Silver Sustainability Bullets

By Stephen M. Pratt, Root Cause
Posted: June 30, 2014

At the Social Impact Exchange Conference on Scaling Impact, Nonprofit Finance Fund’s Antony Bugg-Levine opened the Thursday morning plenary on Financial Sustainability with the seemingly provocative question, “Is scaling impact conceivable?” I say “seemingly” because this year’s Social Impact Exchange conference offered the prima facie bias that scaling impact is conceivable. I remain a skeptic. Despite the launch of venture funds and public initiatives like the Social Innovation Fund, the social impact market remains disorganized, lacking defined investment pools at different stages of capitalization.

Bugg-Levine offered up a formula for sustainability that, on its face, is entirely reasonable:

Repeatable and Reliable Revenue / Ongoing Operating Costs

+

Ability to fund period investment in adaptation and growth

The crux of this formula is the first line, “repeatable and reliable revenue.” The hard reality is that donors remain stubbornly naïve about revenue.

Two years ago, I interviewed over 40 national and regional grantmakers to learn how they thought about financial sustainability. Less than a third of interviewees had ever been responsible for raising money at any point in their careers. Nevertheless, many felt within their rights to express opinions about their grantees’ financial models and fundraising strategies.

The fact is, when we talk about financial sustainability, we’re really talking about cost shifting. Donors want to have a time horizon to their investment, regardless of the stage of capitalization at which they enter. One donor offered a refreshingly honest take on this:

For most foundations, sustainability means ‘I don't have to give you money anymore but you can still exist.’ I think it’s important to not confuse sustainability with exit strategies. That's part of why we're in the place that we're in—a superficial understanding on the part of foundations about what sustainability means.

We’d all feel better if the cost shifting at exit were to revenue sources for which there were evidence of repeatability and reliability. Our work would be much easier if there were some standard way to define that repeatability and reliability for our clients.

Too many nonprofit organizations have been on the receiving end of a succession of prevailing ideas about what constitutes sustainable revenue—endowments, individuals, government, earned revenue—just to name a few.

The ideas about what constitutes a reliable revenue source have all been based on aggregate findings such as the oft-repeated “85% of giving comes from individual donors,” or the statistic cited by one of the plenary panelists, Bridgespan’s Paul Carttar, on the role of a single funding source—government—in sustaining a group of large nonprofits that his colleagues William Foster and Gail Fine studied for their SSIR article “How Nonprofits Get Big” (Spring 2007).

While aggregate revenue data offer a framework for inquiry, they are no silver bullet for sustainability. Individual donors do indeed constitute 85% of giving to all nonprofits, but they do not constitute a significant source of funding for, say, programs serving mentally ill HIV-positive men. Government has helped a program like BELL expand its after school model dramatically, but it is not a reliable source of funding for afterschool arts programs.

No business would go to investors and expect to win them over with aggregate data about spending in their industry. Without rigorous market research on customer segments, product lines, and margins, the pitch would land with a thud. The search for the repeatable and reliable must be based on the same sort of rigor about the specific circumstances in which a nonprofit operates—potential revenue streams by domain, region, and time horizon. Such research reveals that many organizations lack access to reliable revenue at their capitalization stage, raising real questions about the conceivability of sustainability.

 

Stephen M. Pratt is Director of Consulting for Root Cause, a nonprofit consulting, assessment and incubation firm based in Boston and Chicago.