How Do Nonprofits Raise Money
Nonprofit funding is complicated. But having a basic understanding of where nonprofit funding comes from and how you can get it will help you build a more sustainable organization and fulfill your mission. In this article we'll cover the different kinds of donors, how they give, why they give, and what it takes to motivate them.
Earned vs. Contributed Revenue
Donations and philanthropic support (i.e. contributed revenue) are only half of the funding picture. Most nonprofits cover at least part of their budget through earned revenue. Earned revenue is when someone pays you for a product or service you’re providing. This is how for-profits make all of their money, but it’s important for nonprofits as well.
| Earned Revenue
Money paid for a product or service that your organization provides
| Contributed Revenue
Money given to support your mission without expecting something in return
Contributed Revenue: Who Gives and How Much?
At a high level, you can break down the different kinds of donors into four categories: individual donors, foundations, corporate sponsors, and government support.
In 2019, nonprofits in the United States raised a total of $450 billion from these four sources. Individual donors are by far the largest segment, making up nearly 70% of the total all on their own. You can group bequests in there as well, since bequests are ultimately made by individuals, and that’s another ten percent of the pie. That leaves 17% for foundations and just under 5% of total giving for corporations.
What About Government Funding?
You may have noticed that one of the essential types of donors was missing from that pie chart. Government funding is usually left out of these kinds of statistics, for a few different reasons. It’s very difficult to capture the complete picture of public support in an apples-to-apples way. It is difficult to separate grants vs. contracts. And total government funding is big, but mostly comprised of non-charitable items, like Medicare payments.
Individual Donors: Why Do They Give?
So why would someone choose to open their wallet and hand over their own money to your nonprofit?
Belief In the Organization and Mission
The most basic reason is that they believe in the organization’s mission and trust how it will spend those funds. Without that, it’s nearly impossible to get a gift.
Social Status or Pressure
Some nonprofits play a role in their community that creates social pressure (both positive and negative) to support their work. The classic example would be something like an art museum or symphony orchestra, where being a major donor gets you invited to exclusive black-tie events and bestows elite social status. But there are other examples as well, such as a small town church where being in a position of leadership an be a big deal.
Tax Deductions (less significant for most donors)
Finally, donors to 501(c)(3) charities get to deduct their gift on their federal income tax return. This is important, but it’s not nearly as powerful of a motivator as you might think. It sometimes affects the timing of gifts, but it’s never the primary driver behind the decision to give.
Individual Donors: How Do They Give?
There are a few forms that an individual’s donation might take.
Direct Gift (check or credit card)
The primary and most common is a regular old check or credit card charge. But to maximize your donors’ support, you’ve got to consider other kinds of gifts as well.
Recurring, monthly gifts are especially powerful, particularly among smaller donors. Even if someone can’t write you a thousand-dollar check today, if they can commit to $25 or $50/month, that adds up over time and can turn into a much bigger number before all is said and done. Regular, recurring gifts also help ensure you maintain contact with your donors, which is important for establishing and keeping a strong, trust-based relationship.
Stock / Non-Cash Property, Donor Advised Funds, & Family Foundations
Wealthier donors often have access to more sophisticated giving tools. These include gifts of stock or property, and in some cases even include donor advised funds or small foundations. Those may technically be foundations, but for fundraising purposes it’s better to think of them as individuals, since there’s usually one or two single individuals calling the shots behind the scenes.
Some donors go so far as to make supporting your nonprofit one of their dying acts, in the form of a bequest. These very special gifts can serve as the capstone on a long-lasting relationship with your organization.
Individual Donors: Meet Them Where They Are
So how do you crack the code and motivate individual donors to open their wallets? What distinguishes them from institutional supporters like a foundation or government agency?
Driven By Personal Reasons, Emotion, and Narrative
Every person is different, of course, but our fundraising will benefit from generalizing a bit here. For the most part, private individuals’ decisions to give are emotional and narrative-driven, rather than strictly rational or strategic. This is even true among donors who otherwise think of themselves as highly rational, logical people. People give to support causes that matter to them personally, and especially when they have a personal connection to the issue your nonprofit is working on or the people you serve.
Foundations: Why Do They Give?
The biggest difference between foundations and individual donors is that a foundation is, itself, a nonprofit organization. Just like your nonprofit, a foundation has a mission, strategies and programs for achieving that mission, and a professional staff tasked with doing the work.
For a nonprofit seeking a grant, there’s a tendency to think of the foundation’s job as being to support their organization’s work. That’s true, but it’s equally true that it’s your job to help them accomplish their goals.
Personal Connections to Staff or Board
You’ll always be dealing with a human being at the end of the day, and it’s important not to lose sight of that. If you can build a personal connection and rapport with important people on the foundation’s staff or board, and earn their trust and respect, you’re much more likely to be considered for a grant.
Foundations: How Do They Give?
There are three basic ways that a foundation can contribute to your nonprofit.
General Operating Grant
The first is a grant for general operating support. “Gen op” grants, as they’re sometimes called, are given without any restrictions or conditions beyond the fact that your organization should use it in legal ways that directly or indirectly advance its mission. Needless to say, this is the first choice of fundraisers everywhere. Unfortunately, general operating grants are very rare in practice.
Much more common are restricted grants. These are grants made to support a specific project or program, and you aren’t allowed to spend the money on anything else. Sometimes you’re allowed to include some overhead or administrative support in a restricted grant, but not all funders allow that.
Indirect Support / Endorsement
Finally, whether they’re giving you a grant or not, there’s another important way that foundations can support your organization, and that’s by endorsing your work in some public or semi-public way. They might introduce you to other funders or host an event for you at their office. This can be surprisingly effective at opening doors that will prove lucrative in the long run.
Foundations: Meet Them Where They Are
So how do you unlock foundation support for your nonprofit? First and most important, try to understand the foundation’s own strategic goals and how your nonprofit can advance them. Beyond that, you might boil it down to two basic principles: respect the process and respect the people.
As institutions, foundations have processes and guidelines for applying for grant funding. This can seem like it’s just a bunch of red tape that protects insiders and makes it harder to break in, and no doubt there’s an element of that. But from the foundation’s perspective, they erected those barriers for a reason, and as long as they believe they have a purpose to serve, they’re here to stay. So take the time to understand each foundation’s specific policies and do your best to respect them. Not every foundation is a good fit for your organization, so you’re better off spending your time and energy on those that are.
But remember that you’re dealing with people at the end of the day. Take the time to invest in relationships, to meet people where they are, and to build trust. Having a well-earned champion on the inside can make a huge difference.
Corporations: Why Do They Give?
Marketing and Reaching New Customers
The important thing to understand about corporate giving is that most corporations view their philanthropy through a marketing lens. The company’s leadership may have issues they care about, which can influence giving decisions, but most often the decision comes down to how a gift will eventually affect the company’s bottom line.
If sponsoring your nonprofit can expose the company’s brand to a large number of potential customers, that by itself makes you a good candidate for sponsorship.
Companies sometimes look for ways to associate themselves in the public’s mind with a particular nonprofit that has a good reputation or credibility on a particular issue. Imagine a car company that wants people to associate its brand with luxury and exclusivity. They might sponsor an art museum or a symphony orchestra that is known to attract wealthy, influential patrons. This approach also works for companies with bad PR that want to reduce that negative stain on their brands. If that same car company has a reputation for gas-guzzling, polluting SUVs, they might sponsor an environmental charity as a way of countering that image.
Employee Morale and Volunteer Opportunities
Finally, companies are increasingly concerned with employee morale. Sponsoring a nonprofit sometimes comes with volunteering opportunities for the company’s employees. This can be a big win for your nonprofit, since you not only get the financial support, but you get some hands-on help as well.
Corporations: How Do They Give?
There are three main ways that corporations give money to nonprofits.
The main way that corporations support nonprofits is through official sponsorships. Companies will often sponsor nonprofit events or programs. Creating a list of corporate sponsorship opportunities is a good way to share with companies ways that they can support your organization.
Grants from Corporate Foundation
Some big companies, though, go so far as to set up a corporate foundation as a separate nonprofit grantmaking entity under the company’s control.
Employer Matching Gifts
Many companies, especially big corporations, have matching gift programs, where qualifying donations from their employees can be automatically matched by the corporation itself. This can be an easy and effective way to amplify your small donors’ impact.
Corporations: Meet Them Where They Are
The most important thing to remember about corporate philanthropy is that it isn’t usually truly philanthropy in the traditional sense. The corporation wants to maximize shareholder profits, and modest, targeted charitable giving is seen as an indirect way to accomplish that objective.
Marketing Staff Usually Have Power and Budgets
Often your best bet is to connect with the people in marketing, instead of or in addition to those responsible for charitable giving. Marketing budgets tend to be large, and marketing leadership tends to have a lot of decision-making authority. When you talk to these folks, though, remember what perspective they’re bringing to the table. You’ve got to be able to offer the company something it values that it can’t easily get in other ways.
Government: Why Do They Give?
There are two fundamentally different kinds of government funding.
The first and most common is the ostensibly non-political variety. At all levels of government, there are agencies that contract with or make grants to nonprofits to carry out work related to the agency’s mandate. While these agencies are sometimes led by political appointees, the rank-and-file tend to be career civil servants who are sincerely dedicated to their work and try hard to make things happen without regard to political pressure. They aren’t always successful, but many of these folks take pride in their apolitical professionalism.
The second category is explicitly political. Elected officials often have the ability to insert budget line items or otherwise tap into public dollars to support a particular nonprofit’s work.
Government: How Do They Give?
The two main forms of government funding correspond pretty neatly to those same two categories.
Grants and Contracts
Non-political funding usually takes the form of grants or contracts from public agencies.
Legislative Line Items
Political funding usually takes the form of line items inserted into the official government budget.
But remember the word “usually” here. There are many thousands of different government bodies and public agencies in the United States, from a small town’s school board all the way up to the White House. They all have their own quirks and dynamics and no two work exactly the same way.
One constant, though, is that government funding usually comes with a lot of red tape, especially when it comes to non-political agency support. Often these rules are put in place to prevent corruption and abuse. Regardless, both the application and reporting processes can be extremely complex and time-consuming to manage. This is one of many reasons that government grants most often go to the largest, most sophisticated nonprofits —because they’re the ones with the staff and expertise to navigate the bureaucracy.
Government: Meet Them Where They Are
If you’re undaunted by red tape and decide to pursue government support, what do you need to know?
Agency Staff are Professionals
First, when you’re dealing with civil servants, remember that these folks are often capable and experienced professionals in your field. However, they operate as part of a larger bureaucracy, which means they frequently have less autonomy and flexibility than they’d like.
Political Staff are Political and Will Operate Transactionally for Votes, Not Money
Second, remember that politicians are always running for reelection. Just like with corporate marketing departments, they’re always thinking about what’s in it for them. Of course, in this case they’re looking for votes, not customers.
Many Politicians Have Pet Issues
Politicians are still human beings. Many of them have pet issues that they truly, sincerely care about. If you can find an elected official to champion your work because they’re personally passionate about your mission, that can be a very valuable relationship over time.
Let's review the key points:
- Individuals give more than anyone else. They tend to be motivated by powerful stories with an emotional hook.
- Foundations are strategic funders with their own objectives and professional staff. It’s your job to fit into their plans.
- Corporate sponsors are looking to use your nonprofit to improve their image and reach new customers.
- And government funding can look very different based on whether or not it’s politically influenced. Either way, it comes with lots of red tape.
Different kinds of donors have different motivations, perspectives, giving mechanisms, and constraints. Nonprofit leaders tend to be so focused on their own mission and work that it can be hard to pull back from the page. But you’ll be much more successful as a fundraiser if you can understand where your donors are coming from and meet them where they are.