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'Wait, I Have to Pay to Donate to You?' How Nonprofits Are Flipping the Script With 'For Profit' Strategies to 10X Their Impact Spiraling donations and outdated dogmas around fundraising and operating costs have left many charities struggling to stay afloat. Some are trying new strategies to make money.

By Liz Brody Edited by Frances Dodds

This story appears in the May 2024 issue of Entrepreneur. Subscribe »

Mariaelena Caputi

Six years ago, Michelle Brown met with a major funder of her literacy nonprofit. She'd been counting on them to renew their grant, and there was no reason they shouldn't. But as the meeting began, she had that sickening, slow-motion realization that everything was about to change. In her mind's eye, she saw millions of dollars fluttering away like a flock of geese, on to warmer waters.

She thought of William, a seventh-grader in a small, struggling Mississippi town, who was so behind in reading — the one who inspired Brown to start her nonprofit, called CommonLit. Her memories flashed through the years of winning grants and charming donors. The tens of thousands of teachers using the program for free. The measurable improvements in children. But now, her major funder was dropping off, because — as far as she could tell — philanthropists were moving on to some shinier, trendier cause. Brown walked out of that meeting knowing her budget would soon evaporate, wondering how she would support a staff of some 20 people and keep her students reading. "I never thought when I started a public charity, especially for something so basic as literacy," she says, "that philanthropy wouldn't come through."

So Brown did something that had long been frowned on in the world of charities: She started thinking like a business.

On the face of it, a business mindset — which includes thinking about products to market and sell, consumers to test and please, and money to be made and not just solicited — seems antithetical to the premise of a nonprofit. The assumptions are all there in the name: Nonprofits offer social services unhindered by market forces or the "greed" (as some might say) associated with making money. A nonprofit's mission is purely to help. But depending on generosity has always been a precarious model, and in this time of perceived economic instability, charitable giving is in a downward spiral. In 2022, donations plummeted 10.5% adjusting for inflation, according to Giving USA. "Broad public support for nonprofits has also been down this past year," says Soraya Alexander, president of the fundraising platform Classy and COO of GoFundMe, looking back at 2023. "This has required the social sector to be more creative with how they fund their important work."

Related: 5 Compelling Reasons Why Every Entrepreneur Should Consider Starting a Nonprofit Organization

And in reality, there's nothing to say that charity causes and business strategies cannot coexist. Now, numerous factors are converging to give this idea more cultural traction. Since the pandemic upended norms and life poured online, more nonprofits have started using technology and data to carry out their services — both of which lend themselves to earning revenue. The pandemic also laid bare the tenuous nature of our social safety nets — governmental and charitable — underscoring how easy it is for people to fall through the cracks. For sick people to not get the care they need, for families to go hungry, or for kids to fall behind in school. And younger generations are bringing new attitudes about purpose to the workplace. They expect their employers to have missions they believe in — to be actively working to make the world a better place — all of which is making the lines between nonprofit and for-profit causes blurrier.

Beyond these shifting notions about profit, there is a growing sense that the existing philanthropy system is faltering and outdated, including the standard practice of restricting funding, which means that even when a nonprofit does get donations, it may not be able to use them to actually keep the lights on, much less expand.

One of the most fiery advocates for rethinking charities is Dan Pallotta. With two books, TED talks with over 7.5 million views, and a new film called UnCharitable (streaming June 15), Pallotta has long argued that nonprofits are pressured to pay measly salaries, keep operating costs low, and avoid taking risks to innovate, while being expected to fill society's greatest needs. "I look at Tesla, or Apple, or NVIDIA — where they have a massive dream and go out and raise billions of dollars in capital in order to finance that dream," he says. "Nothing remotely like that is happening in the nonprofit sector."

These are the kinds of things that Brown started to question after her major donor backed away. Today, she looks at that meeting as the day that "made us get our shit together." And she's not the only nonprofit founder who's had a moment like this; more and more are experimenting with business strategies to accelerate their causes. As you'll read, charities are doing everything from salvaging medicine to drilling wells in Africa to seeking a cure for cancer. But to succeed, they need to challenge some of the major dogmas that have dominated the charity space for decades. Here are three.

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Charity dogma: Your "customers" can't pay.

A nonprofit founder rarely wants to serve "paying customers." In fact, it's the opposite: They want to serve the people who cannot pay.

That's how Brown got into charity. She signed up for Teach for America and in 2009, at 22 years old, ended up in Itta Bena, Mississippi. That's where she met William, the seventh-grader at his wits' end with reading. Stuck in the remedial class, he was starting to get into trouble. One day, Brown was teaching the advanced reading students and they were animatedly discussing Anne Frank's diary when she saw William looking in from the outside, dejected. People talk about their call to action, the life whisper, the moment of obligation; this was hers. Despite the rules, she invited him into the classroom. "I swear to you," she says, "I've never seen a child go from being so shut down to becoming alive with questions, talking to his peers, and using vocabulary words that I had not heard before."

Five years later, after finishing a master's from the Harvard Graduate School of Education, she decided to start a nonprofit so students like William wouldn't be underestimated. She researched and developed a proven literacy program that emphasized reading as a social experience, rather than drills and exercises. There would be texts and curriculum online in multiple languages for teachers, parents, and students, all for free. At first she had no trouble raising money, including winning a $3.89 million award from the Department of Education in 2016. But two years later, when her major funder dropped off, she learned the hard way that charity causes go in and out of style like shoes and dog breeds. Not long after, she grabbed her chief strategy officer and said, "We are now Team Money."

Kevin Barenblat calls this moment "nonprofit judo." He's the cofounder and president of Fast Forward, an accelerator for charities that deploy tech to serve their beneficiaries (including CommonLit), and he's seen many passionate founders arrive at this realization. "It's like, how do you take what looks like weaknesses of the nonprofit model and turn it into a strength?" he says.

Team Money did that with a traditional business approach: It talked to its best customers — the tens of thousands of teachers using its program for free — and learned what other problems these people had. CommonLit then developed a robust suite of services, which it began selling to schools. "If they use it with fidelity," says Brown, "we see the outcomes from children dramatically increase, so it's driving revenue and impact all at once — a double bottom line."

Earned revenue is hardly a new idea for nonprofits. It's part of the recipe — along with government grants, foundation and corporate philanthropy, and individual donations — that many use to sustain themselves. In fact, in 2019, 49% of total revenue came from fees for programs, according to the National Council of Nonprofits. What's changing is the entrepreneurial mindset that founders are bringing to their earned revenue streams. Instead of approaching them as trickling sideline operations, they're building products with plans to scale and sell them to nontraditional customers. Not only does the money make a nonprofit organization more financially secure, but it frees them from needing "restricted donations" — funds designated only for certain programs or initiatives, which must be documented to the penny. Although these funds are common in the sector, they often hamstring charities trying to grow and improve their operations.

CommonLit's strategy — of finding other problems it can solve for customers who can pay — has been repeated in many other nonprofits. SIRUM is a good example. The organization helps give millions of dollars of unused, perfectly good medicines (unexpired, no controlled substances) to people who can't afford them. It does this by getting surplus drugs from manufacturers and healthcare facilities, and then, through partnerships with charity clinics and pharmacies, distributing those medications to the patients. At the beginning, the model was simple: The drug donation process happened for free. This is still true, but SIRUM discovered another option. The manufacturers and healthcare facilities also had drugs they couldn't donate — expired or otherwise unusable — and had to pay a company to collect and destroy them. So SIRUM created a new service: It would accept all surplus medications — the stuff worth donating and the stuff to trash — and take care of the courier pickup, shipping, logistics, and record-keeping. But this new service would come with a fee.

"They're like, 'Wait, I have to pay to donate to you? This a joke, right?'" says Adam Kircher, one of SIRUM's three founders. But once he showed the manufacturers and healthcare facilities how this would save them time and money, many got on board. Kircher is currently exploring other ways to drive revenue, including potentially selling SIRUM's data to predict drug shortages, for example. Today, earned revenue makes up about 20% to 30% of the nonprofit's core operating budget, excluding some hefty one-time expenditures, but Kircher hopes that will get to 100%.

Still, for every nonprofit like CommonLit or SIRUM that finds earned revenue, there are many others that hit walls. Not all have something to sell, or clients who can become customers. Not all have systems and cultures to support this pivot, or donors who will tolerate years of experimentation and market research. And very few have the resources to iterate, collect data, and improve efficiencies, the way for-profit companies do. "People want the impact data, but they're not going to fund the mileage reimbursements and everything else it costs to get it, because that's not sexy," says Sarah Evans, who's working on creating earned revenue for her nonprofit Well Aware, which drills wells and builds water systems with long term maintenance support in East Africa. When Well Aware collects impact data, for example, they have to spend time working in the villages to figure out metrics like how much the clean water is reducing disease and how much time it saves farmers to not have to walk so far for water, and then have that data analyzed and presentable. She makes it happen, but it costs thousands of dollars a year.

Related: A 5-Step Survival Guide to Fundraising for a Niche Industry

Charity dogma: Never spend on overhead!

Charity websites often make promises like "98 cents of every dollar you give goes to the hungry children." That sounds great, right? If you donate your hard-earned money, you want it to go directly to the kid you saw in a heart-wrenching photo, whose big eyes are filled with the sediments of hardship.

"But they're not selling the impact that they're making. They're selling how low their overhead is," Pallotta says. Why do nonprofits talk like this? Because the public has been trained to look for it. Charities that spend "too much" on administration have been criticized in the press, and it affects their scores from rating organizations like Charity Navigator and Charity Watch. And although that's starting to change, the myth of overhead persists, and nonprofits feel its pressure. The result is that they must figure out how to achieve their ambitious goals, even though they can barely afford the staff and resources to do it. As GoFundMe and Classy's Alexander says, "The misguided focus on low overhead limits the sector's ability to scale its impact effectively."

For one, employees are expected to work for passion. "You can't get paid a living wage," says Jody Levison-Johnson, president and CEO of Social Current, which works with a network of more than 1,800 human and social services organizations. "People are leaving to go work at Amazon, where there's less stress and more money." Low salaries make it challenging to attract top talent from the business world who could help, say, in finance, fundraising, and product development. Paul Blavin, a philanthropist and businessman, has seen this firsthand, having sat on the boards of multiple nonprofits. "I remember one where they were trying to recruit a development officer and were very much focused on, 'Well, we need to cap the salary.' And I'm like, 'If we could pay them a million dollars a year and they could raise five, God bless them, let's do it,'" he says. "There's no difference between a social venture and a for-profit venture in that the results are going to be driven by the people."

But there's no easy fix for a strapped founder, as Vikas Birhma learned. His small nonprofit, Gramhal, aims to make technology that helps farmers in India. But his underpaid staff was rarely sticking around to finish projects. "We couldn't get good talent to even apply," he says. So he's now attempting a high-risk experiment: In October 2023, he greatly raised the salaries he's paying, sometimes by as much as 100%. His hope is to maintain his unrestricted funding (fellowships, accelerators, and competitions) long enough to prove the impact this change will make. Then it will be easier to raise other kinds of donations. "We're now hiring at market rate salaries," Birhma says, "and these roles are critical because we've achieved product-impact fit—and it's time to take the next leap."

How can other nonprofits tackle this problem? Pallotta suggests transparency and dialogue. "Develop a donor literacy program and put your entire staff, board, and all your major donors through it," he says. "If you can get them excited about these new ways of thinking, now you've got permission as a community to move forward with bold ideas." Brown is doing that at CommonLit. When she takes gifts now, she brings the donors along on her thinking: "This is the plan. This is what we're going to spend it on. Are you in? Are you out? Like, are we in a relationship or not?"

Related: 4 Fundamental Mistakes in Fundraising That Startup Founders Can't Afford

Charity dogma: Investors are for businesses, not nonprofits.

In business, everyone is familiar with venture capital: An investor puts money into a startup, hoping to supercharge growth and lead to an exit where everyone profits.

But in nonprofits, there's an increasing embrace of something called philanthropic venture funds. In this case, "investors" give nonrestricted dollars to a fund, which is set up by a charity. That fund then invests in new projects that help the organization grow and improve its impact.

The concept isn't new, and the term "venture philanthropy" itself is credited to John D. Rockefeller III in 1969. But it's taken on a fresh life recently, as successful executives and entrepreneurs apply a businesslike approach to their philanthropy.

Thomas Vozzo is a great example. His long corporate career ended in 2011 as executive vice president of the $13.5 billion professional services company Aramark. Then he became the volunteer CEO of Homeboy Industries, a nonprofit that offers support to formerly incarcerated gang members. Homeboy provides services such as therapy and tattoo removal, but its most unique impact takes place in its stores. It owns and operates 14 small businesses, such as an electronics recycling business and a bakery, where former gang members can work and develop professional skills. Most of Homeboy's donors wanted to fund the services, but Vozzo was itching to actually grow these businesses and start new ones.

His solution? To set up a venture philanthropy fund dedicated to doing just that. "For-profit America knows that they need to spend money to make money," he figured. "Well, let's use that same mentality in the nonprofit world." The idea excited his corporate donors, and with $12 million so far, the fund helped Homeboy open a new dog-grooming enterprise, among others.

For any nonprofits considering venture philanthropy, Sean Doherty has advice: Be very specific about your goal. That way, just like a for-profit venture fund, you can attract the right investors, identify opportunities that appeal to them, and create more impact for everyone. Doherty himself set up a fund for the JDRF, a foundation that researches a cure for Type 1 diabetes. The former general counsel for Bain Capital, Doherty has a son with Type 1 diabetes, so the cause is personal to him. And he was frustrated that virtually no biotech companies were working on a cure. "Unless we change this simple fact, we are whistling in the wind," he says.

Medical nonprofits are ripe for this kind of philanthropy, given how expensive drugs are to develop but how potentially lucrative it is when done successfully. It's also a way to help scientists focus on the disease they're advocating for. The Multiple Myeloma Research Foundation (MMRF) also has a venture philanthropy fund, which has raised more than $17 million and already had two exits, kicking back $4 million for more research. And after eight years, the Type 1 diabetes fund has about $200 million in assets and a portfolio of 38 companies, which have returned $89 million into play. More importantly, they've spawned exciting discoveries in the search for cures.

MMRF's founder, Kathy Giusti, urges other nonprofit founders to explore venture philanthropy as an option. The author of Fatal to Fearless, Giusti started the nonprofit after being diagnosed at age 37 with multiple myeloma and told she only had three years to live. "One of my big regrets," she says, "is that I didn't do it sooner."

Related: How AI Is Becoming a Game-Changer in Startup Fundraising

These days, CommonLit is still fulfilling its mission of helping children to read — but it's also getting good at making money. Once it started selling its literacy programs to schools, it was technically competing against everyone in the for-profit ed tech sector. So just like any other founder, Brown has had to find her competitive advantage. And here, being a nonprofit helps. She wins customers by pricing her product lower and selling it as a research-backed, mission-driven program that improves reading at $4 per student, the cost of a paperback book.

Currently, revenue from CommonLit's products covers 63% of operations, which include paying a staff of nearly 130 at market salaries. Brown expects revenue to cover 100% of operations by 2026. In the meantime, the program is in 2,400 schools, and has helped more than 5 million students become more proficient. "Our revenue is our lifeline and it's our future," Brown says. "Without it, we would definitely not be here."

Pallotta is heartened by stories like this and is trying to create more of them using UnCharitable. In an ambitious initiative, the filmmakers are teaming up with the nonprofit Social Current to develop teaching tools to educate the next generation of nonprofit leaders, and work deeply with five pilot cities on new ways to address their social needs. "Entrepreneurs to me are the real heroes," Pallotta says. "Nonprofit is just a tax status. So if you're passionate about something that can be monetized, do it as a for-profit. Whichever way you go, put all your frustration and all your love and courage and imagination into it, and you will make a great difference. And when you do, the money will follow."

Liz Brody is a contributing editor at Entrepreneur magazine. 

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