Don’t Put All Your Eggs in One Basket When It Comes to Funding: Strategically Pursue Grants and Private Donations
How can you best leverage your funding sources? What is the best balance of Grants and Private Donations? What is the best strategy in order to maximize your organization’s unearned revenue?
The answers to these questions will directly influence how much impact you can achieve in your organization. There have been many studies performed seeking to understand how grant money influences the level of private donations. Previous studies predicted either crowing out or that there is no relationship between the two funding sources. However, a later study performed indicated that these two funding sources could complement each other, and could be used to leverage each other. The study found that it is not advantageous to pursue maximization of both public and private funds simultaneously. In other words, difersify! Don’t put all your eggs in one basket! While this information is nothing new, it is worth repeating.
Government grants can be a really useful too to provide seed money to get the organization started, and increase public support for the organization’s cause that will help increase private donations. Receiving a government grant has the potential to raise the publicity and credibility of an organization. While traditional theories have suggested that government funding will crowd out private funding, actually, at an optimal level, government funding provides valuable leverage to increase private donations.
On the other hand, relying too much on government funds can lead one into the subsidy trap, where an organization depends too heavily on this money. As government funding rises above optimal levels, the organization risks being viewed as dependent on government funds, and the perception that their organization doesn’t have broad public support, which diminishes the credibility of the organization. People don’t ‘donate’ to their government, just as the are less likely to make a private donation to an organization that relies almost entirely on government funding, because it is viewed as not having broad public support.
The trick is to determine how your funding sources affect each other and determine the optimal amount of each type of funding that will maximize your total funding, not only maximize you funding in each separate category.
Often time when an organization gets caught in a subsidy trap, liquidity is the issue. Also, donors’ reactions to increased government funding might be delayed, which would lead a nonprofit to in the short run overly rely on this money, even though in the long run it will decrease private donations. A short term sacrifice may have to be made in order to raise private donations in the long run. A misunderstanding of the subsidy-donation tradeoff could lead to the consumption of a suboptimally high level of subsidies which could lead them into the subsidy trap. The inability or unwillingness to forego some public money in the short run could have long term negative consequences.
Understanding the subsidy trap phenomenon can help policy makers to better allocate subsidies across the nonprofit sector in order to maximize the effects of this grant money in nonprofits.
For nonprofit leaders, understanding that the ticket out of the subsidy trap is not more subsidies is powerful. Funding must be found from increased private donations or from earned revenues.
We can also use this understanding to urge private donors to donate more, as we can appeal to them to ‘invest’ in the organization in order to decrease government funding, which will allow us to attract more private donations in the long run.