I recently read the article “The Nonprofit Starvation Cycle” and was so riled up by it that I decided to devote this newsletter to it. The main idea behind the article is that there is a vicious cycle of underfunding infrastructure in nonprofits that leads to less effective outcomes resulting in less funding and so on.

No doubt, many of you experience this vicious cycle on a daily basis. Recently, I heard about an organization that offered a program that barely broke even. The donor funding the program was insistent that the organization could not make any profit on the program. If they tried, the donor would not only pull the funding for that particular program but also any future funding.

Another organization is expected to pass a particular assessment with a certain score. If they are assessed below that score, then they will not receive funding. But if their scores are low, doesn’t that indicate a need for investing in improvements? How can they possibly build capacity without funding?

Those of us who work in or run for-profit enterprises scratch our heads at this. Venture capitalists don’t ask a business to first prove itself and then come ask for an investment. They take the risk because the business has done the work to demonstrate that the risk is worth taking. Nor do investors just expect a break-even point. Obviously there is a profit motive here, but there is also a need to generate enough revenue to invest back into the business in order to grow the business.

This is where nonprofits can draw from a for-profit business model and adapt it to create greater impact. There are two key factors that can transform this vicious cycle into a virtuous cycle, and the change must come from both funders and nonprofits alike.

Focus on Impact: Nonprofits have for too long counted outputs rather than measuring outcomes. It’s not about the number of people served or the number of programs offered but the quality of those programs and services. What difference have these programs and services made in the lives of the people served? This is already shifting in the sector, creating greater momentum. Both funders and nonprofits are having more in-depth conversations about impact.

Invest in Infrastructure: An organization’s infrastructure is like the foundation and framework of a house. If you don’t tend to it, invest in it, and take care of it, it will likely crumble. In the groundbreaking article, “Collective Impact,” the authors clearly state that a key part of their model is to fund a backbone support organization, otherwise known as the dreaded word “overhead.” Nonprofits need to educate funders and donors about how investing in infrastructure will enhance impact, and that if there is greater impact, the donor will see a greater return on their investment. This is the critical leverage point for turning this vicious cycle into a virtuous cycle.

Those of us who work in the nonprofit sector hear too often that nonprofits need to be more “business-like.” There is a great deal of truth in that thinking but if nonprofits are to act more like businesses, then they need to be given the tools to do so, and that means investing in infrastructure as a means for effecting greater impact.