Relying Primarily on Fund Raising? The Numbers STILL Don’t Add Up

on March 18, 2013
in Blog

Note: This is an update from the original 2010 article as new data has presented itself.

I continue to be astounded by the high number of fundraisers being sought on nonprofit job boards. Many nonprofits still think that fundraising for subsidy support as their main source of income is the appropriate strategy. Once a upon a time there were a few high net worth donors and a few grade “A” organizations in each major issue area (health, education, youth, etc..) to give it to. Organizations could count on long term subsidies that supported their capacity because they were the only kids on the block…

As the statistics clearly show, those days are long gone…

According to the Urban League National Center for Charitable Statistics (NCCS) as of 2013 there are:

* 1,551,705 tax-exempt organizations, including:
– 963,255 public charities
– 97,941 private foundations
– 490,509 other types of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues

In addition there are 317,751 congregations in the United States. This is relevant because In 2011, according to the National Philanthropic Trust the majority of charitable dollars went first to religion (32%) and then to education (13%), human services (12%), and grant making foundations (9%).

That equals about 1.54 million nonprofits of one sort or another competing for the same diminished pot of total funding. I say diminished because the share of the total giving pie in the US peaked in 2007 at approximately 306+ Billion dollars. Since the recession started in 2007, total giving has been consistently under $300 billion and in 2011 was $298 Billion. Assuming those 317,751 congregations are collecting 32% of $298 billion charitable dollars, that leaves $202.64 billion to be divided among 1.54 organizations or put another way and average of $131,840 per organization. Of course the money is not given equally. The statistics note that education and human services get a larger share of the pie. Moreover, the largest most visible charities will necessarily get more from the general public as will those with established institutional donor relationships. These are interesting statistics to consider when analyzing the annual cost to employ a fundraiser versus the average amount of the total giving pie available to each nonprofit.

While total giving has diminished the number of new nonprofits competing for dollars continues to grow….

According to the Urban Institute’s nonprofit section, the nonprofit sector has been growing steadily in size for more than a decade. Between 2001 and 2011, the number of nonprofits increased 25%; from 1,259,764 million to 1,574,674 million today. The growth rate of the nonprofit sector has surpassed the rate of both the business and government sectors. That means an average of 32,000 new nonprofits were created every year. The annual numbers were higher until the recession, over 40,000 per year, but there has been a decrease of about 30% new nonprofits created partly due to the recession and partly due to an IRS rule change.

Giver Profiles:

According to the National Philanthropic Trust, in 2011, the largest source of charitable giving came from individuals at $217.79 billion, or 73% of total giving; followed by foundations ($41.67 billion/14%), bequests ($24.41 billion/8%), and corporations ($14.55 billion/5%).

Individuals who make up the largest portion of giving, typically give in small amounts. “But wait! You say, what about high net worth Individuals?”. Well, they typically give larger amounts to their specific pet causes, and if you’re lucky enough to be one of them that’s great. Only 50 people were responsible for $7.4 billion dollars of total giving in 2012 According to the Chronicle of Philanthropy. BTW that doesn’t count another half billion provided by the Gates’ as part of an earlier 2004 pledge to their foundation. Which brings us to our second largest class of private givers, foundations. Often, really high net worth individuals, companies, etc. set up these institutions to provide funding for the organizations they wish to support; fire walling their donor from their other activities into a neat institutional package the IRS can deal with and that has specific tax treatment rules of its own.

According to the National Philanthropic Trust, the number of foundations increased dramatically (242%) since 1980, but that increase has slowed significantly, 33.6% since 2000; and 6% since 2005. More importantly, according to the NCCS data most foundations are quiet small.

  • 60,000 of 98,000 active foundations have assets under $1 million
  • Another 30,000 have assets between $1-$10 million
  • Only approximately 3,000 have assets between $10-$25 million
  • Only approximately 2,500 assets above $25 million

These organization also operate on the IRS 5% rule — e.g. they are required to give at least 5% [but not necessarily more], of their total assets out annually. And that’s what most do. According to a Foundation center report. The majority stick to that minimum. Between 2007-2009 over 2/3 of the largest 979 foundations surveyed provided only between 4% and 6.9% of their total assets in any given year, with the vast majority (446) paying out between 5%-5.9%. Of the approximately 98,000 foundations the top 50 alone were responsible for about $14.5 billion of 2010 giving according to a Foundation Center Report — That represents 35% of the total foundation giving pie!

According to NPTrust Donor advised funds [typically pooled funding from higher net worth donors who do not create their own foundations] have become more popular. There were 161,873 donor-advised fund accounts in 2010 holding nearly $30 billion in assets. Annual contributions into donor-advised funds were $7.77 billion in 2010 and Donors recommended grants from donor-advised funds totaling $6.18 billion to charities in 2010. However, the average donor-advised fund account size is also quite small relative to NGO need: only $185,087 in 2010.

Do the Math:

Given the statistical increase in nonprofits and corresponding decrease in overall giving, relying on subsidy funding or grants as an NGO’s primary source of revenue is unsustainable over the long term; which may be why the number of nonprofits is finally decreasing. While there were still new entities applying, 2011 saw an almost 16% decrease in overall nonprofits.

More importantly, its why many nonprofits opt for a different alternative to primary dependence on subsidy support. In 2010, the NCCS reported that:

  • 73% of public charity revenue came from program service revenues, which include government fees and contracts.
  • 22% of public charity revenue came from contributions, gifts and government grants.
  • 5% of public charity revenue came from “other” sources including dues, rental income, special event income, and gains or losses from goods sold.

If an NGO’s revenue model is not similarly balanced, but instead heavily skewed to reliance on subsidy funding, then at best organizational development and growth will be a continuing challenge, at worst the organization may have to shutter its operations or merge with another more financially sound entity. What I always advised my grantees as a foundation program director, funder and consultant was to find a program-related income stream based on their mission that could support as much of their general operating expenses as possible. General operating expenses are typically underfunded by foundation support even in the best of circumstances, and individual member supported organizations are expected to keep these costs down as well. A nonprofit looking at long term strategic sustainability should be trying to cover its own operating costs to the largest extent it can while soliciting subsidy support for its ongoing and new programmatic work.

Finally, given the realities of donor support (which typically funds programs first, operations second) and the increased competition for less funding, most nonprofits should be looking to hire new business strategists rather than relying solely on fund raisers to seek subsidy supports. Nonprofits need more individuals that can effectively create and relate sustainable income streams to program missions. No, I am not advising that the answer is a Fortune 500 business specialist for every nonprofit, but rather someone with experience generating rather than simply soliciting revenue for a nonprofit. There is a genuine argument that both are necessary. However, the statistics skew towards insuring an organization can effectively generate revenue through its mission.

Jonathan Peizer is the Principal of Internaut Consulting supporting foundations, nonprofits, governments and socially responsible private sector initiatives. He is the former CIO/CTO and Director of the Open Society Institute’s Global Internet Program.

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How to Incentivize Measuring Outcome and Supporting Nonprofit Capacity at the Same Time

on October 14, 2012
in Blog

I’ve been pondering a solution to the problem of incentivizing two behaviors in the nonprofit-donor relationship that each want from the other. Donors need program outcome measurements from nonprofits and nonprofits need capacity support from donors. Unfortunately, current sector dynamics don’t incentivize these behaviors and often do the opposite of de-incentivizing them. The real trick is to find a solution that works within the current system of donor-nonprofit support that is easy to implement and not too disruptive. Otherwise, it could not easily be adopted by the approximately 120,000 donors and the 1.5 million charitable organizations in the US alone.

The Problem

Related to the capacity issue, most donors prefer funding program objectives and have clear limitations as to how much nonprofit overhead capacity they will fund, often in the form of percentage ceilings in their grants. In our current system it’s also not in the donor’s interest to support a nonprofit’s organizational capacity over the many years it may need to develop when that nonprofit may only be a grantee for a couple of years. Thousands of new nonprofits literally sprout up each year to meet similar challenges and as a donor’s program criteria changes so do the nonprofits it supports to facilitate its objectives.

Related to the measurement issue, as the number of donors who’ve made their money from metrics-based endeavors like finance and technology has increased, nonprofits have come under increasing pressure to demonstrate measured outcomes and value for the investment made in them. Nonprofits have also been encouraged to manage themselves more like businesses. This is somewhat ironic because unlike businesses that can invest product and service revenue back into their own operations to grow and in turn better measure their progress, nonprofit mission support and back office operational investment are not so well aligned. That’s because nonprofit donors are first and foremost interested in the nonprofit’s ability to meet their funding criteria, not necessarily supporting the operational capacity that nonprofits rely on them for as well. It’s no wonder then, that many nonprofits see this focus on objective metrics as a donor-driven exercise and an increased and underfunded mandate on them. After all, the ability to measure impact is also related to an organization’s internal capacity to do so. If it relies on multiple donors for support a nonprofit potentially has the added burden of tracking and analyzing multiple and disparate measures based on individual donor need.

The Simple Solution

What if the standard grant was modified so that extra support (above and beyond the agreed upon program and operating budget) came at the end of a grant as long as a nonprofit produced credible outcome metrics that it had agreed upon with the donor? The metrics would not have to be positive in terms of program outcome, just honest, to receive the support. And this extra support would be for a nonprofit’s general operating expenses.

The donor could still decide to limit the extra support to a percentage of the grant. However, if all the donors a nonprofit relied upon provided this bonus support in return for these objective metrics, any percentage limitation would be less of a problem in aggregate. Overall the nonprofit’s capacity support might double if it received its standard operating support in a grant and produced credible metrics to meet the bonus funding requirements of each of its donors as well. This would incentivize the nonprofit to internalize metric reporting in order to increase its capacity support while also providing an incentive for the donor to increase capacity support in order to get the metrics it required – a win-win situation.

The nonprofit with increased capacity support would also be in a better position organizationally to provide these metrics — and much more. Another result of this “bonus” capacity funding support in return for broader nonprofit metric reporting might be a natural reduction in the overall funding pool available because of the extra funds provided. However with about 45K new nonprofits coming online each year and competing for limited resources in an already crowded field of 1.5 million would that be such a bad thing? Fewer nonprofits with the ability to provide accurate metrics would be more highly rewarded with an increase in their capacity support, while those nonprofits that could not provide such measurements would see their support diminish.

The result would be more objective reporting from healthier nonprofit institutions, more satisfied donors and potentially fewer nonprofits that were unable to report on their outcomes. And all this could be accomplished within the framework of current institutional giving practices by better aligning the incentives without significantly modifying the grant giving workflow process.

Jonathan Peizer is the Principal of Internaut Consulting supporting foundations, nonprofits, governments and socially responsible private sector initiatives. He is the former CIO/CTO and Director of the Open Society Institute’s Global Internet Program.

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