The Case Against Revenue Diversification

As a social impact leader, you may have heard advice along the lines of "we've got to diversify our revenue streams."

It's something a lot of organizations are actively working on — trying to level up grant fundraising and adding new legs to the funding stool. 

This is something we've talked about with our clients a lot. We've actually seen some of our clients rely too much on one revenue stream — particularly one or two major donors or funders — and then something goes wrong and all of a sudden there's a huge hole in their revenue. They have to lay people off. And oftentimes they go under completely.

So it seems like solid advice. But the SSIR article has some contradictory insights that are worth digging into.

Let’s start with a couple of stats. The average founding year of the 10 largest US nonprofits is 1903. These nonprofits have been around for a while. And 90% of high-growth nonprofits rely on one single dominant funding source — 90% of their funding comes from that one source.

When we saw that, it was really surprising — because the prevailing message in the sector has been diversify, diversify, diversify. Don't over-rely on any one channel. However, the largest nonprofits and the highest-growth nonprofits in America statistically are largely funded by one source.

On one hand, that's incredibly surprising. On another hand it makes a ton of sense. On the other hand, the leaders of those organizations must have totally de-risked putting that many eggs in one basket. There must have been a level of assurance that they could go all in before they did. It makes us wonder where that confidence came from or what kind of conversations were happening prior to those decisions. 

On the other hand — that makes sense. The alignment between the funder's outcomes and vision and the nonprofit's particular mission and vision must be so perfect that it gives nonprofit leaders an ability to focus.

Why Focus Beats Diversification

What it comes down to is that getting really good at any funding model is hard. Whether that's major donor fundraising, individual giving, or government grants — to get really good at finding and developing and nurturing relationships with those different channels is, in and of itself, a big project. Trying to do that for multiple different funding sources at the same time — especially if you're a small and growing nonprofit — is really hard.

The article prompted some questions: If you aren't one of these high-growth nonprofits yet, but you want to be — maybe you don't want to be $50 million a year — but you've been constantly stuck at two or five or ten million or whatever it is — how do you break through and get traction? And is part of that solution narrowing and niching in on a particular approach to fundraising? And is there a way to do that while still diversifying?

When we think about this through the lens of a nonprofit with strong earned income — where goods and services are bringing in more than half of the budget, alongside major donors, grants, and smaller giving — the thought experiment becomes: if you went all in on one of those sources, which one would it be?

For many Executive Directors, 70% of their time is already being spent with major donors. So what would happen if 100% of their fundraising energy went there?

One of the greatest gifts a funder can give when they partner with a leader to fuel a mission is multi-year commitments. Those hundred-year nonprofits — they didn't have to spend so many cycles on fundraising. They could spend all of their brainpower and all of their creativity on delivering impact.

There's a couple of case studies in this article that we found particularly interesting that might explain a couple of these different transitions. Let’s take a look.

Case Study: The American Kidney Fund

The American Kidney Fund (AKF) was founded in 1971 to help low-income people with kidney disease. They were forced to switch their fundraising model. They were stuck around $6 million a year in revenue until about the mid-1990s. And they were pretty diverse with their funding. 

Then a federal law changed in 1996 that made it illegal for medical providers to subsidize dialysis costs. They were basically forced to reinvent and rethink their fundraising.

What they did was shift their strategy 100% to corporate giving.

Because they did that, they were able to grow rapidly — to $20 million a year by 2000, and then up to nearly $70 million a year by 2004. We're talking about literally over 10x-ing their revenue. The CFO of the organization said that switching their emphasis to corporate partners was the turning point. The unlock.

What's interesting about this is that they were diverse in their funding and by many measures pretty successful. Six million a year is nothing to scoff at for a nonprofit. But it was holding them back. And we can’t help but wonder — were they stuck without realizing it? Did they think they were doing pretty well? Would they ever have made this shift if a law hadn't been the inflection point that forced them to do so?

This is one example of an organization that was stuck — whether or not they realized it — and then because of a forcing function outside of their control, they made the choice to move into corporate giving as their main model. And then they took that and they were able to scale rapidly because they focused on that. They got really good at navigating that fundraising approach and building a skillset and workflows around doing that really, really well.

What Made the Corporate Model Work?

A natural question is: What did the corporations have to gain by partnering so closely with this particular nonprofit? Going back to the point about the alignment between the mission and the interests of the funder, what was it about corporations in the 1990s that made them really want to support kidney services? 

Perhaps there was something around public perception or public good. There must have been some alignment that this nonprofit was aware of before they made that switch and had some level of confidence. Perhaps their CEO or their Executive Director had a good relationship with a CEO of one of these corporate partners, and there were conversations about what that was going to look like. And we imagine that that was a partnership between the nonprofit and the corporations before they made this big switch.

A lot of corporations these days have CSR arms or even impact funds. Some of our clients are getting grants from the impact funds of these corporations. And it really comes down to value alignment — a shared vision, a shared mission that aligns well with the goals of the impact fund. 

Oftentimes, those grants are unrestricted, or if they are restricted, they're less restricted than a typical program grant. Sometimes they're tied to a particular geography. They're hybrid restricted grants. Sometimes they're multi-year general operating grants. So corporate partnerships can be a really good strategy. We've had some clients who have gone, maybe not all in, but pretty heavily in on that with some success. 

It seems counterintuitive that a kidney-health-focused nonprofit would be able to grow to $70 million a year from corporate partnerships. But they did.

The Inflection Point: When Organizations Need to Level Up

There's another interesting takeaway from this article — this inflection point in a growth stage of a nonprofit.

At a certain stage in a nonprofit’s growth, you basically need to hire a whole new caliber of outsiders to bring into your team to do expertise-driven work — oftentimes around management focused positions or marketing and communications. In the early days of a nonprofit, growth is pretty organic. Everything is focused around programs. Program staff take on a lot of the other work, sometimes getting elevated into new roles. But at this inflection point, where you’re growing as an organization — when it's time to bring in fresh blood from the marketplace — that transition is really hard to fund.

There's a chicken-and-egg situation: you need the money to bring in the next level of staff to get to the next level, but you don't have that funding yet, and this work is what would help you get that funding.

This is another reason to figure out how to simplify your fundraising approach and focus it — so you're not getting pulled in too many directions at once.

The Grass Is Always Greener

Often when clients come to us, they do have a primary focus around a certain type of fundraising. 

A common example is a nonprofit largely funded by foundations or institutional funders. They always want to figure out how to court individual donors. And the organizations largely funded by individuals always tell us, ‘We need grant funding.’

Everyone is on this trajectory to expand and explore new areas of fundraising. We don't want to discourage organizations from doing that. But this article and other conversations in this space have made us pause. 

If not totally diversifying — could the goal instead be to balance your existing strengths rather than chase every potential revenue source out there?

Experimentation — And Knowing When to Stop

We’re all for experimentation. Especially for nonprofits exploring different funding models right now — go out and experiment. Attempt to go after that grant. Attempt to get those smaller donors, or a major donor. Whatever the experiment looks like to you — experiment.

The risk is staying with that experiment too long.

If you're going to attempt to go after new revenue streams or diversify your funding model, you need to know where the kill switch is or when to pull that kill switch. Otherwise the return on the time you're putting in to pursue these new kinds of funds may quickly start to actually lose you money. And that would be the worst thing for your impact.

The key is setting those kill switches before you start. Otherwise you get in so deep and you have cost sunk bias that can start to creep in. The challenge there though is how to know when to scale up and how long to run these experiments.

The Real Cost of Building a Donor Program

Sometimes, people come to us and say — let's say an organization is largely grant funded — and they tell us, ‘We really want to look at how we can increase donations on our website.’ And people underestimate how big of a program that is to really meaningfully, at scale, build out revenue from online giving. It’s a big deal.

It's not just optimizations to the website that are going to make that happen. Those can have a meaningful impact — how you ask for gifts, how you frame that, the user experience, designing for conversion — all of that can definitely have a meaningful impact. But it also has to be powered by so much more than that. Awareness. Activation. Actually having dollars and energy put behind that in a concerted effort. 

You're not going to convert people who you haven't built any trust with — people you have no relationship with — to give to your cause all of a sudden. That will happen sometimes, if you get a big news feature and you land on the front page of the New York Times and you get a million hits to your website. It’s just a numbers game. Even if you only convert 1.5% of visitors, and it’s a million people — you’re doing pretty well. 

But if your traffic is like most nonprofit websites — in the small thousands per week — that's not enough volume. And everyone is vying for those dollars. Everyone is trying to activate the same small donor pool. We are getting bombarded by appeals. In that case, how do you run a small experiment?

It's a genuine question that sometimes clients ask us. And we can do some small things there. But at some level there's a certain amount of foundational emphasis and time that needs to happen to be able to build out a proper small donor program — whether that's recurring or one time gifts or membership or some kind of combination of that. Frankly, that takes years to really build up in a solid, predictable way.

You're also looking at running a deficit for a certain period of time for those programs to really take off. This is Silicon Valley investing 101: VCs put money in knowing a company is going to run at a loss, but with the belief that at a certain point it will turn. 

Nonprofit fundraising is no different. You’re gonna put a couple of years and a lot of money into building a great website conversion experience, but you're going to lose money for those first couple of years. Do you have the reserves to sustain that? Can you de-risk that time enough to keep pouring fuel on it?

Another thing to consider is that there's probably multiple steps with multiple kill switches.  So, what's the easiest way we can validate if we're getting enough people to our website? Okay, we're getting enough people to our website. What's the easiest way to test whether or not we convert them? Okay, we're able to do that. Let's ladder this. Let's build this step by step with each step having a kill switch.

The other thing we think about a lot when people ask us this question is what does your list size look like? How much of a following and a platform are you starting from? If you already have 20,000 engaged people on a list, a big social following, and healthy metrics on your email — this is a lot more doable. If you're starting from low thousands it’s back to being a numbers game. 

And it's not to say you can't do it. We've seen it done even with those smaller list sizes. But it requires a much more human-curated, relationship-based, nurturing-based approach. You're really spending a lot of time listening to donors, understanding what they care about, understanding their priorities. And there's a balance, because you don't want to be so donor-centric that you have no vision as an organization. You don’t have your own mission and you get captured by your donors. That can happen. And that's a problem too. There's an art and a science to that, 

People tend to lean a little bit more on the former situation where they don't have a clear understanding of who their donors are at the level they need to be able to nurture them. To build these relationships. To build the trust necessary to get them to donate through the website or to join some kind of membership program. Even if you are able to interact directly with people in the real world and to build relationships that way, it’s still pretty hard.

The Allure of Different Focuses

If you come from the individual donor world, the allure of grants is tantalizing. If you could just get 1, 2, 3, 5, 10 of these grants a year, your organization is funded. That seems so much easier than having to court thousands — or even hundreds of thousands of donors for a national organization. 

But everyone's vying for those opportunities and funders are improving a lot of their practices. But some of the funder practices kind of suck. It feels kind of like a dog and pony show. You have to do a ton of work to submit the grant. There's sometimes arduous reporting and evaluation metrics assigned to those grants. Sometimes they're highly restricted. There's a whole list of downsides to some grants and funding opportunities in that way. There's a big movement around better practices around fundraising that's more based in trust and general operating grants and unrestricted funds, but it's not an easy walk in the park to get these grants either.

The Power of Deep Partnership

What we keep coming back to is the idea of being deeply partnered with a funder who can make transformational contributions.

Going back to the American Kidney Fund, whatever relationship they had with their first corporate funder — they must have been a level of trust with that corporation that was so unique that they could go all in. Or maybe it was a handful of partners. 

As a social impact leader, think about which of your funders could you sit down with and say, “Hey, here's where we're headed and it's going to take a level of trust here, and some time. Are you with me to go on this journey? It might take a while for us to deliver this vision or this impact.”

We keep coming back to the importance of developing that level of trust with a major donor, or a grant, or a government office, or whomever. You as an organization or as an Executive Director need to be developing that depth of partnership with your funders.

Should You Even Grow at All?

We talk a lot about growth. And we use that word to mean a lot of different things. Largely, people have an unequivocal coupling of growth and revenue, and that makes sense. But you might not actually need to grow your revenue to reach your mission.

Maybe you can right-size your mission based on your current budget and current capabilities. Maybe you can niche in even further — bite off a smaller chunk, but really go deep with your impact in that niche.

For some organizations, growth isn’t a necessary ingredient to deliver the impact that they seek. And when we’re using the word growth in that context, we’re talking about dollars in dollars out. We’re talking about people served in programs. You may not necessarily need to go huge — or have the market to go huge. A lot of it is about the quality of the experience people are having with their organization. Instead, growth can be about the kinds of stories you're telling and being adaptable to what's happening in the moment.

The challenge with a lot of nonprofits — particularly science centers and other educational institutions — is they get really good at something and they stay there — while the world around them changes. They're not necessarily keeping up with the conversations that are most relevant to the community they serve. 

Granted, most organizations will grow. Expenses grow. Personnel costs grow. By necessity, most organizations' budgets must grow — even to deliver the status quo level of impact that they’re delivering today. But there's a big difference between budget growth to sustain impact and the pressure to double, triple, or quadruple your budget to continue to deliver the quality of impact that you seek today. That can be a healthy way to think about growth.

What Are We Really Measuring?

Our modern culture is so focused on growth — especially when it comes to tech, startups, and business culture in general. That's built into our general cultural. And we really need to stop and pause and think: what are we measuring when we talk about growth? Is it just revenue? Or is revenue really the fuel that allows us to grow?

Can we instead measure growth based on actual impact delivered? And not even necessarily scaling that and duplicating that, but really looking at deepening that. Ensuring that the impact we're creating is real. That it has lasting value. That it's not surface-level or some kind of varnish we're putting onto a problem — but actually really deeply uncovering that problem — getting curious about it, deconstructing it, and figuring out how to solve it deeply and sustainably, even if we don’t grow revenue to do it.

So although we have largely focused on revenue growth and fundraising — and of course that's a really important element of the ability to deliver impact, and so many organizations are under-resourced and don't have the revenue they need to fully fund the true costs of their work — we also have to balance that by being careful about how we think about growth in this space.

Don't let it just be focused on revenue — dollars in and dollars out.