Pursuing a Balanced Revenue Mix for Maximum Impact

A Blog Series on the Importance of Pursuing Financial Sustainability

by Scott Benson, Managing Partner

Many retail companies realize they need successful brick and mortar stores and online marketplaces. Traditional retailers, like Target, see the importance of building out a seamless, user friendly e-commerce experience that complements their brick and mortar stores. Similarly, leaders in digital retail, such as Amazon and Warby Parker, understand their online presence can benefit from a complementary physical footprint. Why diversify the retail experience? In part, diversification makes them stronger by helping to attract new customers and unlock new sources of revenue. But diversification also helps them mitigate some of the risks associated with being singularly focused on one channel.

For nonprofit leaders in PreK-12 education, the stakes may be different, but the same lesson applies. Like retailers, it’s risky for a nonprofit to rely heavily on just a few revenue sources. A more balanced revenue mix — the various ways they generate money, from sources like philanthropy, government funding, corporate sponsorships, and paying customers — is generally preferable because if one stream performs poorly, there are others that can continue to support the business, allowing the organization more adaptive stability and long-term sustainability.

As a venture philanthropy, we find, fund and support organizations to help them grow their impact. Through this work, we have come to appreciate the importance of pursuing a balanced revenue mix. While my team works specifically with organizations that partner directly with schools, we hope the following observations will be beneficial to any nonprofit leader:

Observation 1: Leaders who evaluate the pros and cons of revenue streams can avoid disaster

Leaders looking to grow their organization may be tempted to view any money coming through the door as inherently good, but it’s important to recognize the pros and cons of different revenue sources.

Take grants for example. Leaders often seek out large philanthropic or government grants to both sustain their operations and support growth. If possible, they pursue multi-year, unrestricted grants because of the flexibility and predictability they offer. Despite these advantages, grants alone may not provide enough money to sustain an organization, particularly one that is pursuing an aggressive growth strategy. It also takes time and resources to apply for them, they are not guaranteed, and they eventually run out. That’s why we recommend the nonprofit leaders in our portfolio consider other sources of revenue, particularly earned revenue, early on.

Reducing uncertainty should be a primary goal for all nonprofit leaders. Relying heavily on a single funder or concentrating fundraising at a single time of year involves risk that leaders must actively manage. If an organization’s revenue relies on a single funder which then suddenly withdraws its support, leaders are faced with the daunting task of raising as much or more money to fill that void. The blow is compounded because it takes far more time to cultivate anchor funders than it does for an anchor funder to withdraw its support. Nonprofit leaders should also assess grant start and end times to ensure even funding levels throughout any given year and prevent cash flow issues and funding cliffs. Although they may not be able to mitigate risks entirely, leaders who evaluate their revenue sources are more likely to “see around the corner” to avoid potential issues.

Each situation is different, so we urge leaders to consider strengths and limitations of each revenue source within its own context. It might start by analyzing the percentage of revenue from each funding stream to see if there is dependency on one or a small group. They could also map out their revenue streams on a calendar to identify potential funding cliffs. By identifying potential risks, leaders can take a more proactive approach to finding solutions.

Observation 2: Diversifying revenue mix supports sustainable growth

The revenue mix needed by a nonprofit operating in a steady state is different from what is needed to grow. Leaders pursuing a growth strategy, like those in our model provider portfolio, know this. When we polled our active ventures, 63% indicated they expect to make a change to their revenue model in the near future. The three examples below offer insight into what that shift looks like when done successfully.

Teton Science Schools (TSS), a model provider we have supported, was ready to share its tools, resources, and lessons learned with schools outside its home-grown school and programs. However, they didn’t want to expand their offerings until their core operations were more financially secure. With a goal of breaking even without philanthropy by 2025, they have aggressively pursued earned revenue. Their efforts paid off; they were able to cover about 60% of costs this past academic year with earned revenue. This increased stability in their core programs allowed TSS to invest in strategic initiatives, including their Place Network model provider initiative, supported by NewSchools.

Envision Learning Partners, a nonprofit that works with more than 40 school districts, relied on foundations to kickstart their early growth. However, as they grew, they focused on generating earned revenue from district and school partnerships. As a result, they currently operate at approximately 80 percent earned revenue and 20 percent philanthropy. From our perspective, that ratio is much more sustainable than a majority philanthropy because it doesn’t require philanthropy to cover ongoing implementation costs. That allows them to use philanthropy more strategically on special expansion projects or R&D, making future scale more feasible.

Project Lead The Way (PLTW), which serves approximately 1,000 schools, initially relied heavily on grants to support their rapid growth. By 2011, however, they faced a crisis when their fundraising could not keep up with their increasing costs. Recognizing that this represented an existential threat, the leadership team reevaluated their revenue strategy. As Sean Cosgrove, VP of Engagement at PLTW, explained, “We had a great product, great network, and we were a big player… but we were not building things for the next 10 years.” They responded by monetizing their product, implementing a participation fee for their network of resources, and providing training at a reasonable cost. The results have been profound; they now reach 15,000 schools and more than four million students because of these shifts.

All these organizations show there is not a “one size fits all” way to diversify revenue. They also show that organizations in a growth stage must think differently about their revenue model and their diversification strategy must reflect that.

Observation 3: Focus and creativity can yield positive results

There are a few broad categories of revenue for nonprofits: individual donations, foundation grants, government funding, and product and service fees. While some teams may simply need to divert more attention to one of these categories to unlock new revenue, others may need to get creative to identify potential opportunities.

One of our former portfolio members, New Tech Network identified the important role that policy played in their partner schools’ ability to pay for their services. That observation led them to try a legislative strategy focused on advancing state-level policy to secure public funding for their programs. The initial results were successful and convinced the organization to pursue this approach more aggressively.

EL Education offers open-education resources free online, which is great for educators but makes generating revenue tough. When schools and districts began requesting printed copies, EL Education saw an opportunity for an earned revenue stream by selling printed copies of their materials. Charging customers for printed materials was not obvious initially, but by listening closely to the needs of their school and district partners, they found a win-win solution.

Finally, pursuing new revenue often comes at a cost. A nonprofit needs to consider the internal capacity and expertise they will need to be successful. As Propel Nonprofit notes, it’s necessary to develop different org-wide strengths and skills, processes, and staffing models to support the specific revenue mix. A sales-focused strategy, for instance, demands business development expertise while a policy-focused approach may require a lobbyist. Leaders should evaluate their needs relative to current capacity and expertise. Based on that assessment, they can make informed decisions about when it is better to build internal capacity, hire new staff, or use a third-party partner to support new revenue strategies.

Building, growing and sustaining a successful organization requires predictable, sustainable sources of revenue. Leaders who want to take a proactive approach can start by answering the following questions:

• What is your current revenue mix? Are you generating the revenue you need to sustain your current strategy over the near term? Longer term?
• What would happen if one or more of your key revenue streams dried up? What is the likelihood of that happening?
• Do you have the revenue you need to grow in the way you want? If not, how might you identify new revenue sources?
• What capacity and expertise do you need to build or buy to pursue those?

Resources to consider:

• Nonprofit Finance Fund: Organization that partners with nonprofits to build capacity and business expertise
• 10 Nonprofit Funding Models: Article outlining possible nonprofit paths by the Stanford Social Innovation Review
• Transforming Nonprofit Business Models: Resource overviewing nonprofit financial structure by Propel Nonprofits