You don't need a grant writer to start a non-profit

Fully 50% of the calls or emails I get regarding my services involve a desire to hire me to help acquire funding for someone to start a non-profit venture or fund one that has just received a determination letter.

I'm flattered, but you don't need me to find you money, because neither I nor any other grant writer can "get" you a grant at that point in time.

The cold hard truth is there are zero grants available from either foundations or government agencies to start a nonprofit.

That's because true grants (money with no repayment required) have to be made to existing nonprofits. Legally, private grantmakers are prohibited by statute from advancing funds they receive or administer for charitable purposes to a for-profit or an individual.

In the case of  newly approved organizations, while it is technically possible for grantmakers to fund you, in practice that seldom happens.

Here's why.

Typically, every grantmaker will require  that you furnish them with a long-form 990 (the nonprofit equivalent of a 1040 or 1120) for at least the prior two taxable years. Some will even go back five years. They may also require audited financials or have a minimum revenue requirement that you must meet before you can even apply for funding.

Additionally, very few foundations or government agencies have rolling grant open application periods.  Thus, you typically can only apply at specific times, and the awards are actually funded as much as a year later. That means that you never have grant funds available at a moment's notice.

Grantmakers do not fund organizations. They fund programs that align with their interests and produce their desired outcomes. For that reason, they are very picky about what organizations they fund, and look for partners with a proven track record. Only about 1 in 10 grant applications submitted are funded.

Grants should never comprise more than 30-35% of your revenue stream, since they seldom if ever provide unrestricted funding, and almost never fund your normal costs of doing business, like utilities or rent.

In this 2012 report, on page 3,the National Center for Charitable Statistics (NCCS) reports that nearly 75% of all nonprofit income originated as fees for services paid by government and private businesses. 

In other words, you must find another way to fund your operations and programs 100% for a minimum of the first two years, and you must maintain varied income streams for the life of your nonprofit.

How do you do that?

The normal funding development progression happens like this:

·         Self funding – the board members either personally contribute the start-up funding or use their contacts to solicit funds from their business or social networks. BTW – don't state that donations may be tax deductible until you receive your determination letter.

·         Community events –think along the lines of auctions, car washes, bake sales, galas, sponsorships etc.

·         Social impact investors – although this option has not taken off the way the nonprofit industry hoped, there are still investor groups that are active in this field. Note that the funds received have to be paid back with interest, just like a traditional business loan or any other sort of angel financing. The investor's ROI expectations are typically within periods ranging from 90 days to three years.

·         Online appeals – Platforms such as GoFundMe don't require that you have nonprofit status to solicit funds. Other online fundraising options may or may not ask you to provide proof of status. There are fees and commissions involved so don't budget for gross donations. As an aside, the "Donate Here" button on your website will only generate a small portion of your needed funds until you have a track record and good outcomes to share.

·         Fees for services – for most nonprofits this is the largest single source of funds. Studies such as the one refernced above have concluded that from 60 to 75 percent of all nonprofit funding comes from contractual arrangements with government agencies or for-profit businesses.

What a grant professional CAN do to help.

Many grant writers, myself included, can and do provide research and development services to start-up organizations.

For instance I provide a feasibility service for would-be nonprofit founders. Think of it as a preliminary SWOT analysis as found in a business or more properly, a strategic plan. It evaluates such things as your mission goals, monetary support available for your mission and any other competitors working in your field, both for- and non-profit.

I can't possibly stress enough that you need to have at least a basic plan before you even apply for your nonprofit validation from the Internal Revenue Service.

In essence and assuming that you are just in the planning stages, a well researched and prepared strategic plan provides a step-by-step organizational development roadmap, as well as a series of benchmarks that allow you to evaluate your progress.

When I produce (with your input) a full strategic plan, it will cover such things as setting up your initial budget, based on operational and program costs for the first two to three years, whether to apply using the 1023EZ or the full 1023 application form, board development, what type of state corporation you need to form (a step required in advance of your 1023 application) and a brief overview of solicitation law affecting your fundraising. If desired, it may also have a mission development section that defines not just what your mission will be, but what programs and how much money, property  and manpower will be needed to produce your desired outcomes.

I hope this gives you a brief glimpse into world of non-profit financing.  Feel free to contact me at 208-525-2071, or email me at rightwords@ida.net if you have further questions.

Can your nonprofit apply for grants?

To most of the public, the definition of a nonprofit or charity  is the one used to describe 501(c)(3) organizations. In other words, organizations that solicit and spend tax-exempt and  tax deductible funds "for the public good."

Actually there are several subsections of section 501, and how you file your initial paperwork can substantially change the funding landscape for you.

For some of the differences, check out this chart.

Lately, I have run into several organizations self-described as foundations and approved as 501(c)(4) entities that want to apply for grants from other foundations.

In most cases, I don't quite understand why they chose that subsection to file under, but that's a topic for another post.

If you are wondering "what's the difference, we are still a charity " then you might not understand why foundations reject your grant applications and donors don't support you.

 One major difference is that donations to a (c)4 are not tax deductible, and you are legally required to state that fact prominently on all your publications asking for support.

While tax deductibility in and of itself is not the major reason people donate, the lack of that component can lead casual donors to question whether their money will be used for charitable purposes or political lobbying.

As far as major foundation and corporate donors are concerned, the (c)4 can legally only access funds from other charitable organizations under certain well-defined conditions.

That means that (c)4's are far more dependent on developing their donor base one-on-one than their (c)3 counterparts, meaning that grants are usually not part of the fund-raising equation.

Fundraising for a (c)4 may involve more donor education to attract individual donors.

Particularly since the flap about the IRS targeting (c)4's for their political activities, donors need to be told why your foundation is problem-centered rather than politically centered, assuming of course that is the case.

Other types of fundraising that are typically more productive are things like black-tie events, one-on-one donor meetings, social media campaigns, website donation capability, direct mail, phone campaigns  and email solicitations.

You can combine events with a (c)3, as long as the donations are clearly separated. You can rent an email-list from (c)3's, but it must be rented at fair market value (typically .10 to .40 cents per name).

If your mission and that of a public charity are aligned in some way (for instance a research mission to find a cure for cancer could combine with a public charity seeking funds for respite care for cancer victim caretakers),  the (c)3 might welcome your participation.

A major donor cultivation program is essential to access larger lump-sum donations. Just be aware that currently donors are limited to a $13,000 a year limit.

It is absolutely essential that your board participate in fundraising efforts. Even more than usual, (c)4 fundraising is more about who you know than what you know.

Some (c)4's are spin-offs from(c)3's and vice versa. If your organization is having a lot of trouble fundraising, you might want to consider converting to or adding a (c)3, again assuming that your primary mission is not political. 

Can you afford that free money?

One city in New Jersey has discovered what savvy nonprofits have known for years. There are costs attached to free.

As detailed in this Fox.com news story, a donated helicopter has cost the city of Newark NJ over one million dollars since it was acquired in 2005. That's not surprising when you consider the chopper was over thirty years old when they got it.

    

A deeper dive into the story shows that most of the costs break down into normal maintenance and repair costs, as well as upgrading its technology.

That's the same problem faced by grantees. The initial award just sets the recipient organization up to need ever more grants to maintain the original goals outlined in the first award.

The trick is in deciding if the added costs provide forward momentum for your mission.

New or proposed nonprofit founders often can't see beyond grants when it comes to funding their mission, so they fail to develop a plan to add the necessary diversity in their funding strategy.

If I had a dollar for every nonprofit that has asked me to find grants to fund their start-up, I could not only retire to an island, I could buy the island.

After verifying the need for your mission, the very next thing I ask people who want to start a new nonprofit is "What's your strategy to pay for it?"

Almost without exception the answer is grants.  Wrong answer!

The answer to that question should be something like this.

1.  Develop a five-year plan that includes a budget projection.

2.  Research the funding options available and develop a fundraising plan.

3.  Make grants the least important part of that plan.

As a new nonprofit, you are not going to be able to qualify for grant funding for a minimum of one year, and more realistically it's going to be three years.

More importantly, grants require that you have at least some infrastructure in place and have real results to offer to grantors, meaning that your, like all businesses are going to have to spend money to get the free money.

Throughout the nonprofit world, grants comprise about 12-14% of all nonprofit funding and many have a matching component, meaning that you have to have enough money on hand that you can commit part of it to achieving the grantor's purposes.

I can help youget your nonprofit off the ground, but if you want me to find you free money you'd better understand the costs to acquire it.

Is your charity meeting donor expectations?

Given the high trust level that charities are expected to measure up to, could you look a donor in the eye and swear that all their donations will go to the mission?  More importantly, should you?

Donor confidence is not just important to your nonprofit, it is critical. If donors get even a faint whiff of something a little off, it can take years to regain that confidence.

In an article on 9/11 of this year, the Huffington Post noted that  even the venerable Red Cross took a hit for misleading donors after 9/11/01. The article noted that in the wake of the problem, donor and public confidence in charities in general dropped from 25% approval in July 2001 to 18% by May of 2002.

Charities that lose donor confidence don't survive intact. Some may not survive at all. The above-referenced article also noted that out of about 300 9/11-related charities started after 9/11, only five were surviving by 2006.

The best way to retain donor confidence is to be able to prove effectiveness and be up-front with the donors regarding the use of funds.

Given what I do, i.e. grant writing and funding research, I see this statement a lot.

"Once we get some grant money coming in, we can use part of it to pay you."

Ah…no, you can't. Nor can you pay the back rent or the overdue power bill. Almost every RFP plainly states that funds may not be used to pay debts incurred prior to the grant award. This is known as "restricted" funding, i.e. the use of the funds is restricted by the donor to certain costs for defined programs.

Most of them also state that "usual and customary expenses unrelated to the delivery of mission-related goods and services" (or words to that effect) are not eligible to be paid out of grant funds. The exception would be any grant funds received that state the use of the funds is unrestricted, or may be used for "general operating support".

But what about those individual donors?  The ones that chip in a few dollars every month, or write one check a year?  Of course you would never outright lie, but should you sort of gloss over the fact that you are paying the utility bills with their money? After all, shouldn't they just know that you have to pay some administrative expenses out of donations?

Maybe they should, but they don't. However naïve it may be, casual donors think that every dollar buys a meal, a coat, a bag of dog food, or whatever else your appeal is highlighting.

The best way to avoid that is to either define the percentage of each donated dollar that goes to the charitable purpose, or state in the appeal that funds received are used for both general and program support.

In the beginning, that administrative percentage could be 50% or more. Once you have your infrastructure in place, it should be reflected in your program-to-administrative cost ratio.

Just don't over-promise. It is usually unrealistic to claim that your administrative expense-to-mission allocation goal is five or ten percent of total donations. If you've done a proper business plan, you should have at least a rough idea of what percentage of the money will eventually be used for organizational support versus program expenses.

Be sure to let donors know about the good things their money has purchased. If your food pantry  fed 100 people every Wednesday of the last year, put it in your year-end report and plaster it all over your website and social media accounts. If your program participants are willing, tell a few personal stories. Have an animal rescue?  Along with all the animals needing homes, have a page for those that found their forever homes.

Like your Mom always said…honesty is the best policy. 

Making your crowdfunding appeal work.

Crowdfunding is a nonprofit (and small business!) financing option that has generated a lot of interest, both here on this blog and throughout the internet. For nonprofits in particular, it can bridge the three-year development gap before you can hope to attract significant grant funding.

"Joel" responded to my last post on the subject in an email saying he had tried crowdfunding and hadn't even met his modest goal of $500. He mentioned that he posted it, checked back just before it was due to close and only had eighty-five dollars in contributions.

That points out the reality of any type of fundraising, especially crowdfunding.

As Joel found out, making crowdfunding actually work isn't as easy as it sounds. One well-known site reports that less than 10% of the campaigns it hosts actually meet goal. Others report success rates of up to 55%. None report 100% success. Success isn't a sure thing.

Crowdfunding isn't a passive exercise.

To put it as simply as possible, your crowdfunding appeals are investor presentations. Small businesses tend to get the idea of presenting value for money, nonprofits not so much. This is especially difficult because the real value for donors is not quantifiable in dollars and cents.

Think about how you invite people to a party. Would you just tack a post-it note to your front door and expect to have a fabulous turnout?

A fully functional fundraising strategy is pretty much a necessity for success. That includes the usual elements of PR and marketing you would use if you were planning an in-person event. If you are just starting out and looking for seed money, you will need to do a whale of a sales job to convince donors of your legitimacy, so strong board bios, program descriptions, goals and supporter profiles are recommended.

Some sites allow, or even insist on promotional videos, but if they don't you might consider presenting a short (1-2 minutes max) video on your website or on YouTube or other social media and link to it in your appeal. They don't need to be professionally produced, but they do need to be relative to your appeal. You also need to have a link in the appeal to your website or at least your Facebook page.

Organize your campaign for success.

While businesses can offer a share of tangible profits and a return on investment, nonprofits (and here I mean 501(c)(3) organizations, not L3C's) are not able to do so, since all the money raised (less processing fees) has to go to fulfilling or supporting their missions. Since donors still have to be engaged, or to put it bluntly, enticed to contribute, another strategy is needed.

That is often done through the use of rewards. Those might be as simple as a nice thank-you email,  involve  merchandise like a blanket or cap, or  something more personal, like a photo-op with the board or a prominent supporter. That can mean forming alliances with business supporters who will donate merchandise or services such as printing. Use larger prizes for larger donations. Just be sure the rewards don't violate any IRS rules. You need to secure this support before starting your campaign.

Another pitfall for any crowdfunding hopeful is lack of understanding about how the process works. On one level it's still a sales pitch, but you still  need to create an emotional connection so that people will stick around long enough to actually donate. Having a strong statement of need is critical, so create that in advance. Have a concrete goal for the funds. General appeals with unspecified uses for the money don't do as well.

The truly nice thing about crowdfunding is that unlike a lot of grant applications, you can inject some emotion into the picture. Don't be shy about appealing to people's emotions. If you say "people are hungry" try to have some pictures or first-person stories that illustrate the problem available.

You need to have a strong network.

People you don't know don't just roll out of bed in the morning and say "I think I'll troll the web and find someone to give money to," and they certainly aren't going to put your name in the search terms.

Your network, i.e. your existing supporters and contacts have to help you get the word out as well as being your first donors. If you've ever been to an auction, you know that everybody sits on their hands until the first bid. You need people to start the ball rolling by getting a few donations posted. Also like an auction, most of your support will probably come in the last few days, provided that you really push for the support. Don't give up on the campaign too early.

If you have three people following you on Facebook, that's probably not going to get the job done. Somebody has to email, like, or tweet the message every day to people who will then do the same thing. You may have to use traditional advertising methods like flyers or ads to drive traffic to the campaign. Ask, ask again, and keep asking. This is grassroots networking at its finest.

You need to have good basics.

Some sites require that you  present a formal presentation to the website before they will even list you. That means you will need things like a business plan, program descriptions and a budget. Others require that you are able to respond to inquiries with those documents. Most, if not all the sites require that if you advertise you are a nonprofit, you have the paperwork to prove it.

A web presence is pretty much mandatory. You should have a website where people can get some in-depth knowledge of your mission and competency. A social media presence such as Facebook, or any of the other platforms can substitute, but if you are looking for really big dollars (and that's mid-five figures or more in this world) people are going to check you out. Be sure to add a link to your campaign and the start and end dates in any online copy or email blasts. Don't make prospective donors hunt for the crowdfunding site – they won't do it.

Read all the fine print.

Reputable crowdfunding sites will have a fully detailed terms and conditions section. Find out how much of the money you actually get, how and when it is transmitted, whether you have to meet minimum goals to get the money and what guarantees the site offers to assure that if your goals are not met, the money is returned to the donors. Find out if there are any limits on how often you can post a campaign. Look for reviews or complaints online.

Be realistic.

Your goal needs to be realistic for the phase you are in now. If you are new, asking for a million dollars isn't reasonable, and it guarantees that you won't meet your goal. If you are established, and have a good track record to show that you use donor money well, then you can be more ambitious. Crowdfunding can and has reported campaigns raising well over $100,000.

Crowdfunding might be the answer to surviving that period between initial start-up and the point at which you can compete for grants, but it isn't a simple, easy process. Before you click "sign me up",  do your homework.

Wondering if your crowdfunding campaign measures up?  Drop me a line at rightwords@ida.net if you would like an inexpensive review. 

More on Nonprofit Crowdfunding – Is it leaving the little guy out?

In  my September 13, 2013 post, Crowdfunding for Nonprofits - Hype or Hope, I presented an overview of this form of funding development. This follow-up offers a more in-depth look at how the process is evolving to provide better structure, protection and validation for both donors and nonprofits and some of the pitfalls of that process, particularly for smaller organizations.

The visible problem  

In the above post, after viewing some of the websites catering to this funding model I stated:

 " There didn't seem to be a lot of vetting of the projects and nonprofits for the donor's peace of mind. In some cases, there was no way for the donors to receive an accounting for whether the money actually resulted in tangible gains or completed projects."

Apparently I wasn't the only one who spotted this weak spot. Now there are various approaches to deal with it.

Anything that deals with collecting and spending OPM (other people's money) is generally viewed with some reservations by would-be supporters. There is a good reason why the California legislature is moving forward to pass a law to crack down on what they see as fraudulent fundraising practices in the charity sector.

That's one way to approach the problems of donor exploitation. Another way is for the industry itself to define parameters by which such campaigns can be vetted. It's the old government vs. private enterprise argument. Should government impose a one-size-fits-all regulation, or can the industry police itself?

Public perception vs. reality

Nonprofits on the whole don't want to cheat anyone. Not the donors, not the beneficiaries of their goods or services, and certainly not the nonprofit community as a group. The problem is that one well-publicized bad apple experience taints the whole sector, and no one understands that better than the nonprofits themselves.

The public, perhaps naively but certainly vociferously, demands that nonprofits, like Caesar's wife, be above reproach. They might shrug off insider trading on Clorox as an isolated event, but just let a charity slip up once, and the whole sector gets a black eye.

Then there is the public perception of what constitutes charitable giving. The Nonprofit Times in an article published June 1, 2014 notes that  donors seem to be having trouble differentiating between funding and fundraising.

Measuring honesty

Legitimacy is the keyword, but to have legitimacy, you have to have a standard.

Enter the Accountability Review Wizard as designed and distributed by  the Charities Review Council. This tool seeks to bring uniformity and legitimacy to a rating and certification process.

In a April 16, 2014 posting on the hosting website, the Charities Review Council states that this is the only cloud-based risk and assessment tool currently available. In addition, they promise to provide resources to assist charities to advance to meet the optimum standards.

This fee-based service requires that the charity have the usual documents to verify organizational and financial  legitimacy, and seems fairly reasonably priced, at .02% of the organization's annual operating expenses, rather than total revenue, and ranges at present from $100 to $3,000. That should make it affordable even for smaller charities.

Arguably, someone should also address the vetting of the platforms on which campaigns are posted. Enter the Crowdfunding Bill of Rights developed and sponsored by David Neff and Miriam Kagan and profiled on the Kimbia.com website. For a more in-depth look at this proposed toolkit,  check out the entire article in The Nonprofit Times referenced above. While this is primarily slanted at the donor, it does peripherally note that the fees charged by some of the platforms are quite high.

All this is a step in the right direction. The internet has a well-deserved reputation as a hotbed of scammer activity. Anything that is perceived as or results in reducing the risk for donors or investors is surely better than nothing.

 Or is it?

Are we measuring the right things?

The one problem I see with all of this is the attempt to define what constitutes an acceptable level of administrative costs vs. program investment.

The California legislature ran into this problem when crafting their law. Originally they had a set-in-stone ratio of program spending vs. administrative and fundraising costs. After some educational meetings with nonprofits, they discarded that number.

The problem arises when looking at the vastly different mission requirement costs for nonprofits, and the public perception of what is "good".

No matter who or what agency tries to arrive at that figure, it is going to result in assigning an arbitrary number as the optimum standard. That number will then be the benchmark for the general public to judge which organizations are "good".

This isn't a new problem. Every nonprofit rating website has some sort of arbitrary standard they use to assess nonprofits. That can be anything from a cost ratio tied to the revenue figure of the organization to the dollar figure of the key personnel salaries.

The problem there is that it doesn't necessarily present a total picture of your organization.

A nonprofit delivering a healthcare service may have salary and labor costs in excess of 50% of their operating budget due to the legal requirements to employ highly-trained licensed professionals. A all-volunteer group that collects food, clothing or books for the underprivileged may not have any salary costs, but  does pay out a substantial portion of the budget for fundraising to purchase the items distributed. Very new organizations may have high initial development vs. program  costs.

The above-noted Accountability Review Wizard, as a part of their method to assign a rating, does attempt to address this by having a range of acceptable program spending levels from 65 to 90 percent,  but even in that framework, they suggest that a 90-10 ratio of program to administrative spending ratio is the most desirable.

That just seems to further the notion that all nonprofits have to be broke to be effective.

And therein lies the problem with crowdfunding, particularly if it is an all-online event.

The strategy, which is growing exponentially year-over-year in dollars invested in charitable giving, needs to be more about educating the public.

That doesn't mean that developing these benchmarking strategies is ineffectual or wrong. They just don't go far enough.

Is there a logical next step?

To address that shortcoming, if you think it is a shortcoming, the nonprofits themselves need to be actively involved in providing educational tools that go beyond dividing numbers attained from the 990 or the financial statements to arrive at ratios.

For instance, should the mid-six figure salary of a CEO whose organization requires the holder that position to have multiple master's or doctoral degrees be equated to the $10,000 salary of a  CEO who oversees a newly-formed  local conservation group? The former may only utilize 1% of the organizations funding, while the latter might currently account for 40% of the revenue. Do the ratios tell the whole story?

What's acceptable should be somehow tied to the type of nonprofit and it's relative chronological development as it relates to effectiveness.

In that way, a donor, whether through crowdfunding or more traditional avenues, could assess whether the effectiveness of the organization is improving with the modifiers of age, growth and revenue. Is bigger better?  Should donors fund  developing management expertise in favor of programs during the first five years of the nonprofit's existence?

What about you?

This is an area that the nonprofits would seem to have to move from passive acceptance of other's standards to active participants in shaping those standards. Larger organizations know that, and some of them are doing it, thereby shaping the dialogue.

Smaller and newer nonprofits have a stake in this too. Crowdfunding is evolving into something much larger than a simple social media posting event. The organizations that stand to benefit the most are the little guys, the ones that can't immediately access large grants.

Your messaging needs to address the issues being debated and codified on a national scale by these larger platforms. Even if you choose not to be evaluated, you ignore current trends in shaping public perception at your peril.

You are the folks that constantly contact me to bemoan the fact that you can't compete in the traditional grant marketplace. This is your chance to make the dialogue about effective outcomes, not financial ratios. Make the most of it.

If you need help crafting a message, contact me at granthelp@ida.net, or visit my website at http://www.cloudlancerwriting.com.