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Nov 13, 2012

Accelerating Nonprofit Innovation

Our communities need nonprofits to be self-sustaining while still remaining true to their nonprofit purpose.  The formula that has worked for over 20 years is no longer reliable.

Government outsourcing contracts brought many current nonprofits into existence.  But those contracts no longer cover all costs and often impose uncompensated administrative requirements.  The upshot is that a government grant or contract most often imposes financial losses on the nonprofit.  Nonprofits which have been surviving on government contracts, especially human service nonprofits, face a high risk of bankruptcy in the next ten years.

Philanthropy cannot solve this problem. It has its hands full just maintaining its ability to provide one-fourth of nonprofit revenues – a share that has not changed significantly since 1984.  Maintaining that share requires continually fostering a new generation of philanthropists to step up as the older generations pass on.  Just 15 years ago the philanthropic community worried that the children of the Greatest Generation would not step up as their parents had.  Gratefully, they did.  Now the challenge in the next 10 years is for the grandchildren to assume that mantle.  If successful, philanthropy will not decline, but I doubt it will expand beyond the 25 percent capacity of the past 30 years.

The needs of our communities should not be short changed by asking nonprofits to reduce their mission services in quantity or quality in order to eliminate losses from providing those services.  With government’s role diminishing and philanthropy’s role at capacity, I believe the best way out of this dilemma is for nonprofits to innovate to develop revenue-generating activities that can supplement philanthropy to cover the losses inherent in fulfilling a community need well.

But there is a problem.  While my recent survey of Ohio nonprofits disclosed the encouraging fact that over half of the nonprofit respondents were starting or expanding new revenue-generating activities, it also discovered a funding model that can compromise their efforts.  Virtually all were expecting to receive grants or use scarce operating revenues before moving ahead.  This money-first approach makes sense when one is looking to fund a key mission activity which has no prospects of positive net revenues.  Without funding, a key mission activity’s losses cannot be sustained.

This is where nonprofits can borrow a page from the for-profit playbook.  As we see in the very active technology start-up world, an innovator follows this sequence.  He comes up with an idea, then develops a business plan to identify the scale necessary for it to be cash positive and profitable in a reasonable time period.  With that information he determines the amount of capital necessary to make the plan work and then looks for investors and lenders.  With this sequence, he has strong conviction that his idea is financially viable and strong conviction about how much capital he needs before starting operations.

What do we need to jumpstart innovation among nonprofits?
•    We need mentor-investors who have skills in new ventures and start-ups.
•    We need capital in a form and quantity that meets the needs of investors at the same time it enhances the odds of success of the venture.
•    We need patient yet attentive capital that will advise and support the nonprofit venture to reach a scale that is profitable.

Let’s build the list of nonprofit social entrepreneurs.  First by identifying those social entrepreneurs we already have.  Send their names and contact information to  Then let’s find new social entrepreneurs by creating a new infrastructure that mentors, invests in, and supports profitable “nonprofit” social innovation.

If you are not comfortable with the notion of nonprofits being profitable, read my book Linking Mission to Money.  Or let me talk to your group as I just talked before the Minnesota Council of Foundations and Minnesota Council of Nonprofits.  Either way, this is the future; let me help you to understand and follow this essential path.