A dance company I am involved with is in the midst of a business analysis and planning process, prompted by a foundation grant designed to strengthen the organization and increase its sustainability. Like most of its nonprofit brethren, the company engages in a constant, exhausting search for capital, which I define as the resources needed to operate in pursuit of the organization’s mission. For any business, for-profit or nonprofit, capital is essential to the life of the organization and accomplishing its goals. Generally, nonprofits have an ongoing and sometimes overwhelming difficulty in building sufficient revenue to meet their capital needs. Many consider this effort a necessary distraction from mission-driven activities, and for many groups these pressures have steadily increased in our current environment.
All organizations need sufficient capital to provide for operational necessities and to allow future development. Whether for-profit or not, raising capital takes effort and time, focusing on developing relationships and matching interests and motivations. To effectively succeed today, therefore, it is critical to understand the different motivations of capital suppliers, to understand all of the tools available for raising that capital, and not to rely solely on how capital has traditionally been raised.
Successful for-profit companies have the primary purpose of generating surplus capital so as to return capital to those who gave resources to the organization. Nonprofit companies, on the other hand, are expected to utilize as much capital as possible to deliver their mission and are generally discouraged from accumulating it. This critical distinction results in different operational imperatives and, more importantly, decision-making parameters. Those offering capital are driven by different motivations depending on which type of organization they offer their capital to.
A for-profit company can offer the promise of sharing future profits to motivate people to supply its capital needs (along with the concomitant risk of loss). Because nonprofits offer products and/or services that, by definition, cannot sustain themselves in the market – and therefore cannot generate sufficient capital — they rely on other, often more intangible, incentives. Sometimes, as with tax deductions for donations, incentives are fostered by the government to achieve policy goals; sometimes institutions offer incentives themselves. All are designed to garner additional capital to subsidize the nonprofit’s insufficient earned income. Putting it in simple terms, we have traditionally relied on philanthropic impulses to support nonprofits, while for-profit companies rely on the potential for personal enrichment.
In addition to traditional fundraising pathways and motivations, there are new and additional opportunities to access capital, which all institutions should consider folding into their fundraising activities. The most common is crowdsource funding (or crowdfunding). Total crowdfunding is predicted to approach $35 billion this year, or more than double the $16.2 billion raised through this method in 2014. Also in 2014, $2.7 billion of that $16.2 billion –– $1 out of every $6 – was raised in the arts and entertainment area, making crowdfunding a source of capital nobody should ignore. Although this new method may be more in line with younger artists’ approaches — more project-based and freed of historical strategies and practice — it is of such potential value that even those organizations with established ways to generate unearned capital must consider it. While it is not yet clear whether these alternatives will become permanent or significantly impact nonprofit organizations, at the very least they offer one more avenue to generate needed funding.
The new instruments for raising capital that have popped up since the beginning of this century are driven simply by promising greater participation and closeness to the creative process. Kickstarter, the most widely known example, describes the motivation thus:
If properly structured, nonprofits should be able to combine this approach with traditional tax incentives that have proven so appealing and effective, thereby expanding their arsenal of capital-raising tools. As with all fundraising, however, it is essential to appreciate and address the motivation of those providing the capital and to further appreciate that the traditional incentives are largely absent here unless incorporated in some hybrid approach.
It is important to emphasize that these new capital-raising platforms are limited almost always to project-based support and therefore may not address the underlying institutional needs of sustainability that make the constant search for capital so consuming to a nonprofit (or even for-profit) organization. Organizations can try, therefore, still other new and developing platforms, such as Patreon, which are specifically designed to offer ongoing support to organizations and artists. The limits of these new financing methods and the movations of their participants have also not yet been fully or clearly determined. For example, there have been instances in which extremely successful projects, and even failed projects, have been accused of abusing the platform and misleading participants. This would seem to indicate that while those offering capital are willing to do so based mainly on participation, there is some as yet undefined philanthropic expectation that projects should not be purely commercial in nature and that accountability is demanded, especially where a deliverable product is involved.
It is now well-documented that many young artists, faced with the persistent need to raise capital and to maintain the infrastructure required, choose to forego the traditional institutional approach and work solely on a project basis. New funding platforms seem to mirror this operational format and may be ideal for them. Yet even those working in institutional frameworks should be looking to take as much advantage as possible from these additional capital-raising platforms. To do so, they must enlarge their understanding of what motivates the givers of capital, and must look beyond the established, tried and true “science” of fundraising they know.
There is no doubt that artistic and cultural organizations and individuals will continue to need to raise capital constantly to accomplish their goals. As new capital-raising vehicles arise, organizations that decline to explore and utilize them to their advantage do so at their own peril, particularly those nonprofits that resist considering the accumulation of capital to realize their mission.