Business

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.

Is Growth Always Good?

When I was an MBA student, I absorbed the message that growth is always good. And later at The Boston Consulting Group, working with corporate executives, I shared their assumption that a growing business is a successful business. "If you're not growing, you're dying," was an oft-cited phrase. But for nonprofit organizations it's not so simple. Of course, there are times for growth. Incubators like Blue Ridge Foundation New York, New Profit, and Bikkurim find and support nonprofits with high growth potential. And an organization like City Harvest that feeds the hungry of New York has a mandate for growth given all the unserved hungry people in the city. But an advocacy organization like the D.C. based Afterschool Alliance can fulfill its national role with a staff of around 25. Further growth is not required. And some organizations have found themselves over-sized for the funding available, or ungainly in their operations, and have chosen to downsize.

I have seen business executives on a nonprofit board confused when realizing that growth for the nonprofit will mean increased deficits. In business, growth in products sold or services delivered typically leads to increased profits, which can mean re-investment for more growth. It's a virtuous cycle. But for nonprofits, the equation is different. Given that most nonprofits require donations and grants to subsidize their work, growth in service delivery requires more fundraising to fill deficits.   And if the organization's funding is tapped out, growth may not be advisable even while the need served by the organization goes partly unfilled.

Based on our experience, it is an open question if a nonprofit should grow. An organization can be long-lasting and sustainable by finding the right business model, right-sizing operations to fit revenue potential, and delivering services with excellence. Growth is not always good.

What do you think? I'd love to hear from you. Please leave a comment.