Nonprofit leaders often grapple with critical financial questions: How much funding is needed? Where can it be found? Why is it scarce? These concerns become especially urgent in tough economic times, but the answers are elusive. While nonprofit leaders excel at program development, they typically lack expertise in securing sustainable funding, and philanthropists often struggle to understand the full impact of their donations.
This disconnect between nonprofits and funding sources can have serious consequences, such as promising programs being reduced or abandoned. Additionally, limited funding can lead to disorganized fundraising efforts.
In contrast, the for-profit sector benefits from clear financial strategies, often explained through business models. These models provide a shared understanding of how companies operate and succeed, allowing for efficient communication and informed decision-making between business leaders and investors.
The nonprofit sector, however, lacks similarly defined funding models, which leads to confusion and missed opportunities. To address this, our research has identified 10 nonprofit models commonly used by large U.S. organizations. These models aim to help nonprofit leaders better articulate their funding strategies and understand the potential and limitations of different approaches.
Beneficiaries Are Not Customers
Nonprofits face a unique challenge in developing funding models because, unlike for-profit businesses, the process of generating revenue is not directly tied to creating value for beneficiaries. While a for-profit company earns revenue by satisfying customers, nonprofits must identify a separate economic engine to fund their mission, as donors—not beneficiaries—provide the funding.
Experts like J. Gregory Dees and Clara Miller highlight that nonprofits operate in two separate “businesses”: one focused on programs and the other on fundraising. This distinction is why we use the term “funding model” rather than “business model” to emphasize the need to focus on financial strategies, not just program activities.
For smaller nonprofits, raising funds may be more flexible, but as organizations grow and need to raise larger sums—often $25 million or more—well-defined funding models become crucial. Research of large nonprofits shows that those achieving significant growth have successfully matched their funding sources with their activities, creating a professional, targeted fundraising approach.
As nonprofits scale, it’s essential to rely on established funding markets with clear decision-makers, such as government funding or large groups of individual donors. While changes in public awareness or events may lead to funding increases, these shifts are unpredictable and should not be relied upon as consistent sources of revenue. Nonprofits that adopt intentional, strategic funding models are more likely to achieve predictable, long-term financial sustainability.
Ten Funding Models
Creating a framework for nonprofit funding comes with challenges, as the models need to be specific enough to be relevant, but not too detailed that they lose their broader application. For instance, a community health clinic supported by Medicaid and a nonprofit funded by the U.S. Agency for International Development (USAID) are both government-funded, but the type of funding and decision-makers involved are vastly different. Including both in the same model would be ineffective. However, separating them into distinct models would be overly narrow.
To create a meaningful framework, we identified three main parameters to define funding models: the source of funds, the types of decision-makers, and the motivations of these decision-makers. These factors allowed us to distinguish ten distinct funding models.
Interestingly, some models we initially considered didn’t emerge. For example, nonprofits relying entirely on earned income from ventures separate from their core activities or those that operate strictly on a fee-for-service basis didn’t appear in the large nonprofits we studied. We believe these models don’t sustain large-scale nonprofit advantages over for-profit entities.
Here are the ten models, ordered by the dominant funder type:
Heartfelt Connector
Some nonprofits, like the Make-a-Wish Foundation, use this model by focusing on causes that resonate with a broad range of people. They connect large groups of individuals to causes that appeal to emotions, typically across a range of incomes and demographics. Such nonprofits often engage volunteers through fundraising events, building an emotional bond with a wide network. The Susan G. Komen Foundation is an example of a Heartfelt Connector, which organizes events like the Race for the Cure to fund cancer research.
Questions to consider:
- Is there a large group of people already passionate about this cause?
- Can we articulate the nonprofit’s mission clearly and concisely?
- Can we attract volunteers on a wide scale?
Beneficiary Builder
Nonprofits like Cleveland Clinic rely on donations from individuals who have directly benefited from their services. These organizations generally charge for services but rely on additional donations for major projects. Examples include universities and hospitals, where alumni donations contribute significantly to operations and long-term goals.
Questions to consider:
- Does our service create individual benefits seen as a social good?
- Do we have a strong connection with beneficiaries who may donate?
- Can we scale our outreach to reach a large number of beneficiaries?
Member Motivator
This model involves nonprofits like Saddleback Church, where members donate to support causes central to their lives. These organizations serve communities (such as religious or environmental groups) who collectively benefit from the organization’s work. The National Wild Turkey Federation (NWTF), for example, raises funds via membership and events that engage individuals around shared interests.
Questions to consider:
- Will our members feel the organization directly benefits them?
- Can we engage and manage members for fundraising activities?
- Can we remain true to our core members and their interests?
Big Bettor
Big Bettors, like the Stanley Medical Research Institute, rely on large donations from a few major donors or foundations. These organizations usually focus on medical or environmental issues where large sums can accelerate change, often from donors passionate about specific issues. Conservation International (CI) uses this model by attracting large donors to fund projects aimed at protecting biodiversity.
Questions to consider:
- Can we create a tangible solution to a major problem within a foreseeable timeframe?
- Can we effectively communicate how large-scale funding will address our goals?
- Are we able to attract wealthy individuals or foundations to fund our cause?
Public Provider
Nonprofits like the Success for All Foundation depend on government funding to provide services in social sectors like housing, education, and human services. They often contract with the government to deliver services according to predefined rules. An example is TMC (Texas Migrant Council), which started with federal funding and expanded over time to secure additional government sources.
Questions to consider:
- Is our nonprofit a good fit for government funding programs?
- Can we demonstrate that our service delivery is superior to competitors?
- Are we prepared to manage regular contract renewals and compliance?
Policy Innovator
Some nonprofits, such as Youth Villages or HELP USA, develop new methods to tackle social issues and secure government funding by proving their solutions are more effective and cost-efficient. They often push for policy changes or new funding mechanisms to support their innovative approaches.
Questions to consider:
- Is our approach significantly more effective or cost-efficient than existing solutions?
- Can we provide evidence that our program works?
- Are we able to cultivate strong relationships with key government decision-makers?
Beneficiary Broker
Nonprofits like the Iowa Student Loan Liquidity Corporation fall into this model. These organizations act as intermediaries, providing government-funded services to beneficiaries but competing for these funds with other nonprofits. They typically work under government grants or contracts to deliver specific services.
Questions to consider:
- Can we differentiate our services from competitors?
- Do we have the capacity to meet government criteria for service delivery?
- Are we prepared for competitive funding processes?
Resource Recycler
Some nonprofits, such as those supported by corporate funding, use this model to supplement their activities. These organizations may receive in-kind donations or direct financial support from corporations to fund initiatives. Often, this model leverages corporate social responsibility (CSR) programs.
Market Maker
This model involves mixed funding sources, where nonprofits secure a blend of government, corporate, and individual donations. These organizations may focus on innovative programs that require diverse funding channels to grow.
Local Nationalizer
The Local Nationalizer model combines local and national funding sources to sustain operations. These nonprofits typically operate at both a local and national level, drawing support from a broad range of funders.
These 10 models represent different strategies nonprofits use to secure funding. They highlight the complexity of nonprofit funding and how organizations must tailor their approach to their mission, the needs of their beneficiaries, and the sources of funding available.
Implications for Nonprofits
In today’s economic climate, nonprofit leaders may be tempted to seek funding from any available source, but this approach can lead to losing focus. It’s crucial to carefully examine and maintain discipline in fundraising strategies, especially during challenging times. This article aims to guide leaders in refining their funding models.
While funding approaches will vary, nonprofits can benefit from clarity in their strategies. Some may even develop models capable of generating substantial revenue—evidenced by nearly 150 nonprofits achieving over $50 million in annual revenue between 1970 and 2003.
Philanthropists, too, are becoming more strategic in their investments. Foundations like the Edna McConnell Clark Foundation and New Profit Inc. are focusing on strengthening both program and funding models to better support grantees.
As society increasingly relies on nonprofits and philanthropy to address critical issues, understanding and implementing effective funding models is essential for fulfilling these goals.
For more information on how to refine your nonprofit’s funding strategy, reach out to DBC for guidance and support.
