Connection Café: Hedging economic uncertainty for nonprofits: expand and diversify

	Hedging economic uncertainty for nonprofits: expand and diversify
	Posted by at Jan 24, 2009 06:18 PM CST Categories: Fundraising, Nonprofit Trends

No industry is recession-proof, as the recent demise of the once-mighty automotive and financial industries demonstrates. The nonprofit sector is no exception. The economic problems that began in real estate and their related financial securities have created a shock wave that is rippling through the rest of the economy. For many in the nonprofit sector, the effects show up in the form of lower revenue and increased demand for services. This one-two punch puts the squeeze on nonprofit operations.

What can be learned from this event that will help guide nonprofits toward a solution to this problem? The answer lies in the root cause of the problem: too much emphasis on high-risk, high-reward strategies for revenue and investment. A brief look at how this problem affected the financial and automotive industries can give insight to how nonprofits might better navigate through the economic aftershock by diversifying revenue sources.

Key factors affecting the financial sector are lack of revenue diversity and poor due diligence. Recent years were witness to a large increase in mortgage-backed securities in the investment portfolios of many companies. The well-known trouble with these securities was the lax standards by which loan applicants were screened for sub-prime mortgages that make up a good deal of those securities. Giving too much portfolio share to high-risk, high-reward investments like these proved to be detrimental. Ask anyone who used to work for Lehman Brothers or Washington Mutual.

American auto makers rely heavily on the manufacture of SUVs and light trucks to contribute much of their profit. The over-emphasis on producing these high-margin vehicles exposed the auto makers to fluctuations in the price of the fuel needed to power them. When Americans began to feel the dual squeeze of rising fuel prices and economic trouble, sales of these expensive and inefficient vehicles plummeted...and so did the cash flow of the Detroit Three. Scrambling too late to diversify their product base, American auto makers are on the ropes, paying the price for putting their eggs in the SUV basket.

What do these two occurrences have to do with nonprofits? Each example is a lesson in misjudging risk when valuing the reward. Many nonprofits rely heavily on the contributions of corporate donors, philanthropic foundations, and wealthy individuals giving major donations. The reward is that there less work that a nonprofit must perform to secure a donation of considerable size, as compared to the effort involved in cultivating a large donor base of smaller donors. The risk of relying on major gifts: there are fewer people involved in the decision to reduce or eliminate the major gift. If you have a major donor giving $1,000, and a hundred donors giving $10 each, and then all 101 of the donors are asked to give during difficult economic times, which group will yield more gifts? Hint: it's easier to ask for $10 from a person under financial stress than to ask for $1,000.

Evidence from interviews I've conducted with several nonprofits confirms that many are experiencing a drop in major gifts during the recession. Yet most are simultaneously experiencing continued healthy growth in total donations from large donor bases giving smaller amounts. In many cases, the growth in 2008 has been consistent with or better than prior years.

A recent study conducted by Management Consulting Services suggests that many nonprofits are responding to economic difficulty by asking more people for donations.

How can a nonprofit hedge against the risk of relying on major donors? Diversify. Expand the donor base. The power of the crowd gives a natural hedge against the concentrated power of the major donor. The effort given to cultivate a large donor base and develop engagement pathways for those constituents is worth the reward in both good and bad economic times.

Hedging economic uncertainty for nonprofits: expand and diversify

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