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Should Nonprofits Spend Money on Fundraising? YES.
Examining the relationship between nonprofit spending and mission fulfillment
LESSON FROM A VENTURE CAPITALIST
Years ago, while working as the head fundraiser for a very large capital campaign, I (Claudia) was sitting in a board meeting. The topic was cost. The opinions around the table ranged from conservative and careful to ambitious and risk-oriented. The voice of our board chair broke through the din, and I’ll never forget what he said:
“I’m a venture capitalist and if there’s one thing I know for sure, it’s that if you underfund your venture, it will fail. We cannot afford to fail.”
Within minutes, the CEO said resolutely, “We’ll find the money we need. You are right. We cannot let this campaign fail.”
SCARCITY AND CAUTION
Unfortunately, in the nonprofit sector, the prevailing attitudes – both from within and from without - toward nonprofit spending reflect hesitancy to spend any more than is absolutely necessary.
Donors often praise organizations for spending as little on fundraising and administration as possible. The idea of fundraisers and nonprofit leaders earning more than a living wage is often frowned upon by many. Fundraisers receive phone calls from donors claiming that the organization is spending too much money on mailers and other marketing materials and that those dollars should be going straight to programs. At the same time, many are lamenting that the organization is the best kept secret in town.
From within, some nonprofit leaders continue to advance notions that staff should be “in it for the mission, not the money” (as though seeking reasonable compensation is in conflict with a mission-first motive). There’s a slowness to scale up fundraising staff or hire consultants to ensure a successful campaign. Marketing budgets are kept tight and bare bones. The notion that “we’re not in the business of profit, we’re in the business of change” is a common rationale to embrace a scarcity mindset rather than an abundance of mission fulfillment as the mindset.
But achieving missional growth and scalable impact can and should drive philanthropic investment discussions. Why do these attitudes of scarcity and caution persist, then?
TWO RULE BOOKS
In 2013, Dan Pallotta, author of the book Uncharitable, gave an important Ted Talk he titled, “The Way We Think About Charity is Dead Wrong”.
He stated that “the things we’ve been taught about charity and about the nonprofit sector are actually undermining the causes we love and our profound yearning to change the world”.
He arrived at that conclusion by identifying that there are “two rule books” – one for the nonprofit sector and one for the rest of the economic world. These two rule books can be summarized this way: society holds an investment/return rulebook for the private sector, and holds a “you have limited resources, so spend only what is absolutely necessary” rulebook for the nonprofit sector.
Take compensation, for example. Pallotta painfully, yet correctly identifies that, “We have a visceral reaction to the notion that anyone would make a lot of money helping people. What’s interesting is that we do not have a visceral reaction to people making a lot of money not helping people.” The people who are giving their lives to serve others may be willing to make less money, but they certainly don’t deserve to make less money.
Another example of this is in the area of risk and growth. Again, Pallotta points out that “Disney can make a new $200 million movie that flops and nobody calls the attorney general. But you do a little $1 million community fundraiser for the poor and it doesn’t produce and your character may be called into question”.
He continues, “When you prohibit failure, you kill innovation. If you kill innovation in fundraising, you can’t raise more revenue. If you can’t raise more revenue, you can’t grow. If you can’t grow, you can’t possibly solve large social problems”.
WHERE THE THINKING HAS GONE WRONG
There’s a fundamental principle at work here: it’s the idea that overhead is not part “the cause”. In other words, it’s the idea that only program expenses fulfill the organization’s mission.
We’ve been taught that the less money we spend on overhead, the more money we’ll have to spend on “the mission or cause” of the organization. But if we live in a logical world where investment in fundraising raises more funds and multiplies the pool of money available for the cause, then this way of thinking is completely backwards. Overhead expense creates more money for the cause.
A RECENT STUDY PROVES IT
For a nonprofit leader, the scary thing about fundraising investment is that the return is almost never immediate. The cost of hiring a new Major Gift Officer position or a Capital Campaign Manager or the cost of a feasibility study is not immediately justified by multiplied funds raised. It may take a year or two or more to see the return on that investment. Internally, this reality causes many leaders to shy away from spending on growth. But if the expenses were viewed as a 3-year ROI, any for profit business would easily agree to make that investment. The nonprofits that invest in fundraising and administration with a 3-year ROI are positioning the organization for fundraising success and mission fulfillment.
A recent study conducted by the Chronicle of Philanthropy and business professors Arian Aflaki and Goker Aydin concluded that “spending on Fundraising and Admin makes nonprofits more resilient” – not more financially weak and vulnerable.
While you can read the whole study for yourself, their research showed that, “new organizations and groups that are operating on small budgets need to spend a larger share of their revenue on administrative costs than larger, more established nonprofits. This investment lays a solid foundation for long-term resilience and ensures they are better equipped to serve their beneficiaries.”
Notice that the research didn’t conclude that larger, more established organizations need to spend a larger share of their revenue on fundraising. Why? Because many of those organizations invested in fundraising when they were smaller and as a result, scaled their mission. Large organizations often become large because they’ve learned this important lesson of nonprofit investment by personal experience.
SO HOW MUCH SHOULD WE BE SPENDING?
So, here’s where the rubber meets the road. Sufficiently funding your nonprofit venture will more surely lead to success than funding it with as little as possible. But how much is enough? The answer is unique to every organization, but here are some ways to ensure you’re making progress toward sufficiently funding your nonprofit venture:
- Talk to a recruiter and ask about current standard salary ranges – Executive search firms and recruiters tend to have a great finger on the pulse of what fair compensation ranges are – and what the best talent (aka – those most capable of scaling your impact) are looking for.
- Accurately report in-kind value and volunteerism – Grantors and watchdog organizations like Guidestar will continue assessing the proportion of expenses going toward program costs vs. fundraising and admin. Work hard to make sure that ratio reflects the total value (within allowable legal limits) of all donated labor and in-kind – not just cash – given to your cause. This also shows donors you steward all your resources well and pays tribute to volunteerism.
- Fund the ventures that will scale your solution - the work that your organization is doing is probably addressing a serious problem in your community or around the world. Your solution needs to have a vision of scaling to the size of the problem – and the investment to get it there.
- Change inside to change outside – Your donors will not take on an investment mindset before the organization itself does. If your marketing conveys that you’re taking big risks to scale your solution, that you’re unapologetically making strategic hires to bring in the right talent, and that you’re aspiring to a high standard of excellence across the board, your donors will catch on. Some may not change their perspective. But many will. And they’ll be the ones who fund your nonprofit venture on its way to long-term growth and success.
If you’ve found something within this white paper that you would like to explore further with our team, please contact us.
Claudia A. Looney, FAHP, CFRE
Principal and Managing Partner
Kyle Houlton, CFRE
President and CEO
