Folly #55: Diversified Revenue

Will you play Frogger or Legos?

Foundations generally like diversified funding. This is, of course, completely consistent with their risk-averse approach to social impact.

I agree that diversified revenue is in the best interest of a grantee – no one wants to live in fear that their main source of funding may not renew. But just how “diversified” a nonprofit’s funding is involves a bit of game theory.

Frog image by Austin Santaniello and Lego image by Sen. You can find both on Unsplash.com

Diversified funding that’s like Frogger – uncertain jumps

Based on the questions that foundations ask, diversified funding seems to mean: big grants from multiple foundations (or corporations, but we all know that corporate philanthropy adds up to peanuts, as you can see in the graph below).

But getting those big grants is a bit like playing the video game Frogger. The goal is to focus your energy on jumping into the void, and hope that you land on a passing log to get across the river. And if you miss? Game over.

Here’s how the question generally looks in a foundation’s grant application:

List your largest five gifts last year.

Who else funds this work? List major funders and grant amounts.

What portion of project funding has already been secured?

(Don’t even get me going on funders who wait until the project is nearly done to commit, which is not at all helpful in making the project happen! Or how completely inappropriate it would be to list an individual by name next to the amount of their large gift.)

Diversified funding that’s like Legos – building blocks

GivingUSA is a respectable source of data. Yet not everyone agrees with their statistic that individual donors make most philanthropic gifts each year (73% in 2022, counting annual gifts and bequests).

I respect the heck out of

Vu Le

and his excellent Philanthropy AF newsletter. A few years ago he wrote about data biases that skew individual donor numbers, including the ways that racial, socio-economic and size (budget) disparities among nonprofits impact their ability to access donors. Lots of wealthy white folks invest in nonprofits that build equity and opportunity for marginalized communities. And smaller nonprofits having a smaller share of donor revenue is, IMHO, all the more reason to focus on building individual donors and the sustainable, diversified, unrestricted revenue they bring. Unlike most foundation grants, individual donations provide much needed general operating support.

If you’re reading the fine print in the graph above, you’ll see that individual donor giving decreased in 2022, as our guest interviewee Nathan Chappell knows well. (You can read his book and learn more. This trend is getting a lot of press.) None the less, donations from individuals remain key to diversifying a nonprofit’s sources of revenue.

So why don’t foundations focus on helping nonprofits build that kind of diversified donor base?

Questions asking about diversified funding – DQ or TAC?

Every question in a grant proposal feels like a test. If I answer this grant question “correctly,” then maybe I’ll move on to the next round of review. Despite your best efforts, the chances are not in your favor.

These proposal questions allow foundations to gather important data about nonprofit revenues.

What if – rather than use it to disqualify [DQ] applicants that don’t list a bunch of big grants – the foundation provided (or paid for) technical assistance [TAC] to help the nonprofit diversify their funding by reaching more individual donors?

Whatever your feelings about individual donors, I think we can all agree that foundations and individuals, together, give nearly all of charitable gifts. As you may have gathered, I feel strongly about the need for small nonprofits to build revenue from individual donors. Foundations can be fickle and grants are difficult.

If you know a small nonprofit whose executive director and board are doing most of the fundraising, please share this: