Top Ten Funding and Business Models for Nonprofits
Top Funding and Organizational Models for Nonprofits and Charities
Stanford’s SSIR reports:
What follows are descriptions of the 10 funding models, along with profiles of representative nonprofits for each model. The models are ordered by the dominant type of funder. The first three models (Heartfelt Connector, Beneficiary Builder, and Member Motivator) are funded largely by many individual donations. The next model (Big Bettor) is funded largely by a single person or by a few individuals or foundations. The next three models (Public Provider, Policy Innovator, and Beneficiary Broker) are funded largely by the government. The next model (Resource Recycler) is supported largely by corporate funding. And the last two models (Market Maker and Local Nationalizer) have a mix of funders.
HEARTFELT CONNECTOR Some nonprofits, such as the Make-a-Wish Foundation, grow large by focusing on causes that resonate with the existing concerns of large numbers of people at all income levels, and by creating a structured way for these people to connect where none had previously existed. Nonprofits that take this approach use a funding model we call the Heartfelt Connector. Some of the more popular causes are in the environmental, international, and medical research areas. They are different from nonprofits that tap individuals with particular religious beliefs, political leanings, or sporting interests, who come together to form organizations in the course of expressing their interests. Heartfelt Connectors often try to build explicit connections between volunteers through special fundraising events…. Nonprofit leaders considering the Heartfelt Connector funding model should ask themselves the following questions:
• Have a large cross section of people already shown that they will fund causes in this domain?
• Can we communicate what is compelling about our nonprofit in a simple and concise way?
• Does a natural avenue exist to attract and involve large numbers of volunteers?
• Do we have, or can we develop, the in-house capabilities to attempt broad outreach in even one geographic area?
BENEFICIARY BUILDER Some nonprofits, such as the Cleveland Clinic, are reimbursed for services that they provide to specific individuals, but rely on people who have benefited in the past from these services for additional donations. We call the funding model that these organizations use the Beneficiary Builder. Two of the best examples of Beneficiary Builders are hospitals and universities. Generally, the vast majority of these nonprofits’ funding comes from fees that beneficiaries pay for the services the nonprofits provide. But the total cost of delivering the benefit is not covered by the fees. As a result, the nonprofit tries to build long-term relationships with people who have benefited from the service to provide supplemental support, hence the name Beneficiary Builder. Although these donations are often small relative to fees (averaging approximately 5 percent at hospitals and 30 percent at private universities), these funds are critical sources of income for major projects such as building, research, and endowment funds. Donors are often motivated to give money because they believe that the benefit they received changed their life….Nonprofit leaders considering the Beneficiary Builder funding model should ask themselves the following questions:
• Does our mission create an individual benefit that is also perceived as an important social good?
• Do individuals develop a deep loyalty to the organization in the course of receiving their individual benefit?
• Do we have the infrastructure to reach out to beneficiaries in a scalable fashion?
MEMBER MOTIVATOR There are some nonprofits, such as Saddleback Church, that rely on individual donations and use a funding model we call Member Motivator. These individuals (who are members of the nonprofit) donate money because the issue is integral to their everyday life and is something from which they draw a collective benefit. Nonprofits using the Member Motivator funding model do not create the rationale for group activity, but instead connect with members (and donors) by offering or supporting the activities that they already seek. These organizations are often involved in religion, the environment, or arts, culture, and humanities. The National Wild Turkey Federation (NWTF), which protects and expands wild turkey habitats and promotes wild turkey hunting, is an example of a Member Motivator. It attracts turkey hunters, who collectively benefit from NWTF’s work and therefore become loyal members and fundraisers. Local NWTF members host more than 2,000 fundraising banquets each year, raising about 80 percent of the organization’s annual revenues….. Nonprofit leaders considering the Member Motivator funding model should ask themselves the following questions:
• Will our members feel that the actions of the organization are directly benefiting them, even if the benefit is shared collectively?
• Do we have the ability to involve and manage our members in fundraising activities?
• Can we commit to staying in tune with, and faithful to, our core membership, even if it means turning down funding opportunities and not pursuing activities that fail to resonate with our members?
BIG BETTOR There are a few nonprofits, such as the Stanley Medical Research Institute, that rely on major grants from a few individuals or foundations to fund their operations. We call their funding model the Big Bettor. Often, the primary donor is also a founder, who wants to tackle an issue that is deeply personal to him or her. Although Big Bettors often launch with significant financial backing already secured, allowing them to grow large quickly, there are other instances when an existing organization gets the support of a major donor who decides to fund a new and important approach to solving a problem. The nonprofits we identified as Big Bettors are focused either on medical research or on environmental issues. The primary reasons that Big Bettors can attract sizable donations are: the problem being addressed can potentially be solved with a huge influx of money (for example, a vast sum can launch a research institute to cure a specific illness); or the organization is using a unique and compelling approach to solve the problem. Conservation International (CI), whose mission is to conserve the Earth’s biodiversity and to demonstrate that humans can live harmoniously with nature, is an example of a nonprofit that uses the Big Bettor funding model….Nonprofit leaders considering the Big Bettor funding model should ask themselves the following questions:
• Can we create a tangible and lasting solution to a major problem in a foreseeable time frame?
• Can we clearly articulate how we will use large-scale funding to achieve our goals?
• Are any of the wealthiest individuals or foundations interested in our issue and approach?
PUBLIC PROVIDER Many nonprofits, such as the Success for All Foundation, work with government agencies to provide essential social services, such as housing, human services, and education, for which the government has previously defined and allocated funding. Nonprofits that provide these services use a funding model we call Public Provider. In some cases, the government outsources the service delivery function but establishes specific requirements for nonprofits to receive funding, such as reimbursement formulae or a request for proposal (RFP) process. As Public Providers grow, they often seek other funding sources to augment their funding base….Nonprofit leaders considering the Public Provider funding model should ask themselves the following questions:
• Is our organization a natural match with one or more large, preexisting government programs?
• Can we demonstrate that our organization will do a better job than our competitors?
Are we willing to take the time to secure contract renewals on a regular basis?
POLICY INNOVATOR Some nonprofits, such as Youth Villages, rely on government money and use a funding model we call Policy Innovator. These nonprofits have developed novel methods to address social issues that are not clearly compatible with existing government funding programs. They have convinced government funders to support these alternate methods, usually by presenting their solutions as more effective and less expensive than existing programs. (By contrast, Public Providers tap into existing government programs to provide funds for the services they offer.) An example of a Policy Innovator is HELP USA. This nonprofit provides transitional housing for the homeless and develops affordable permanent housing for low-income families…. Nonprofit leaders considering the Policy Innovator funding model should ask themselves the following questions:
• Do we provide an innovative approach that surpasses the status quo (in impact and cost) and is compelling enough to attract government funders, which tend to gravitate toward traditional solutions?
• Can we provide government funders with evidence that our program works?
• Are we willing and able to cultivate strong relationships with government decision makers who will advocate change?
• At this time are there sufficient pressures on government to overturn the status quo?
BENEFICIARY BROKER Some nonprofits, such as the Iowa Student Loan Liquidity Corporation (??), compete with one another to provide government-funded or backed services to beneficiaries. Nonprofits that do this use what we call a Beneficiary Broker funding model. Among the areas where Beneficiary Brokers compete are housing, employment services, health care, and student loans. What distinguishes these nonprofits from other government-funded programs is that the beneficiaries are free to choose the nonprofit from which they will get the service. The Metropolitan Boston Housing Partnership (MBHP), a regional nonprofit administering state and federal rental assistance voucher programs in 30 Massachusetts communities, is an example of a nonprofit that uses the Beneficiary Broker funding model….Nonprofit leaders considering the Beneficiary Broker funding model should ask themselves the following questions:
• Can we demonstrate to the government our superior ability to connect benefit or voucher holders with benefits, such as successful placement rates and customer satisfaction feedback?
• Can we develop supplemental services that maximize the value of the benefit?
• Can we master the government regulations and requirements needed to be a provider of these benefits?
• Can we fi nd ways to raise money to supplement the fees we receive from the benefits program?
RESOURCE RECYCLER Some nonprofits, such as AmeriCares Foundation, have grown large by collecting in-kind donations from corporations and individuals, and then distributing these donated goods to needy recipients who could not have purchased them on the market. Nonprofits that operate these types of programs use a funding model we call Resource Recycler. Businesses are willing to donate goods because they would otherwise go to waste (for example, foods with an expiration date), or because the marginal cost of making the goods is low and they will not be distributed in markets that would compete with the producer (for example, medications in developing countries). In kind donations typically account for the majority of revenues, but Resource Recyclers must raise additional funds to support their operating costs. The vast majority of Resource Recyclers are involved in food, agriculture, medical, and nutrition programs and often are internationally focused. The Greater Boston Food Bank (TGBFB), the largest hunger relief organization in New England, is an example of a nonprofit that uses the Resource Recycler funding model. This organization distributes nearly 30 million pounds of food annually to more than 600 local organizations, including food pantries, soup kitchens, day care centers, senior centers, and homeless shelters. TGBFB acquires goods in many ways. The dominant sources of goods are retailers and manufacturers. It also receives surplus food from restaurants and hotels. In 2006, corporate in-kind support accounted for 52 percent of TGBFB’s revenues. Federal and state government programs provide TGBFB with in-kind goods and money, accounting for 23 percent of its annual budget, which TGBFB uses to purchase food for distribution. Cash donations from individuals make up the remaining 25 percent of revenues, covering overhead and capital improvements. Nonprofit leaders considering the Resource Recycler funding model should ask themselves the following questions:
• Are the products that we distribute likely to be donated on an ongoing basis?
• Can we develop the expertise to stay abreast of trends in the industries that donate products to us so that we can prepare for fluctuations in donations?
• Do we have a strategy for attracting the cash we’ll need to fund operations and overhead?
MARKET MAKER Some nonprofits, such as the Trust for Public Land, provide a service that straddles an altruistic donor and a pay or motivated by market forces. Even though there is money available to pay for the service, it would be unseemly or unlawful for a for-profit to do so. Nonprofits that provide these services use a funding model we call Market Maker. Organ donation is one example where Market Makers operate. There is a demand for human organs, but it is illegal to sell them. These nonprofits generate the majority of their revenues from fees or donations that are directly linked to their activities. Most Market Makers operate in the area of health and disease, but some also operate in the environmental protection area (for example, land conservation). The American Kidney Fund (AKF) is an example of a nonprofit that uses the Market Maker funding model….Nonprofit leaders considering the Market Maker funding model should ask themselves the following questions:
• Is there a group of funders with a financial interest in supporting our work?
• Are there legal or ethical reasons why it would be more appropriate for a nonprofit to deliver the services?
• Do we already have a trusted program and brand name?
LOCAL NATIONALIZER There are a number of nonprofits, such as Big Brothers Big Sisters of America, that have grown large by creating a national network of locally based operations. These nonprofits use a funding model we call Local Nationalizers. These organizations focus on issues, such as poor schools or children in need of adult role models, that are important to local communities across the country, where government alone can’t solve the problem. Most of the money for programs is raised locally, often from individual or corporate donations and special events. Very little of the money comes from government agencies or fees. Very few local operations exceed $5 million in size, but, in totality they can be quite large. Teach for America (TFA) is an example of a nonprofit that uses a Local Nationalizer funding model. TFA recruits, trains, and places recent college graduates into teaching positions in schools across the country….Nonprofit leaders considering the Local Nationalizer funding model should ask themselves the following questions:
• Does our cause address an issue that local leaders consider a high priority, and is this issue compelling in communities across the country?
• Does expanding our organization into other communities fulfill our mission?
• Can we replicate our model in other communities?
• Are we committed to identifying and empowering high-performing leaders to run local branches of our organization in other communities?