Chairman’s Corner: June 2004

Toward Fiscal Sustainability

by Mario Morino, Co-founder of VPP

Recently, I attended the second annual National Business Plan Competition for Nonprofit Organizations sponsored by Yale School of Management- The Goldman Sachs Foundation Partnership on Nonprofit Ventures, and the Pew Charitable Trusts.  The following is an edited version of remarks I made on a panel for funders of nonprofit enterprise.

When you boil it all down, the underlying challenge that nonprofits and funders are wrestling with today is how to achieve fiscal sustainability.  Having the proper financial resources year in and year out is the key to enable nonprofits to continue to do the vital work they do in our communities and, for those so inclined, to be able to grow their efforts over time.

Particularly challenging for nonprofit leadership is moving beyond the more constraining “stove pipes and silos” of what the fields sees as “fund development” toward a more encompassing view of how one finances their organization and, ultimately, attains fiscal sustainability.  Fiscal sustainability requires long-term funding and financing strategies.  It is integral and fundamental to the organization, must be squarely the responsibility of the lead executive and the board of directors, and cannot and should not be relegated solely to a funds development person or department.

One view of fiscal sustainability suggests there are three primary sources:

• Public funding sources and subsidies,
• Endowment, major donor, and charitable funding, and
• Fee-based services and venture enterprises.

All three of these sources are important. However, as federal and state budget deficits grow and the donor and charitable funding sources are increasingly challenged, fee-based services and venture enterprises must play a larger role for many nonprofits as well as for the funders that support them.  This is not to say the former two areas are not important and should not be aggressively pursued, but rather that the latter may offer a new financing stream and the ability to better diversity one’s funding sources. The reality, however, is that creating earned-income and venture enterprises within the nonprofit sector is very challenging for four reasons:

• lack of access to capital,
• the absence of a supporting infrastructure,
• acute shortage of relevant talent, and
• a reluctant-to-skeptical attitude and culture.

Of these four, the lack of available capital and the means to distribute it effectively is the compelling factor and limitation.  It is what keeps most subsectors of the nonprofit field from developing stable, sustainable organizations and represents The challenge facing funders and nonprofits alike.  The capital challenge is even more pronounced for growth capital, the money that enables organizations to invest in themselves so they can grow, build, improve, and strengthen their organizations, products, and services for greater scale and impact.  It has particularly strong implications for those who seek to develop income-earning or venture enterprises that may some day require capital for their growth.

The second factor is the lack of an ecosystem to nourish and support innovation that enables the development of nonprofit earned income and venture enterprise.  If you look at any of the most prolific for-profit entrepreneurial regions in the world—in Boston, Silicon Valley, London, or Singapore—you’ll see that there exists a “critical mass” of entrepreneurs, larger firms, research, and a myriad of suppliers, e.g., tech firms, recruiters, service providers, etc., that understand and are capable of serving entrepreneurial businesses.

The nonprofit world needs to witness an ecosystem evolve along similar lines in which relevant knowledge, funders, resources, and relationships are available, accessible, and within close proximity to social entrepreneurs. No such comparable infrastructure or ecology exists within the nonprofit sector today, although there are the beginnings of such an infrastructure stemming from another of initiatives.

Although the nonprofit sector is blessed with remarkable leaders with compelling models for social change, a third factor is the dearth of relevant talent to manage and develop nonprofit organizations, particularly people with the skills necessary to perform in COO, CFO, “product development,” and traditional fund development roles, four of the most critical roles in stabilizing nonprofits or helping them grow. In addition, to develop earned-income and venture enterprise, the sector needs to cultivate a different kind of talent pool, people who in addition to being mission-driven and entrepreneurial are also savvy in “product management,” marketing, and general management aligned to the logistical needs of a particular service.  This, unfortunately, is not where social entrepreneurs are most effective, but their willingness to recruit and work with such talent—sometimes as a peer or even a mentor—will be crucial to their success.

And finally, attitude and culture are very relevant. They can be highly supportive or work to quash any such earned-income or venture enterprise effort. Organizations pursuing earned-income strategies will have to effectively deal with the inherent tension and perceived conflict of being “mission-driven” and “earning income from services”—which, when not effectively addressed from the outset, may pit “the earned income” against the “mission-driven” members of the staff.  Most fundamentally, the field needs to deal with how the sector views “risk.” Many executive directors and their boards are averse to the risk of building a dependency on earned income and the inherent uncertainties due to market ups and downs.  No one wants  “human life and services” to suffer for the sake of profit gain or loss. And for many executive directors and their staffs, there exists a culture of disdain for the functions of marketing, product management, and sales, which feels at odds with the mission-driven nature of their nonprofit organization.  As a nonprofit considers earned-income or venture enterprise, it must do so in a way that recognizes and takes into account their organizational culture and staff attitudes.

All of us in and around the nonprofit sector—funders, public policy makers, potential donors, philanthropic thought leaders and nonprofit leaders alike—have heard over and over how we need to think differently about the way we do business. And we do. One such step organizations can take is to do more to bring people who have started and grown businesses, financial experts, and others to the table.

We need to break out of our traditional boxes and search for different ways of financing nonprofit enterprises so that effective organizations can not only become stable and sustainable, but, for those so inclined, grow and scale their operations and impact. We need to explore and most certainly create new sources of capital and invent alternative financing mechanisms that would allow the nonprofit sector to achieve its full potential.

The social ills we face are great, and the “status quo” is not acceptable as circumstances change around us. The rewards of building a stable and sustainable nonprofit sector will be invaluable for all of us.