Capacity Capital

Everyone recognizes that the nonprofit sector is sorely undercapitalized.  But how do we solve that without a major overhaul of how nonprofit organizations and financial markets are structured?  Yes, those things do need to happen, but in the meantime there are things we can do to improve the nonprofit sector’s ability to generate more revenue.

Many nonprofit organizations here in Austin and the Southwest region lack sufficient fundraising infrastructure.  They don’t have a big enough donor base, efficient and effective technology, expertise in the various methods for raising money from diverse areas, messaging that is clear, concise, compelling and investment worthy, or a plan for turning things around.  With an investment in technology, planning and expertise and a commitment to make real changes, a nonprofit can achieve real results in their revenue generation abilities.

However, it can be difficult to find that initial investment.  Nonprofit budgets are extremely tight, and even tighter in the current economy.  Capacity capital isn’t just sitting around.  However, a nonprofit could put together a convincing pitch to someone close to the organization (a board member, a long-time donor) and demonstrate the return that such an investment could have.

Let me give you an example.  Nonprofit ABC (completely fictional) currently raises $400,000 a year from foundation grants, events, individuals (via direct mail mostly), and a few corporate gifts.  They have a fairly inefficient donor database. They spend too much time, money and energy on an annual event that nets (not including staff time) $50,000.  They do very little online communication or solicitation.  They do almost no major donor cultivation and solicitation. They have two development staff members:  a development director who only has 2 years of experience and a grant writer.  Their board is not involved in fundraising at all, yet they have some capacity and connections.  Their foundation grants (totaling about $100,000) will probably dry up in a year or two when the foundations want new projects to fund.  Their individual giving, approximately 1,200 donors with a small average gift of $150, totals almost $200,000.

Nonprofit ABC could put together a pitch for “capacity capital” of $30,000 which will help them pay for:

• new donor database
• online marketing/giving technology
• new collateral
• fundraising consulting

Then, with the help of a fundraising consultant they could put together a comprehensive development plan, purchase and integrate a new donor database that allows them to better track and upgrade and grow their donor base and launch a major gifts campaign, purchase and integrate new online marketing tools that allow them to better communicate with and more cheaply raise money from online constituents, create new collateral with more concise and compelling messaging focused on impact, and so.  The result over the next year or two could be hundreds of thousands of dollars in revenue.  They could go from a $400K a year organization to a $600K+ organization.  An investment of $30K resulting in a $200K per year increase is a pretty impressive return.

We did something similar on a larger scale at KLRU.  We took $350,000 worth of investments from a handful of donors and board members and turned that into a $1.6 million annual increase in revenue.  You can read the case study to learn more.

I think there is something to this idea of “capacity capital.”  A relatively small investment in smart, strategic revamping of an organization’s fundraising function can result in a dramatic increase in their revenue generation abilities, paying dividends for years to come.

Related posts:

1. Can PRIs Support Fundraising and Capacity Building?
2. Overcoming the Bias Against Nonprofit Capacity
3. A PRI Experiment in Austin Pushes the Social Capital Market Forward
4. Transforming the Nonprofit Fundraising Function
5. A Crazy Idea?

Tags: Fundraising

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