There's been an ongoing debate within the OpenGov Hub recently around “sustainable” non-profits.
The basic concern is that traditional non-profit organizations are overly dependent on grants funding to keep the lights on and are at risk of going out of business whenever a grant or two falls through. The advice given by some colleagues is for non-profits to instead generate earned revenue from non-grant sources and act more like businesses in monetizing their assets.
I'm sympathetic with the goal of diversifying revenue streams but worry that the term “sustainability,” at least when applied to social sector non-profits, is a misleading term that steers many organizations towards a likely-to-fail strategy of trying to sell goods and services. A better approach for the vast majority of groups would be to diversify their philanthropic funding sources rather than attempt a proverbial bake sale. There are several myths contributing to this confusion that deserve some unpacking.
Myth #1: Selling goods and services to clients is easier than raising grants. I'd challenge anyone who thinks that closing a sale is materially easier than closing a grant. Having done both — at Global Integrity and through our revenue-generating custom research service Foglamp — I know firsthand that most commercial sales efforts are as labor intensive as any grant seeking process. This is particularly true when attempting to sell enterprise-grade services to large clients; the sales cycles are similarly long, require multiple layers of approval, and the bureaucracies involved can be daunting. In my view it's a wash as to whether raising a $200,000 grant from a foundation is any harder than selling a $200,000 service agreement to a commercial client. And the requisite skill sets are nearly identical: any good philanthropic fundraiser knows that what he or she is doing is classic sales work at the end of the day.
Myth #2: Selling goods and services to clients is more reliable than raising grants. Right, because the market's appetite for your goods and services will never change, and people will buy your widget forever. Probably not true. While grants fundraising is certainly subject to fads and trends, it's likely far less prone to whipsawing than the commercial market. No successful company sits ideally by assuming the market will always remain stagnant. The good ones are constantly attempting to innovate and get ahead of the curve. That requires real product development strategy and non-trivial investments into experimentation and R&D, capital-intensive processes that the typical non-profit is unlikely to be able to invest in adequately. So while it may be possible for a non-profit to bring a successful product or service to the markets once, the chances of that organization keeping up with the competition is slimmer. The long-term risks of being overtaken by market trends are significant.
Myth #3: Grants funding is erratic and time bound. True, but arguably no more of a challenge than your favorite client walking away after five years to use a different service provider or product. “Sustainable” firms or non-profits aren't ones that simply rely on the same pool of clients or donors for decades. They are constantly seeking more durable revenue streams and attempting to “upgrade” the quality of their sources of revenue. They are forced to embrace a constant churn in revenue sources. Speaking from personal experience, Global Integrity's three most important philanthropic donors from our first year in business (2006) haven't given us a dime in more than three years. Yet we've managed to nearly triple our overall revenue in that same time period by diversifying and upgrading the quality of our donors.
Should non-profits sit idly by and rely solely on traditional grants funding? Not necessarily. Supplementing grants funding with earned revenue streams can be an important safeguard against the vagaries of philanthropic donors while providing steadier sources of cash flow. But in the vast majority of cases, my instinct is that non-profits will achieve greater levels of stability and predictability in their funding streams — that elusive “sustainability” — by expanding their work streams and diversifying their philanthropic funding sources rather than trying to build businesses within the walls of the non-profit. Relying on a single project to bring in indefinite grants funding is indeed almost certain to fail. Instead, launching new projects and initiatives that fit the organization's strategy offers a chance to tap new and diverse sources of grants support year after year. That strikes me as a better approach to non-profit sustainability.