Sasha Dichter makes some great points about funding of for-profits vs. non-profits.
Recently I had the chance to attend a roundtable discussion on how to scale innovations in global development.
One of the participants, a successful serial entrepreneur, related an important and telling story about why it’s hard to seed innovation in the nonprofit sector. She said she’d raised $200 million in her life, $190M in her four for-profit enterprises and $10M on behalf of nonprofits that had important innovations that needed funding.
With her for-profit ventures, her experience was that when she’d ask a venture capitalist for $1M to fund a new innovation, if they said yes to funding they would typically invest $1.5M or $2M because they knew that she probably needed more money (“runway”) to get it right – that there would be twists and turns in the road, and that the best way to minimize her chance of success was to underfund her.
Her nonprofit fundraising might have the same starting point: asking for $1M to fund a new innovation. In one case she was working on raising $1M from a foundation, and they approved the funding. However, though she asked for $1M they had only approved $750,000 of funding. I wish I’d found this outcome more surprising. If anything I was expecting her to say they gave her $100,000. But the story about VC fundraising was news to me, the idea that a funder would often tell the entrepreneur that they’d asked for too little money.
A big part of what holds us back in the nonprofit sector is that we’re stuck in a program delivery mindset. In that mindset your philanthropy is paying for a set of defined tasks and as a donor your goal is efficiency. And if efficiency is your goal, you might be right in thinking that you could eek out more bang for your buck by giving a little less money than you were asked for.
But new ideas are different – you’re not aiming for efficiency you’re aiming for success. That means that giving less than what’s needed or doing things like challenge grants or other mechanisms designed to “catalyze” other funding are probably a terrible idea. An underfunded innovation cannot get more efficient, it can just have too little cash, which will either suffocate it or force the entrepreneur to spend more time fundraising and less time building the business.
Once we decide a new idea is worth funding, might we take a page from folks whose job is to bet on innovations and write bigger, not smaller, checks?
One counter-argument is that there is less capital for non-profits because there is no profit for the investor to reinvest in the same or other non-profits. That said, millions of dollars go into non-profits every year, but not necessarily strategically. Furthermore, resources are often wasted due to lack of focus on collective impact and collaboration. If non-profit funding became more strategic and if funders provided for capacity and not just programs, non-profits would be given more rope to innovate, iterate models and services, and ultimately produce more impactful solutions.