In this month’s Social Velocity interview, I’m talking with Hilda Polanco. Hilda is the founder and CEO of FMA – Fiscal Strength for Nonprofits, a consulting firm that helps nonprofits and foundations develop the fiscal capacity they need to fulfill their missions, including stronger operations and fiscal management, improved foundation grant-making capacity, and increased staff financial knowledge.
In addition to leading FMA, Hilda serves on the NYC Human Services Coalition’s special commission to study the closure of high-profile human services organizations. She was a founding member of the selection committee of the New York Nonprofit Excellence Awards and has served as an adjunct professor at Columbia University’s Department of Health Policy and Management, as well as on the faculty of the Donor’s Forum of Chicago.
Nell: Your career has been about strengthening the financial capacity of the nonprofit sector. Why do you think nonprofits struggle so much with financial sustainability?
Hilda: All businesses struggle with sustainability, as it turns out, but in the case of nonprofits, there are several additional challenges: I think of these challenges as follows:
- Missions that compete with the business model for attention, creating an unclear vision of what it costs to deliver services and what the revenue and expense drivers are to delivering these services.
- A lack of focus on the balance sheet, and instead a focus only on annual operating results
- An insufficient focus on longterm financial planning
- A lack of common understanding of the meaning of sustainability, among nonprofits and the funders that support them
Mission-driven leaders who are so important to the nonprofit sector are not often motivated by the “business” of delivering services. They care about the issues, the causes, the communities. As a result, they may not understand what a nonprofit’s business model is, or they may have absorbed a popular mistaken notion about nonprofits — that they should not strive to preserve surpluses. In order to be sustainable, an organization needs to understand its revenue and expense drivers and strive to strengthen its financial position over time.
An additional challenge is pricing. This is commonly subsumed under a discussion of “overhead,” but that term conceals some of the details of the problem. Organizations will face challenges to their sustainability if they are pursuing work or lines of business without fully understanding the cost when compared with what funds they are raising. Where there is a gap between what they raise and what it costs to perform the work, a “structural deficit” takes hold. A structural deficit is not one you can cure with a targeted fundraising appeal –as you could, say, to replace your roof or buy a new school bus. A structural deficit is one that persistently drains resources from the organization until the underlying problem is corrected. It’s a roof that, by design, will collapse every single year.
Having a focus on the balance sheet means having a focus on establishing healthy reserves. We drill our clients constantly on their Liquid Unrestricted Net Assets (or LUNA, for short). LUNA describes an organization’s available reserves for addressing strategic opportunities or unexpected expenses. They appear on the balance sheet. Too many organizations reckon their financial standing by simply comparing income and expenses for a given year. They need to look at a balance sheet. A strong balance sheet allows a leader to address the organization’s future needs. A weak balance sheet creates uncertainty. And this raises the issue of capital. There are several ‘kinds’ of capital—funding that is raised or preserved for different uses, for growth or innovation, for example.
It’s not just nonprofit leaders who need to understand this. Foundation program officers, major donors, and all buyers of nonprofit services need to share in this viewpoint, to arrive at a common understanding of what nonprofit sustainability looks like. The market for nonprofit services is sort of unusual in that we expect the funders, as much as the nonprofit leaders—to be self-reflective about their role in the transaction.
Funders should not expect their grantees to deliver quality services without understanding the full cost of the enterprise. And sometimes, they need to engage in a substantive discussion about business models so they can come to a shared understanding. Funders can have a different conversation with grantees, even if they are only funding a project. The conversation should not be just about what they are “buying”, but also about the organization’s overall capacity. Rather than focusing exclusively on this moment, the question should be “How can we be sure that you will have the capacity to achieve your target outcomes over time?”
What should they be doing to remedy the situation? This isn’t easy to solve. In many ways, it goes against how we think about our roles in a buying and selling relationship. Think about how strange this is: If you value the service your local coffee shop provides, it would be like prodding its owner to charge you more for your coffee so they could stay in business and serve the community who counts on that coffee each and every day!
Of course, the future is unknown. Sustainable nonprofits need to be planning for at least a two year horizon. Decisions made this year will have an impact on future years and preparing for those future years is much more effective with a longer horizon to strategize, rather than pretending that life happens in one year increments in isolation from the following year. For example, new hires, raises, multi-year grants that may come to an end in the coming year. These are all examples of business assumptions that should be taken in the context of their impact on future operations. More broadly, an organization must revisit its financial model over time, understanding what may have changed in the funding ecosystem or what competing organizations are doing.
Nell: There are two parts to financial sustainability: bringing money in the door and then using that money effectively. There have been some strides toward changing cultural norms around how nonprofits use money (with the Real Costs project and the Overhead Myth campaign), but what about on the bringing money in the door side? How do we get smarter about that?
Hilda: Efforts to raise funds for “services” have created a tendency to raise money for particular programmatic activities, rather than for the mission and outcomes of the organization as a whole. When an organization can articulate its target outcomes, and know what financial resources will be required to achieve these, the conversation can shift to an investment in the organization’s vision, rather than the purchase of specific activities. These are requests for investments of capital.
We see a growing trend in capital campaigns lead by a “funder prospectus” – a vision for the organization’s outcomes, with a request for investment in these outcomes; a way to focus the conversation differently. And with a funder prospectus, multiple funders can come to the table to support a common strategy – rather than create parallel strategies to suit the goals of the funder, rather than the goals of the organization. These campaigns can be for the sustainability of current operating levels, or the funding for growth.
Another issue to keep in mind is the concentration vs. diversification strategic conversation. There are a lot of consultants advising nonprofits to diversify their revenue sources, and not put “all their eggs in one basket.” This can be good advice under some circumstances, but it is not a one-size-fits-all solution. Diversification sometimes means building a much more complex—and potentially fragile—business model. For many organizations, concentrating on one revenue source can help focus, strengthen, and build the business model. For example, the skills and capacity to successfully raise funds from foundations and corporations is different from special events, major donors, or government grants. Without sufficient activity in each, the business model may not be able to support the required levels of diverse skill sets. It is somewhat of a balance – a diverse revenue strategy means a diverse skill set and capacity to succeed; often not found in a common staff position or limited organizational infrastructure.
And lastly, there is the need to balance between raising funds for current operations, vs. raising funds for new and “innovative” programming. Here’s where the “shiny object syndrome” can undermine an organization’s sustainability. The Development Director is excited about new programs, but the organization isn’t raising the necessary funds to cover core programming. Years ago, an Executive Director I know lamented to me: “If I hear ‘innovation’ one more time, I’m going to lose my mind. What happened to tried and true?” This notion of balance need not be confined to the leadership of an organization. Indeed, in healthy and sustainable organizations, this sense of balance is shared across the organization. The development team and program leaders should, effectively, understand the organization’s financial model just as much as the finance team. It is particularly important for development leaders to be able to articulate a coherent and compelling financial story of the organization as a whole, not just respond to the new ideas a funder may be focused on.
Nell: What role does research to understand what works and what doesn’t play? There seems to be a dearth of research in the sector about effective financing models. Do you agree with that assessment? And if so, how do we change that?
Hilda: I agree that there’s not much research, and there should be more.
And the first step toward research is sharing knowledge and lessons learned as these are happening rather than waiting for longer term research and evaluation. We need to build more of a shared understanding of the universe of possibilities. For example, what are Program Related Investments (PRI’s)? We hear about PRIs from time to time, but what are some early lessons learned? Who is making them effectively? More esoteric investments like Social Impact Bonds have made a splash, but there’s little understanding of the risks organizations take on by accepting this type of investment and the lessons learned in getting them off the ground.
Funders who are funding in a more holistic way can help the sector by educating other funders about it. Can a foundation make an investment in an organization’s operating reserves rather than operations? What does that look like?
Funders who are willing to experiment and share their experiences can play an important role here.
Photo Credit: FMA
This week the Evelyn and Walter Haas, Jr. Fund released the second in their series of reports about fundraising. Their Fundraising Bright Spots report, by Kim Klein from Klein & Roth Consulting and Jeanne Bell from CompassPoint, joins their Beyond Fundraising report, released last month.
These two reports are part of the Haas, Jr. Fund’s larger “Resetting Development” effort “to ‘learn out loud’ about how to…help put the sector on a surer path to sustainability and long-term success.” Given my concerns about their Beyond Fundraising report, the Haas, Jr. Fund very graciously asked me to review this latest report.
This new report analyzes 16 social change organizations that have been successful at individual fundraising to determine what the sector can learn from them.
I am always a huge fan of case studies. I think there is much to be gained by looking at others who have done things well, so I applaud the Haas, Jr. Fund for moving from theory into practice to see what is working in individual fundraising.
But first, we have to understand this report for what it is. This report only looks at nonprofits that have been successful with individual donor fundraising, which is just one of several ways that nonprofits bring money in the door. And the report only looks at “progressive organizations with limited budgets and small staffs.” So I would argue that this report and the case studies contained within it will only be applicable to similar types of nonprofits that have individual fundraising as part of their financial model.
Nevertheless, the report finds four themes present in these 16 social change organizations, which are that fundraising:
- Is core to the organization’s identity
- Is distributed broadly across staff, board and volunteers
- Succeeds because of authentic relationships with donors
- Is characterized by persistence, discipline, and intentionality
Many, if not all, of these themes make up the “culture of philanthropy” that the Beyond Fundraising report described.
There were several things I liked about the Bright Spots report.
First, I love the report’s focus on making fundraising part of the job of an entire organization’s board and staff. Two case studies in particular, Jewish Voice for Peace and Mujeres Unidas y Activas, demonstrate how major donor fundraising should be shared among senior staff and board members. For example Jewish Voice for Peace “has 57 portfolio managers from across the staff, board, and volunteers who together manage 600 major donor relationships in addition to other roles they play within the organization.”
Indeed the report points out that in these 16 organizations the head fundraiser’s role is to marshal staff, board and other organization resources toward fundraising, which I love: “Time and again, we heard from the development directors at these organizations that their job is to coordinate, to teach, to coach, and to inspire. The individuals in this role are highly relational and they take deep satisfaction in enabling staff, board, volunteers, and members to be successful fundraisers.”
Second, I really appreciate the Breast Cancer Action case study, which emphasizes creating a give/get fundraising requirement for the entire board:
At Karuna [Jaggar]’s first in-person board meeting as the new executive director, she laid out her desire to establish a board give-and-get policy to her board members, each of whom had been told explicitly upon recruitment that they did not have to participate in fundraising…After an in-depth discussion, they set a give-and-get policy of $10,000 per board member. “Maybe we lost some potential board members who felt they couldn’t do it,” said [board chair] Tracy [Weitz], “but only in the first year. Now, our veteran board members can share their fundraising stories with prospective members and say, ‘I’ve been fine, and you’re going to be fine.’” It’s important to note that BCAction does not prioritize personal wealth now more than it did before this policy change, but rather invests the time to support board members’ success, regardless of personal financial capacity, in the fundraising program.”
Yes! That’s exactly the way to get every board member involved in fundraising, of which I am a huge proponent.
Third, the Bright Spots report points out the need to fully integrate marketing and fundraising in a nonprofit: “A critical aspect of building and refining an individual donor program is tending to the intersection of communications and fundraising…development and communications are inextricably linked and staff driving these efforts work extremely collaboratively.” Agreed, fundraising can not sit on the sidelines of anything an organization does, but must be fully integrated throughout the organization.
Now, let’s get to where I think the report falls short.
First, I would have liked to understand better how these 16 organizations were selected as “bright spots.” I think in holding up organizations as exemplars it is critical to understand in what ways they are exemplars. While the beginning of the report describes what these organizations have in common: “a deep commitment to and strong track record with raising money from individuals,” and “individual support is a consistent part of their overall revenue strategy,” and the report highlights some of their individual donor fundraising successes, it is unclear why these 16 organizations in particular are held out as bright spots.
In my mind, I would select case study organizations that achieved: individual giving growth year over year, and/or higher than average donor retention rates, and/or more profitable than average fundraising activities, and/or demonstrated long-term financial viability. While some of the 16 organizations had significant individual donor growth, not all of them did, so I’m not sure what selection metrics were used. I would like to understand how the Bright Spot organizations’ fundraising metrics compare to their most fundraising-successful peers.
It is particularly important to understand what makes these organizations bright spots when the report points out that some of the 16 social change organizations are struggling with scaling or making sustainable their individual fundraising efforts:
“We heard from the Bright Spot leaders who want to grow their organizations that they are grappling with how to scale this organizational highly relational approach to fundraising. And many of them acknowledge how dependent their success is on long-time leaders, despite their distributed approach to fundraising…Many of the Bright Spots will soon have to adapt to very long-time leaders moving on.”
Second, the report does not make a clear distinction between small donor fundraising (one-to-many cultivation and solicitation of donors) versus major donor fundraising (one-to-one cultivation and solicitation). I wonder if the four themes that the report uncovers differ, and if so how, between fundraising activities targeting many small donors versus fundraising activities targeting a few large donors.
Third, the report touches briefly on the 16 organizations’ fundraising systems and use of data and metrics, but not in a robust way. I would have loved to understand better the kinds of systems these bright spot organizations use and what metrics they are tracking and trends they are seeing. While I understand the report’s overall emphasis on some of the “soft” skills of fundraising (“authentic relationships with donors,” “culture of philanthropy”) I also think that understanding the “hard” skills (systems, metrics) is key to replicating fundraising success (and overall financial sustainability).
Fourth, just as the Beyond Fundraising report did, the Bright Spots report continues to leave the problems (and in this case, the successes) with fundraising largely in the hands of individual nonprofits and their leaders. I am still hungry for case studies and research about how nonprofits (and their funders) can overcome the more systemic financial flaws inherent in our social change sector.
In the end, I would say that the Bright Spots report gives us a glimpse into a piece of what works to bring money in the door. For social movement, individual donor fundraising at small nonprofits, the Bright Spots report provides some important and useful insights. But for more broadly understanding what contributes to overall financial sustainability in the nonprofit sector, this report falls short.
But as I have said before, I don’t fault the Haas, Jr. Fund for exploring these issues. Indeed, they are one of very few funders contributing to the knowledge base about what creates a more financially sustainable nonprofit sector. We just need more of them.
Photo Credit: Evelyn and Walter Haas, Jr. Fund
It is the ultimate question for many nonprofit leaders. But often one that they can’t answer on their own. Perhaps because nonprofit leadership may be so mired in the weeds, or so used to doing what they’ve always done, or simply lack fundraising expertise or knowledge of new trends and tools. The end result is that they simply can’t figure out how to raise money in new and better ways. Which is where a revenue assessment can turn the tide.
Let me give you an example.
Institute for Human Services (IHS), a large social service agency for homeless men, women and children in Honolulu, Hawaii, enjoyed success in government grant funding, but had been unable to diversify their funding as much as they would like in individual and corporate areas. At the same time, their small fundraising staff was over capacity and struggled to keep up with the volume of work. The board of directors was eager to help fundraise but didn’t know the best way to get involved.
The organization knew they had the opportunity to raise more money, but didn’t know how to prioritize their resources to do so.
IHS hired Social Velocity to conduct a revenue assessment to find opportunities for growing their funding. I interviewed board, staff and external funders to get their insights about fundraising at IHS. Then I reviewed organization financials, materials, technology, staffing, planning, and other processes. From this analysis, I wrote a 30-page analysis with specific recommendations for improving fundraising in each revenue area and presented my findings to the staff and board.
With Social Velocity’s revenue assessment, IHS has hit the ground running making improvements to their fundraising function. They have already hired a new Development Director who has been able to shoulder more of the responsibility for fundraising, freeing the Executive Director to participate in more donor relations activities. They are looking forward to reviving past donors through more targeted fundraising strategies, caring for existing donors and creating broader opportunities for constituents to support the mission more personally. The staff and board are energized by the specific fundraising role and responsibilities I outlined for them. The assessment really turned the tide for them, as executive director Connie Mitchell explained:
The analysis and recommendations turned on the light bulb for me about how an investment in one key development staff could multiply our results over a short time. We’re also confidently using our resources more wisely for a better ROI when it comes to fundraising tools and media strategies.
A revenue assessment is for nonprofit organizations that know they want (or need) to raise more money, but don’t know how to get there. Here are the steps I go through in a nonprofit revenue assessment:
- Interview Stakeholders. I conduct in-depth, one-on-one interviews with the executive director, key staff, key board members, and key funders and other external constituents to understand what is working and what isn’t.
- Review Documents. I analyze all organization documents, policies, procedures, financials, systems, and materials to understand the internal and external processes for raising money.
- Assess Organization. I look at 6 elements of the organizational structure (mission and vision, strategy, operations, etc) to determine how well they contribute to fundraising effectiveness.
- Analyze Revenue Streams. I look at all current and potential revenue streams to uncover opportunities for increases.
- Review Fundraising Infrastructure. I review all aspects of the organization’s back-end functionality for raising money (such as donor database, materials, systems, technology) in order to uncover areas for increased efficiencies.
- Deliver Analysis and Recommendations. I write a 15-20 page detailed analysis with recommended actions for increasing funding streams.
- Present Assessment. I present the assessment and recommendations in-person to staff and board for questions and discussion.
It doesn’t have to be so hard. A revenue assessment can give you a clear road map for moving your organization from financial insecurity to long-term financial sustainability.
Photo Credit: Julia Manzerova
Lucy Bernholz is hosting a great conversation on her Blueprint Research and Design website called “What Capital When?” As part of their work with the John D. and Catherine T. MacArthur Foundation in their Digital Media & Learning initiative, Blueprint is hosting this online conversation around the theories and strategies of program-related and mission investing to advance knowledge and research in the field. They asked that I do a guest post on using PRIs (program related investments) to improve the fundraising effectiveness of nonprofit organizations. Below is that post. You can also read the post on their What Capital When site here, and you can read the whole series here.
I think there is a tremendous opportunity that most foundations and nonprofits are missing. PRIs (program-related investments) are an under-used tool that could provide much needed capital for nonprofits to transform how they finance social impact.
PRIs are loans that foundations make to nonprofits at low, or no interest. At the end of the loan period (typically 3-7 years) the loan is repaid, or forgiven. PRIs are usually used for capital projects or land purchases in the nonprofit world. But they could also be used to increase the fundraising capacity of a nonprofit organization, through increased fundraising knowledge, planning, tools and staffing. The current economic climate seems like the perfect opportunity for this new use of PRIs when foundations are trying to hold on to their dwindling corpus while maintaining their past level of community support.
A nonprofit could use a PRI to improve their fundraising infrastructure in several ways:
- Create a strategic development plan. Many nonprofits don’t have the expertise or time to put together a strategy for how they will bring money in the door. With funding to hire an outside consultant to put together such a plan, the nonprofit would have a much better chance of increasing their fundraising revenue.
- Get fundraising training for their staff and board. If a nonprofit staff and board have the tools and expertise for successfully raising money, they will be more likely to do so.
- Hire a seasoned Development Director. Many nonprofit organizations can only afford to pay the bare minimum for a Development Director, which means that they are often forced to hire someone with little experience who must learn on the job. If instead they had enough funding to pay a market rate salary for a seasoned fundraiser, they could hit the ground running, increasing the likelihood of fundraising success.
- Purchase a new donor database. A key element to success in individual donor fundraising is an organization’s ability to capture and use data about donors and prospects. A good donor database makes this effort easier and more successful.
- Upgrade their website, email marketing, social media efforts. As direct mail appeals (a nonprofit fundraiser’s traditional standby) continues to become less and less effective, nonprofits need to move effectively into the online world. Funds for technology upgrades and staff could help them do this.
- Launch a major gifts campaign. The vast majority of private funding in the nonprofit sector comes from individuals (80+%), so to stay competitive nonprofits need to move into the world of major gift solicitation. But that takes expertise, staff, collateral and other infrastructure elements.
These are just a few examples of how nonprofits could make investments to strengthen their fundraising efforts. But currently it is difficult to find funding to support things like this.
But a PRI could provide an initial investment that sets the nonprofit on a path toward more diversified, more sustainable fundraising for the social impact they are working to create.
There are tremendous benefits to a PRI program like this. First, for the foundation:
- Increases their ability to meet past levels of giving, despite any losses they might have found in the market, because the loaned money will eventually come back to them.
- Encourages their nonprofit grantees to be proactive in creating fundraising streams that will make them more sustainable. Thus, increasing the likelihood that their nonprofit grantees a) won’t have to come back to them year after year for ongoing support and b) will become more sustainable and thus achieve greater social impact.
- Stretches their capacity-building dollars further. Because PRI money eventually comes back to the foundation, they can increase their level of impact by helping more nonprofits improve their capacity than they could with grants alone.
- Increases the level of accountability among nonprofit recipients because of the expectation of repayment.
And second, for the nonprofit:
- More diversified and sustainable fundraising streams.
- Increased fundraising knowledge and experience.
- Increased ability to work towards social impact.
Although PRIs used in this new way seems, at least to me, to be an obvious win-win, very few foundations are doing it. PRIs in general are used (according to the Foundation Center) by only a few hundred of the thousands of grantmaking foundations in the country. And I know of only one example of a foundation using a PRI to upgrade the fundraisng capacity of a nonprofit (the KDK Harman Foundation in Austin just launched a program like this last Fall, but does not yet have any participants).
So what is holding foundations back from launching a PRI program like this? A number of things:
- Nonprofits lack the expertise to put a plan together and pitch it to foundations. This is where Social Velocity comes in to help nonprofits create a plan to upgrade their revenue function and pitch that plan to foundations and other funders.
- Most foundations have an aversion to capacity building funding and prefer that their money go to direct program service. However, as more nonprofits can demonstrate to funders that capacity building actually results in even more impact, this aversion can be alleviated.
- Foundations lack awareness of or experience with PRIs. However, this is changing, especially in the last year when the poor economy has made foundations increasingly interested in finding alternative ways to maintain community investment levels.
- Foundations that are experienced with PRIs are not aware of using them to improve a nonprofit’s fundraising function.
So there is a disconnect. But I am optimistic that as nonprofits learn to put a plan together to upgrade their fundraising function and articulate to funders how PRI’s could finance it, more examples of this new use of PRIs will surface.