Is The Tech Nonprofit Business Model Sustainable?

Ten years ago, startup fundraising was a foreign concept to most. These days, most people over the age of 12 are in the know thanks to startup culture sweeping the nation and shows like Shark Tank and Silicon Valley giving the rest of the U.S. a taste of Sand Hill Road. While, the nonprofit business model is still an emerging idea in tech, both for-profit and nonprofit tech startups are tasked with fundraising to get their ventures off the ground. Today we’re talking not just fundraising, but tech nonprofit sustainability.

While sustainability looks different whether you are a for- or non-profit startup, it’s still the holy grail for a startup. Nonprofit sustainability may seem particularly overwhelming, since philanthropy is typically a primary revenue stream. But today there are many capital sources and pathways to sustainability. The nonprofit business model can vary case by case.

VC vs Philanthropy

For-profit tech startups rely on venture capital, which is raised in various rounds with the expectation of significant financial returns. Nonprofit tech startups often rely initially on philanthropic grants; charitable donations given without the expectation of a financial return. That tends to be the most well-known nonprofit business model.

Returns are measured differently in the nonprofit and for-profits worlds. For-profit startups measure returns through revenue and funders expect financial ROI. Nonprofit returns, however, are measured in terms of impact, and the way this is measured varies from one organization to the next. Both nonprofits and for-profits can have earned-revenue sources, but because tech nonprofits work on problems that markets cannot solve, like poverty or human rights, earned revenue is not typically the primary source of capital in their nonprofit business model.

While the idea of philanthropy as a sustainable nonprofit business model may sound daunting, the good news is there is a lot of philanthropic capital available. In 2014 alone, over $358 billion was granted to charities and thanks to the tech boom, this funder pool is becoming more diversified.

Where will seed, growth, and mezzanine capital come from?

Increasingly, we are seeing tech nonprofits raise in rounds like their for-profit counterparts. This can be divided up into three key stages: Seed, Growth, and Mezzanine capital. Fast Forward and our industry peers like Echoing Green and the Draper Richards Kaplan Foundation come in at the seed level – providing the critical early capital and support a tech nonprofit needs to find product market fit and accelerate growth.

Tech corporations like Google, AT&T, BlackRock, Twilio, and Comcast NBCUniversal deeply understand what it takes to build a successful tech product, and are now getting involved with early-stage tech nonprofits through partnerships and pro-bono support. Similarly, tech sector success has birthed a new generation of philanthropists who understand the power of tech that scales, and are looking for ways to give back. Organizations like Fast Forward and corporate tech funders are working together to fill the current void in growth funding, which is meant to support the natural iteration cycle of a startup as they scale.

Mezzanine funders like The Gates Foundation, The Case Foundation, The Skoll Foundation, Omidyar Network and others typically come in with larger gifts once a tech nonprofit has proven impact and ability to maintain an annual budget in the realm of $1 million.

The combined efforts of tech philanthropists, funders like Fast Forward, and both corporate and traditional foundations are helping tech nonprofits amass the capital needed to achieve scale and eventually garner attention from larger institutions. There are plenty of capital pools available, but tech nonprofit founders need support to build their products and tell their stories in the right way.

The big nonprofit business model question: Does “nonprofit” mean I can’t make money?

Nope! It’s a common misconception, but what nonprofit status really means is there is no owner or founder who benefits from surplus revenue generation. For nonprofits, any extra revenue beyond organization expenditures is funneled back into the organization and its programs, rather than into the wallets of the founders and shareholders as with a for-profit company. Philanthropic donors never receive equity stake, so there are no IPOs, exits, or terminal events for tech nonprofits, and they cannot be bought or acquired for cash. However, a nonprofit may decide to spend out its reserve if it fulfills its mission.

Have more questions about raising money or achieving sustainability as a tech nonprofit? Feel free to reach out to us at info@ffwd.org.