Funding Models

Funding a successful, effective non-profit is comparable to running a similarly sized for-profit organization. Some consider non-profit funding models to be more complex than for-profit models. When a for-profit company creates value for a customer, the customer then becomes the source of revenue and pays for the value. In contrast, when a non-profit creates value for a beneficiary, the beneficiary tends not to become the source of revenue. Thus, raising funds is an entirely separate step.  There are many different funding models that non-profits utilize. However, once organizations try to raise $25 million to $50 million a year, there are fewer possible paths because the number of potential people who are authorized to spend such a large amount of money decreases.  A study on the 144 non-profits in the United States that had grown to $50 million a year or more in size confirmed this idea and found that their funding models could be categorized into 10 different types.(1)

Funding Through Individual Donations:

  1. Heartfelt Connector: This strategy is utilized by organizations that focus on causes that resonate with large numbers of people at all income levels. This type of organization creates a way for people to connect around a common cause, often through fundraising events. Examples include the Susan G. Komen Foundation and the Make-a-Wish Foundation.
  2. Beneficiary Builder: Organizations utilizing this strategy provide services to individuals who pay to cover part of the cost. For additional donations, they also rely on people who have benefited in the past from these services. Nonprofit universities are an example of this type of organization. Beneficiaries pay tuition, which does not cover the whole cost of their education. But, later these beneficiaries are often motivated to give money back to their university because of the impact that the schooling had on their lives.
  3. Member Motivator: Individuals who are members of the non-profit donate money because the issue is integral to their daily lives and is something from which they can draw a collective benefit. This funding model seeks to connect members (and donors) by offering activities they already seek.

Funding Through a Large Donation from a Single Person

  1.  Big Bettor: These non-profits rely on major grants from individuals or foundations. They often seek to tackle an issue that can potentially be solved with a huge donation, such as finding a cure for a specific disease.

Funding by the Government

  1. Public Provider: These non-profits work with government agencies to provide essential services, and the government allocates funding.
  2. Policy Innovator: These non-profits rely on government funding to address social issues that are not clearly compatible with existing government programs, and government funders support these alternate methods.
  3. Beneficiary Broker: These non-profits compete with one another to provide government-funded services such as housing, healthcare, and student loans.

Corporate Funding

  1. Resources Recycler: These organizations have grown large by collecting in-kind donations from corporations or individuals. They then distribute the items to needy recipients.

Mix of Funders

  1. Market Maker: These non-profits provide a service where there is money available to pay for it, but it would unlawful for a for-profit to do so. Since there is a demand for human organs, but it is illegal to sell them, organ donation is an example where Market Makers operate.
  2. Local Nationalizer: These are non-profits that have grown large by creating a network of locally-based operations.  Most of the money is raised locally and around issues that resonate with local funders. Teach for America uses this funding model.

Revenue-Generating Programs

Though the above funding models might prove useful, it is also important for non-profits to focus on developing revenue-generating programs, as opposed to relying solely on charitable contributions.  Revenue-generating social-enterprise programs can provide the organization with greater financial autonomy and have the potential to diversify revenue and bring in new clients who offer new services or service delivery methods.(2) Increasing numbers of non-profits are using direct business principles and turning to social entrepreneurship to raise revenues.  “Today, non-profits are increasingly finding that social entrepreneurship offers the tools and techniques needed to build capacity and to achieve and maintain long-term financial stability during times where there are changes in the economic environment.”(3)  Through social entrepreneurship initiatives, an organization is able to take their strengths and match them to an opportunity they see in the market.  Through social entrepreneurship, non-profits are also developing new strategies for meeting their goals and staying within their mission by adopting effective business practices. For example, the organization Southwest Women Working Together holds job training services, counseling and housing programs for women and children in Chicago so that they will achieve emotional well-being and economic self-sufficiency. The organization recently decided to develop an income-generating thrift shop, which will allow the organization to remain self-sufficient and continue to offer their existing services.(4) Another example is the Girl Scout Councils and their annual cookie drive. By selling cookies, the organization generates enough revenue to offer programs, training and events for thousands of young girls.(5) Similarly, Unite For Sight focuses on generating revenue through its four program divisions: Global Health Delivery Program with Global Impact Corps; Global Health & Innovation Conference; Global Health University; and University Health Chapters. Approximately 90% of Unite For Sight's annual income is generated through its programs. Additionally, each revenue-generating program scales on an annual basis, and new programs are regularly developed and implemented.

It is important to realize that just because an organization is a non-profit does not mean that it can’t raise capital. Non-profits can legally engage in for-profit activities as long as these activities further their charitable intentions.(6) However, before implementing revenue-generating activities, it is important that non-profits understand the legal implications for any program idea that they may develop. For a guide to legal issues for non-profits please see the following article: “Revenue-Generating Activities of Charitable Organizations: Legal Issues.”

Footnotes

(1) Foster, W., Kim, P., and Christiansen, B. “Ten Non-profit Funding Models.” Stanford Social Innovation Review. (2009). Accessed on 23 September 2010. <http://www.ssireview.org/articles/entry/ten_nonprofit_funding_models/>

(2) Stater, K. “The Impact of Revenue Sources on Marketing Behavior: Examining Web-Promotion and Place-Marketing in Non-profit Organizations.” Journal of Non-profit and Public Sector Marketing. 21 (2009): 202-224. Accessed on 23 September 2010.<http://www.informaworld.com/smpp/content~db=all~content=a911730777>

(3) “Capacity-Building Digest. Social Entrepreneurship: The Double Bottom Line.” Accessed on 23 September 2010. <http://www.iff.org/resources/content/3/3/documents/cbd_series_3.pdf>

(4) Ibid.

(5) Ashby, M., Locke, L. and Wilson, G. “Non-profits Look to Business for Funding Model.” Accessed on 23 September 2010. <http://www.stlouisfed.org/publications/br/articles/?id=559>

(6) “True Sustainability: A New Model to Aid Non-profits in Developing Self-Sustaining Revenue Streams.” Accessed on 23 September 2010.