New study reveals funding intentions of budding nonprofit entrepreneurs

By Michael L. Jackson, Director of Marketing and Communications, SPEA at IUPUI

During his time as a senior fellow at the Midwest Center for Nonprofit Leadership in Missouri Fredrik Andersson has counseled hundreds of nonprofit professionals on how to improve performance and organizational effectiveness.

He has also met with countless entrepreneurs who have great ideas for new nonprofit ventures. They all want to know the same thing: “Where can I find money for it?”

That ongoing query sparked Andersson’s most recent research into the funding intentions among nascent nonprofit entrepreneurs. His latest journal article, published this spring in the Journal of Public and Nonprofit Affairs, examines anticipated funding sources and amounts that budding entrepreneurs believe they’ll need as they formally launch their new nonprofits.

“I would make the argument that one of the most difficult things there is for anyone who wants to start a new organization is how to obtain and allocate resources,” said Andersson, an assistant professor of nonprofit management at the IU School of Public and Environmental Affairs at IUPUI. “There are so many different options for funding – individual donations, earned income, foundations, grants – and careful consideration of those sources is a key thing.”

Andersson collected data over the course of a year from 103 budding nonprofit entrepreneurs who were participants in seven “Planning a New Nonprofit” workshops at the Midwest Center for Nonprofit Leadership. He found that the average number of sources in a funding portfolio was 3.12, with philanthropic grants (67 percent) and donations (57 percent) listed as the top two potential sources.

As for estimated start-up capital needs, 9 percent of respondents indicated they would need less than $5,000, 46 percent expected needs to fall between $5,000 and $10,000, 31 percent in the $10,000 to $20,000 range, and 14 percent estimated start-up capital needs exceeding $20,000.

While philanthropic grants and individual donations are clearly considered an important source of start-up funding among emerging entrepreneurs, they emerged as critically important for those entrepreneurs who expected start-up costs to fall within the range of $5,000 to $20,000. Nearly two-thirds of respondents in this group expected the two sources to cover a majority of their capital needs.

“There is a perception – and the idea must have been shaped somewhere – that a lot of start-up money is coming from (foundations),” Andersson said. “The reality is that a lot of these nascent entrepreneurs intend to compete for philanthropic grant dollars they are unlikely to get.”

Andersson and American University professor Lewis Faulk investigated foundation grants made to new nonprofits in Milwaukee, Wisconsin, between 2003 and 2012 and discovered that new nonprofit startups receive grants at significantly lower rates than already established nonprofits.

“Research shows that the greatest predictor of getting a grant from a foundation is getting a grant previously,” Andersson said. “Foundations generally want to know that something is making a difference before they invest. They want to see evidence that this is a risk worth taking.”

With his latest research, Andersson also discovered that previous start-up experience appears to play an important role when determining funding options for a new organization. He says those individuals who have prior experience starting a nonprofit are more likely to draw from personal savings, income, loans and credit.

These entrepreneurs’ intentions to utilize personal means and other funding sources like angel investors or crowd funding is a tactic that minimizes the need for external funding to allow the emerging organization to get going, according to Andersson.

“One interpretation of this finding is that that experienced nascent nonprofit entrepreneurs are more aware, through learning, of just how difficult it can be to obtain funding from external financiers,” Andersson said.

Regardless of the funding source or amount, Andersson says it’s important for nascent entrepreneurs to think beyond money. He cautions them to be prepared for what happens if they don’t get the start-up capital they expected and to make contingency plans.

“If you’re going to charter your success on whether or not you can obtain financing, then I think you disregard the fact that you can muster resources in other ways,” he said. “That is sometimes what is referred to as boot-strapping.

“Instead of buying a new building you work out of your home,” he continued. “Instead of buying equipment you borrow it from another organization. You partner and collaborate. Obtaining resources that are beyond finances is a critical element to startup success and should not be overlooked in the process.”

Michael L. Jackson joined SPEA as its Director of Marketing and Communications in 2015 following two years at the Kelley School of Business, where he helped launch the school’s physician-only MBA program in 2013. Previously he worked for The Indianapolis Star.

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