Archives for posts with tag: foundations

I know a lot of people who’re starting up new nonprofits, and most don’t have any prior experience with fundraising. That was me!, back in 2007 when I took over the Wikimedia Foundation. And so, the purpose of this post is to share some of what I learned over the past eight years, both from my own experience and from talking with other EDs and with grantmakers. I’m focusing on restricted grants here because they’re the most obvious and common funding source for nonprofits, especially in their early stages of development.

Restricted grants can be great. Grantmaking institutions fund work that’s socially important, that’s coming out of organizations that may have no other access to funding, and that is often risky or experimental. They take chances on people and organizations with good ideas, who may not yet have a track record. That’s necessary and important.

But restricted grants also pose some specific problems for the organizations seeking them. This is well understood inside nonprofitland, but isn’t immediately obvious to people who’re new to it.

Here are the five main problems with restricted grants.

Restricted grants can be administratively burdensome. At the WMF, we actively sought out restricted grants for about two years, and afterwards accepted them only rarely. We had two rules of thumb: 1) We would only seek restricted grants from organizations we knew well and trusted to be good partners with us, and 2) We would only seek restricted grants from organizations that were roughly our size (by staff headcount) or smaller. Why? Because restricted grants can be a lot of work, particularly if the two organizations aren’t well aligned.

Big institutions have a big capacity to generate process: forms to fill out, procedures to follow, hoops to jump through. They have lots of staff time for meetings and calls and email exchanges. They operate at a slower pace than smaller orgs, and their processes are often inflexible. People who work at grantmaking institutions have a responsibility to be careful with their organization’s money, and want to feel like they’re adding value to the work the nonprofit is doing. Too often, this results in nonprofits feeling burdened by expensive process as they procure and report on grants: time that you want to spend achieving your mission, instead risks getting eaten up by grantmakers’ administrative requirements.

Restricted grants risk overwriting the nonprofit’s priorities with the grantmakers’ priorities. At the WMF, we didn’t accept grants for things we weren’t planning to do anyway. Every year we developed our plan, and then we would (sometimes, with funders we trusted) seek funding for specific components of it. With funders we trusted, we were happy to get their input on our priorities and our plans for executing them. But we weren’t interested in advancing grantmakers’ goals, except insofar as they overlapped with ours.

Too often, especially with young or small non-profits, I see the opposite.

If an organization is cash-strapped, all money looks good. But it’s not. Here’s a crude example. Let’s say the WMF knows it needs to focus its energy on mobile, and a funder is interested in creating physical spaces for Wikipedians to get together F2F for editing parties. In that context, agreeing with a funder to take money for the set-up of editing cafes would pose a distraction from the mobile work the WMF would need to be doing. An organization’s capacity and energies are always limited, and even grants that fully fund a new activity are necessarily drawing on executive and managerial attention, as well as the organization’s support functions (human resources, accounting, admin, legal, PR). If what a restricted grant funds isn’t a near-perfect fit with what the organization hopes to accomplish regardless of the funding, you risk your organization getting pulled off-track.

Restricted grants pull focus from core work. Most grantmakers want their money to accomplish something new. They’re inclined to see their grants as seed money, funding experiments and new activity. Most successful nonprofits though, have important core work that needs to get done. At the WMF for example that core work was the maintenance and continued availability of Wikipedia, the website, which meant stuff like hosting costs, costs of the Ops team, site security work and performance optimization, and lawyers to defend against censorship.

Because restricted grants are often aimed at funding new activity, nonprofits that depend on them are incentivized to continually launch new activities, and to abandon or only weakly support the ones that already exist. They develop a bias towards fragmentation, churn and divergence, at the expense of focus and excellence. An organization that funds itself solely or mainly through restricted grants risks starving its core.

Restricted grants pull the attention of the executive director. I am constantly recommending this excellent article by the nonprofit strategy consultancy Bridgespan, published in the Stanford Social Innovation Review. Its point is that the most effective and fastest-growing nonprofits focus their fundraising efforts on a single type of funder (e.g., crowdfunding, or foundations, or major donors). That’s counter-intuitive because most people reflexively assume that diversification=good: stable, low-risk, prudent. Those people, though, are wrong. What works for e.g. retirement savings, is not the same as what works for nonprofit revenue strategy.

Why? Because organizations need to focus: they can’t be good at everything, and that’s as true when it comes to fundraising as it is with everything else. It’s also true for the executive director. An executive director whose organization is dependent on restricted grants will find him or herself focused on grantmaking institutions, which generally means attending conferences, serving on juries and publicly positioning him or herself as a thought leader in the space in which they work. That’s not necessarily the best use of the ED’s time.

Restricted grants are typically more waterfall than agile. Here’s how grants typically work. The nonprofit writes up a proposal that presumes it understands what it wants to do and how it will do it. It includes a goal statement, a scope statement, usually some kind of theory of change, a set of deliverables, a budget, timeline, and measures of success. There is some back-and-forth with the funder, which may take a few weeks or many months, and once the proposal is approved, funding is released. By the time the project starts, it may be as much as an entire year since it was first conceived. As the plan is executed the organization will learn new things, and it’s often not clear how what’s been learned can or should affect the plan, or who has the ability to make or approve changes to it.

This is how we used to do software development and in a worst-case scenario it led to death march projects building products that nobody ended up wanting. That’s why we shifted from waterfall to agile: because you get a better, more-wanted product, faster and cheaper. It probably makes sense for grantmaking institutions to adapt their processes similarly, but I’m not aware of any who have yet done that. I don’t think it would be easy, or obvious, how to do it.

Upshot: If you’re a new nonprofit considering funding yourself via restricted grants, here’s my advice. Pick your funders carefully. Focus on ones whose goals have a large overlap with your own, and whose processes seem lightweight and smart. Aim to work with people who are willing to trust you, and who are careful with your time. Don’t look to foundations to set your priorities: figure out what you want to do, and then try to find a grantmaker who wants to support it.

This post requires a number of caveats and acknowledgements. They’re at the bottom.

In 2008 I was interviewing a candidate for an engineering position at the Wikimedia Foundation and as we talked I found myself imagining what a terrific impression he would make on donors. He’s so shiny and cheerful and mission-oriented, I found myself thinking — donors will love him!

As soon as I thought it, I had the grace to be embarrassed. And although we ended up hiring the guy, we did it because he seemed like a talented engineer, not because he was charming. I was horrified at myself for a while afterwards anyway, and the whole thing ended up being a bit of a turning point for me, as well as a cautionary story I sometimes tell. Because that was the moment that crystalized for me what’s *actually* wrong with nonprofits.

Preface! I’ve always been irritated by people who assume nonprofitland is self-evidently suckier than forprofitland. I’m particularly irritated by people who say that nonprofits “should be more businesslike,” with businesslike as a kind of confused stand-in for “better.” That just seems dumb to me — I feel like it’s obvious that nonprofits function in a specific context including challenges unique to the sector, and that solutions aimed at increasing our effectiveness needed to be designed to respond specifically to those actual, real circumstances. That’s what this post is about: my goal is to describe a serious problem, and point to where I believe we’re beginning to see solutions emerge.

Here it is.

Every nonprofit has two main jobs: you need to do your core work, and you need to make the money to pay for it. In the for-profit sector when you make better products, you make more money — if you make awesome socks, you sell lots of socks. Paying attention to revenue makes sense in part because revenue functions as a signal for the overall effectiveness of the org: if sales drop, that’s a signal your product may be starting to suck, or that something else is wrong.

Nonprofits also prioritize revenue. But for most it doesn’t actually serve as much of an indicator of overall effectiveness. That’s because donors rarely experience the core mission work first-hand — most people who donate to Médecins Sans Frontières, for example, have never lived in a war zone. That means that most, or often all, the actual experiences a donor has with a nonprofit are related to fundraising, which means that over time many nonprofits have learned that the donating process needs –in and of itself– to provide a satisfying experience for the donor. All sorts of energy is therefore dedicated towards making it exactly that: donors get glossy newsletters of thanks, there are gala dinners, they are elaborately consulted on a variety of issues, and so forth.

By contrast, when I buy socks I do not get a gala dinner. In fact it’s the opposite: the more that sockmakers focus relentlessly and obsessively on sock-making awesomeness, the likelier I am to buy their socks in future. This means that inside most of nonprofitland –and unique to nonprofitland– there’s a structural problem of needing to provide positive experiences for donors that is disconnected from the core work of the organization. This has a variety of unintended effects, all of which undermine effectiveness.

It starts with the ED.

EDs prioritize revenue because a fundamental job of any CEO is to ensure their organization has the money it needs to achieve its goals. That means fundraising is necessarily the top priority for a nonprofit ED. That’s why the head of fundraising normally reports to the ED, and it’s why, I’d say from my observation and reading, the average ED probably dedicates about 70% of his or her energy to fundraising.

Optimizing for fundraising distorts how the ED behaves. To the extent EDs optimize themselves for fundraising, they tend to spend time outside their organization — being interviewed, attending conferences, publicly demonstrating wisdom and thought leadership. An ED must hone his or her self-presentation and diplomatic abilities, even at the expense of other attributes such decisiveness or single-mindedness, because that’s what donors see and respond to. There’s an obvious opportunity cost as well: spending 70% of your time on fundraising leaves only 30% for everything else. (That’s why, in a different context, Paul Graham argues that start-ups should have only one person designated to handle fundraising: to preserve the bulk of organizational resources for other stuff.)

The second effect: Optimizing for donor experience promotes a general emphasis on appearances rather than realities. Appearing effective rises in importance relative to being effective.

Here’s how the mature nonprofits I know self-present. Everyone is very polite and the offices are quiet. Their reception areas display racks of carefully-designed marketing materials. One I know has gorgeous brushed stainless steel signs attached to its conference room doors, engraved with an exhortation to be silent in the hallways. Typically the staff dress like academics — the women wear interesting jewelry, with the men in shabby suit jackets and corduroys.

By contrast I noticed in my early days running the WMF, we were quite different. Our staff were young and messy and wore hoodies. They were smart and blunt, sometimes obnoxiously so. The office was often half-deserted because everybody worked all the time, often while travelling or from bed. I’m pretty sure at one point we had a foosball table in the middle of the room, and later there was a karaoke set-up and a Galaga game. What if donors think we’re erratic, undisciplined slobs, I found myself worrying. What if they’ve never met programmers before?

Most nonprofits, it seemed to me, optimized to self-present as competent, sober, and diligent. I think if they optimized to get stuff done, they might look different.

The third effect. Nonprofits are generally conservative in their approach to regulatory compliance, administration, finance and governance practices. (Why? Partly it’s because the core work is complicated: hard to do and hard to measure, so people drift towards stuff that’s simpler. Also, the nonprofit sector is too small to support a diverse array of service providers, and so the services provided by consultants tend to be extremely generic. Boilerplate recommendations on term limits and that kind of thing.) Optimizing for donor experience makes that worse.

Why? It’s easy to describe for donors the core problem a nonprofit is trying to solve, but explaining the work of solving it –and how impact can best be measured– is hard. Far easier to show that the 990 was filed on time, that the org got a clean audit letter, and that the ED’s compensation was determined according to a highly responsible process. And donors seem relatively willing to accept the proposition that administrative effectiveness is a good proxy for overall organizational impact, even though such a proposition is actually pretty weak. A whole industry has developed around this: supporting good compliance and measuring it, as a service for potential donors.

This effect is amplified by the presence of major donors, who are typically wealthy retired business executives.

That’s because major donors like to feel their advice is as useful as their money, and they have decades of experience of people taking their opinions seriously. But they can’t necessarily say much that’s useful about the specifics of helping victims of domestic violence or rehabilitating criminals or protecting endangered gorillas in the Congo. So many nonprofits create opportunities where they can help. They are put on the investment committee, they are asked to help with the audit firm selection process, their advice is sought about when to launch an endowment campaign. This has the effect of focusing the ED’s attention in those areas — because the ED, of course, wants to make sure the major donor’s experience with the org is a positive one. More unintended consequences: “providing a good donor experience” becomes an unstated job requirement for the head of finance. A great head of nonprofit finance needs to not just be a person who’s financially and administratively competent: he or she also needs to be credible, composed, tactful and likable.

So. A major structural flaw of many nonprofits is that their revenue is decoupled from mission work, which pushes them to focus on providing a positive donor experience often at the expense of doing their core work. That’s bad.

What can we do about it?

I believe the problem is to some degree newly now solvable. I know that, because we solved it at the Wikimedia Foundation.

Here’s what we did.

From 2008 until late 2009, the WMF played around with various fundraising models. We applied for and got restricted grants, we cultivated major donors, we made business deals that brought in what’s called in nonprofitland “earned income,” and we fundraised online using what we grew to call the many-small-donors model. After two years we determined we’d be able to be successful using any of those methods, and an important study from Bridgespan had persuaded us to pick one. And so we picked many-small-donors, because we felt like it was the revenue model that best aligned with our core mission work.

Today, the WMF makes about 95% of its money from the many-small-donors model — ordinary people from all over the world, giving an average of $25 each.

It’s awesome.

We don’t give board seats in exchange for cash. Foundations’ priorities don’t override our own. We don’t stage fancy donor parties (well, we do stage one a year, but it’s not very fancy), and people who donated lots of money have no more influence than people who donate small amounts — and, importantly, no more influence than Wikipedia editors. Donors very rarely visit the office, and when they do, they don’t get a special dog-and-pony show. I spend practically zero time fundraising. We at the WMF get to focus on our core work of supporting and developing Wikipedia, and when donors talk with us we want to hear what they say, because they are Wikipedia readers. (That matters. I remember in the early days spending time with major donor prospects who didn’t actually use Wikipedia, and their opinions were, unsurprisingly, not very helpful.)

The many-small-donors models wouldn’t work for everyone, mainly because for it to succeed your core work needs to be a product or service that large numbers of people are aware of, understand, and want to support. About a half-a-billion people read Wikipedia, and we get on average 11 cents a year from each one, which is not much. I know a couple of nonprofits that’ve backed away from the many-small-donors model after doing that math. But I think the usefulness of the many-small-donors model, ultimately, will extend far beyond the small number of nonprofits currently funded by it.

Why? People are slowly getting used to the idea of voluntarily giving smallish amounts of money online to support stuff they like — look at Kickstarter and Donors Choose and Indiegogo. These are not self-interested transactions made after a careful evaluation of ‘what’s in it for me’: they’re people funding stuff because they think it’s great. Meanwhile, the online payment processing market is maturing, with an increasing number of providers supporting an increasing number of currencies and countries, and fees are starting to drop. And, note that donations to the WMF have risen steadily every single year (we’ve been named the nonprofit with the fastest growing revenues in the United States, which probably actually means in the world) — even though the WMF’s fundraising is deliberately restrained. Eleven cents per user per year is nowhere near a ceiling, for Wikipedia or for anyone.

The advent of the internet has given ordinary people access to the means of production, and now they (we) can easily share information with each other on sites like Wikipedia. That’s been playing out for more than a decade, and its effects have included the disintermediation of gatekeepers and middlemen of all types. I think we’re now seeing the same thing happen, more slowly, with the funding of mission-driven work. I think that among other things, we’re going to see the role of foundations and major donors change in surprising ways. And I think the implications of these changes go beyond fundraising itself. For organizations that can cover their costs with the many-small-donors model I believe there’s the potential to heal the disconnect between fundraising and core mission work, in a way that supports nonprofits being, overall, much more effective.

Notes: This post is written from the vantage point of somebody who thinks many nonprofits do good work in difficult circumstances: please read it from that perspective. Lots of people think nonprofits are lazy and inefficient and woolly-minded. That’s sometimes true, but no more so in my experience than at for-profit orgs. The world has no shortage of suck.

I also want to thank some of the people who’ve influenced my thoughts in this area. Although the views expressed here are my own, Erik Moeller and I have talked a ton about this stuff over the past half-dozen years. He was the first person to point out to me the absurdity of overheard ratios, and has written about them extensively and publicly, starting back in 2009. Afterwards, he and I discovered the good work of Dan Pallotta and also the Urban Institute, investigating overhead ratios and explaining why they’re bunk. I’ve also benefited from reading Jim Collins’s monograph Good to Great and the Social Sectors, as well as two books from Michael Edwards: Just Another Emperor? The Myths and Realities of Philanthrocapitalism, and Small Change: Why Business Won’t Save the World. I was helped by a conversation about difficulties facing new nonprofits a few years back at the Aspen Institute, as well as by dozens of less structured conversations with fundraisers including particularly Zack Exley, as well as with my fellow EDs, including ones on whose boards I serve. David Schoonover has done some analysis of U.S. non-profit funding models that has influenced me, and he and I have talked extensively about challenges facing the nonprofit sector, including this one. The folks at Omidyar have also been helpful, including pointing me towards the very useful Bridgespan study linked above.

Because I’ve been working lately on issues related to grantmaking and Wikimedia movement entities, it might be tempting to assume my arguments here are somehow aimed at informing or influencing those conversations. They’re not. To the extent anything here is useful to those conversations that’s great, but that’s not why I wrote this.

Every non-profit has two main jobs: service delivery (which is the mission work, the reason the non-profit exists) and revenue generation (how you pay for the costs of service delivery).  If a non-profit is lucky, the two are aligned and support each other.   But that’s rare — it’s more common for them to be completely disconnected, and often they’re in flat-out conflict.

When I started working at the Wikimedia Foundation in 2007, I wanted us to experiment with revenue generation.  So we spent about two years doing a bit of everything: making friends with grant-making institutions, cultivating major donors, developing business deals, and running various forms of online fundraising including our annual campaign, mobile giving, and so forth.

The stand-out winner was online fundraising.  It makes perfect sense: Wikipedia has 371 million unique visitors every month, and if even a tiny fraction of those people donate, we will easily cover costs.   And that’s exactly what happens.  New graduates give us 50 or 100 dollars for helping them as they go through school.  Little kids donate, or their parents donate on their behalf.  And all kinds of ordinary people around the world give every day, because they used Wikipedia to help them plan a trip, or understand a medical condition, or settle a bar bet, or get a job, or satisfy their abstract intellectual curiosity.  People use it and they like it, so they want to make sure it sticks around.

So, the “many small donations” model makes sense for Wikipedia, because it aligns fundraising with the rest of the Wikimedia movement: it makes it global, and it empowers ordinary people. It also enables us to stay focused on our own mission and strategy, rather than being pulled off-course by large funders’ needs and desires.   It makes us independent. It creates the right incentives: it supports us being accountable and responsive to readers.   It reduces the risk that donors will grow (inappropriately) to be more valued by us than editors. It’s scalable, it minimizes risk and it’s replicable and transferable – so, it enables us to help equip our chapter organizations to fundraise too.

So, newly this year, the Wikimedia Foundation is reorienting our revenue generation strategy towards small donors, away from institutional support and earned income. This is good: there are lots of happy consequences.  One is that I personally will have more free time.

Practically all Executive Directors complain that they spend way too much time fundraising. I never really felt that way.  Wikipedia has never spent a single dollar on advertising, and so it hasn’t necessarily been well understood.  I find people have all kinds of misconceptions about Wikipedia, and there are lots of interesting things about it that they don’t know: I’m happy to help them understand it better.

But there is an opportunity cost to fundraising – essentially, any hour that I spend thinking about donor cultivation, is an hour I’m not spending thinking about the work we’re trying to get done.

So I’m happy that beginning this year, I will have more time to dedicate to talking to Wikimedia editors, and thinking about the work Wikimedians are engaged in. This blog is part of that.  I plan this year to do more “office hours” on IRC, to have more unstructured time to talk with Wikimedians, and to spend some time writing here.

I’m looking forward to it :-)