Note: I was asked by Markets for Good to write a post as part of their ongoing online conversation about improving how money flows to social change. Markets for Good is an effort by the Bill & Melinda Gates Foundation, the William & Flora Hewlett Foundation, and the financial firm Liquidnet to improve the system for generating, sharing, and acting upon data and information in the social sector.
Over the past several years, Markets for Good has been a forum for discussion and collaboration among online giving platforms, nonprofit information providers, nonprofit evaluators, philanthropic advisors, and other entities working to improve the global philanthropic system and social sector. Below is the post I wrote. You can see this post and the others in their series and contribute to the ongoing conversation at the Markets for Good blog.
As we talk about creating a space “where capital flows efficiently to the organizations that are having the greatest impact” we must address the elephant in the room: how nonprofits are funded.
Currently that’s a pretty broken model. And if we are ever to direct more money to more social change, we must fix it.
In an ideal world, a social change organization would create a potential solution to a social problem, prove that the solution actual resulted in change, and then attract sustainable funding to grow that solution.
But that’s not currently happening because the way nonprofits are funded is broken in three key ways:
Nonprofits don’t articulate a theory of change. 10 years ago it was enough for “charities” to “do good work.” In an ever-increasing drumbeat nonprofits are being asked to demonstrate outcomes and impact. And for good reason. If we are truly interested in social change then we must understand which organizations are actually creating it and thus deserve our investment.
But you cannot demonstrate outcomes and impact if you have not first articulated what outcomes and impact you think your solution provides. Those nonprofits that truly want to solve a social problem (as opposed to simply provide social services) must articulate a theory of change. A theory of change is an argument for how a nonprofit turns community resources (money, volunteers, clients, staff) into positive change to a social problem. It seems simple, yet most nonprofits working toward social change have not done this.
We need to change that. This simple argument is the first step in creating real, lasting social change and attracting money to be able to do it in a financially sustainable way.
Nonprofits struggle to prove impact. Once a theory of change is in place, nonprofits need to prove whether that theory is actually becoming a reality. Nonprofits have struggled for years to figure out how to measure whether they are actually achieving results. But they cannot figure it out on their own.
Philanthropy needs to step up to help fund the work, or on a much larger scale, social science could prove the impact of overall interventions that nonprofits can then implement.
Either way, the burden of proof can no longer rest solely on the shoulders of individual nonprofits.
Fundraising isn’t sustainable. Once social change is actually happening, we want to grow that effective solution in a sustainable way. But that necessitates a real financial model.
Most nonprofits chase low-return fundraising efforts that lock them into a band-aid approach that is far from financial sustainability. Few nonprofits create and execute on an overall strategic financial model that aligns with the impact they want to achieve and their organizational assets.
We have to stop the madness.
We must help nonprofits create an overall financial engine that strategically and effectively supports the social change they are working toward.
Philanthropists must provide nonprofits the runway necessary to find the right financial model for their organizations. Capacity capital funding could do this, allowing nonprofits the space to analyze their current money-raising activities and create and execute on a plan for transforming those into a sustainable financial model. The end result would be nonprofits with a great solution to offer suddenly have the ability to grow the solution in a sustainable way.
If we are really serious about directing more money to more social change, we need to reinvent how money flows to nonprofits. Instead of relying on a broken fundraising model, we need to take a big step back and get strategic. With articulated theories of change, systems for effectively proving impact and the runway to create real financial models, nonprofits will be able to bring social change to sustainable fruition.
Photo Credit: Markets for Good