In response to my recent column in the Financial Times, Reader Jeremy Gregg has been asking what makes a nonprofit “sustainable”. George Overholser of the Nonprofit Finance Fund (profiled in the FT story), has sent an email my way that breaks down the distinctions between earned income, donations, and what makes a nonprofit sustainable. I think his line of thinking is a wonderful example of drawing on business thinking without committing the sins of “philanthrocapitalism”.
Although a nonprofit is driven by a mission to help others, it is inescapably in the business of turning funders’ money into program execution.
If I buy a tutoring session [from a nonprofit] for my own kid, that’s called “earned revenue”. If I make a donation that results in a tutoring session for someone else’s kid, that’s “unearned”. But in both cases, the nonprofit firm does the same thing: it turns someone’s money into a useful tutoring session. And it ought to be that good tutoring begets a sustainable flow of loyal paying customers, earned or unearned.
For this reason, I think it’s often best for philanthropists to avoid a “support the organization” mindset, in favor of a mindset that says “buy program execution from the organization”. That way, the earned vs unearned distinction stops being (incorrectly) mapped into the sustainable vs unsustainable distinction.
All this plays directly into the question of sustainability, because an organization that sells a product (superior program execution) is inherently more stable than one that asks for generic support (“we need your help… again!”). Likewise, funders that “purchase” program execution will come back for more (if they think they got a good deal) whereas funders that “support” an organization may begin to ask why the organization can’t seem to get past its difficulties.
All this to say, so-called “unearned” philanthropic revenues can be a fine source of sustainability.
[Not to be confusing, but all of the above excludes what I think of as Builder type funding relationships (as opposed to “Buyer”). Builders are the ones who provide one-time equity-like growth capital. Builders are decidedly not the source of an organization’s financial sustainability. Rather, they help pay the bills while an organization learns to attract Buyer types. Our SEGUE methodology is designed to attract Builder capital.]
When George writes about “Builders vs. Buyers”, he’s making a distinction between “investors” in the nonprofit and “customers” who buy from the nonprofit. This concept was discussed in the FT column and you can read George’s excellent paper on the concept titled “Building is not Buying”.