I’ve worked with and for a number of not-for-proft companies in my career, but I’ve never been responsible for raising the capital for their operating costs. Aside from writing several successful grant applications for the Watertown Free Public Library, I’ve not raised a significant amount of capital for a non-profit. But I am familiar with the various approaches which I’ll recap here as they may be helpful to those few startups that choose the non-profit route. We see very, very few non-profits at MIT VMS, though many of the startups are focused on social impact.
One major difference between for profits and non-profits when it comes to raising capital is that non-profits have no stock to sell. So that eliminates investment and no return on capital – period. No vcs, no angels, no convertible debt. So how do you raise money?
The most important thing to keep in mind is that non-profits must get a 501 (c) (3) designation from the IRS. In short this enables donors to deduct their donations from their income taxes. It is very hard to raise capital for a non-profit without a 501 (c) 3 classification from the IRS. Unfortunately in my experience it can take 6 months or more to get the charitable designation from the IRS. There is a workaround as founders can route donations through another 501 (c) (3) corporation. Startups in Massachusetts affiliated with MassChallenge are able to use MassChallenge in this manner. However, it is just a short term fix. It appears that the current partial government shut down may affect the IRS and slow down 501 (c) (3) applications or halt them completely until the federal government fully reopens.
So where does a 501 (c) (3) corporation go for funding?
Friends and Family
This tried and true method of fund raising has been used by for-profit companies forever. While friends and family may feel better investing in a charitable organization those funds are not really an investment as there is no mechanism for a return, it’s really a charitable donation.
Foundations like the Bill and Melinda Gates Foundation grant billions of dollars every year to non-profits. However, there are at least two problems with foundation grants. One, many of these grants are one-time grants. It is difficult to get multi-year grants. So that leaves non-profts in the position of having to constantly raise money. The other issue is that typically foundations work by the calendar: applications must be submitted by fixed date each year, applications may then take months to be reviewed and more months may go by before a check is cut to the “winning” grant applicants. Many foundations have terms and conditions around their grants and may also require periodic reports on how the grant money is spent. Preparing and administering foundation grants requires a lot of work on the part of founders. Understand the opportunity cost before embarking on a quest for foundation grants.
The best known grants in the tech world are SBIR grants. These Small Business Innovation Research grants can provide valuable support for a startup. I even knew one entrepreneur who had financed his entire company with multiple SBIR grants. I would encourage every startup, not just non-profits, to consider filing for an SBIR grant. Government granting agencies can move even slower than the IRS and require more detailed applications. I would encourage every non-profit to hire someone with deep experience applying for and administering foundation and government grants. They should be able to more than pay for themselves, especially if they are working on a part-time, project basis.
Wealthy people typically have their own foundations or what is called a family office. I would encourage founders to study up on family offices as many invest in startups and/or make donations to non-profits. Large corporations may set aside a portion of their profits for charitable donations. They key is finding these offices and if possible getting a warm introduction to their administrators. Again, your non-profit must have a 501 (c) (3) designation to work with a family office.
Work for hire
Just because you are a non-profit it doesn’t mean that you can charge for products or services. It just means that any excess capital beyond your operating costs has to get plowed back into the organization – which could even be salary increases for your staff. If your non-profit possesses a particular skill such as training teachers, you can run training workshops and charge their parent organizations a fee for the workshops. You could even develop a product, such as a portable water purifier, which you could sell and use the proceeds to support your organization. Grant making organizations and individual donors tend to look favorably on startup that generate revenue, as donor organizations do not want to be the sole source of support for a non-profit. Similarly they don’t like be the first money it. Thus generating some revenue can be the first money in and encourage foundations to look more favorably on your grant application.
Their is nothing to prevent a non-profit from making and selling products. In fact my absolute favorite charitable organization is the Newman’s Own Foundation, set up by the late actor and run by his daughter. Not only do they give grants they also have created an entire product line of excellent food products – we especially like Newman’s Own salad dressing and frozen pizzas. They have reached a milestone of $535 million in donations!
Non-profts should act like for-profit startups in that they need founders, a fleshed out management team, a great business plan, traction, a customer acquisition plan, etc. One nice thing about non-profits is that while they do compete for grant money, in general they may well be more collaborative and cooperative with other non-profits.
This post would be incomplete without mentioning the Social Innovation Forum, They are a greater Boston organization that helps startups raise capital and increase their social impact. I’ve had the privilege of working with them on founders’ presentations and SIF is an excellent organization which I highly recommend to Boston area non-profts.
My last word on non-profits is that you should acquire and use a .org domain name. .com signals a for-profit company, .org signals a non-profit. Since web and social media are so important in today’s marketing you want to make sure you are viewed as a non-profit from the get-go.