Good Money or Bad?

I have been thinking about my work helping organizations resolve issues of revenue, funding and sustainability, a perennial issue among nonprofits. To support its mission sustainably, an organization’s impulse is often to “get funding from whoever will give it.” This reminds me of a theory developed by Clay Christensen of Harvard Business School, which asserts that good money comes from funding sources that are impatient for profit, and patient for growth, while bad money comes from sources impatient for growth, yet patient for profit. In business, profit can be an indication that a company provides value and its strategy is on target, suggesting a solid basis for growth. If a business scales before proving that its model will make money, it risks scaling a model that is not viable long-term. When a business accepts bad money, its decisions can be inordinately influenced by the funder, causing the business to scale rapidly before vetting the soundness of its model.

Nonprofits face similar pressures, and in many cases are more vulnerable to accepting funding from any willing provider. Additionally, due to many nonprofits’ shoestring budgets, they may lack the wherewithal to push back on funder influence. To avoid this pitfall, organizations would do well to distinguish between good money and bad before accepting funding. Similar to a business, it is often beneficial for a nonprofit organization to be clear about the value it provides and to whom – proof that its model works – before attempting to scale. Otherwise, the organization may not survive for the long-term.

I recently worked with an organization hoping to scale significantly in coming years.  I was impressed by this organization’s Board members who, when facing a substantial funding opportunity focused on growth, thought hard to determine if they had sufficient proof for the viability of the organization's model to be comfortable with scaling.

Given that a concrete predictor of viability is often hard to come by in the nonprofit sector, it is important that organizations accept major funding from those committed to proving the organization's strategic viability before investing in its growth. This in turn will help organizations avoid a potential boom and bust cycle created by focusing inordinately on growth.