By David Maggs, Metcalf Fellow on Arts and Society

The precarity of Canada’s cultural nonprofit sector, post-pandemic, is now widely understood, and the challenge of building it back into roaring form is being explored coast to coast by organizational leaders, policymakers, and arts funders alike. At Metcalf, we’ve been revisiting the age-old question of revenue diversification, looking for ways to add to — not replace — the public funding that keeps arts organizations alive in our communities.

In particular, we are interested in opportunities that combine new capital and new capacity, so that we aren’t just constantly reaching for short-term, stop-gap solutions, but addressing long-term sustainability challenges as well. Here, we find ourselves looking beyond the cultural sector to innovators in Canada’s broader nonprofit world. Kristi Fairholm Mader of Thrive Impact Fund and Scale Collaborative has dedicated her career to helping nonprofits strengthen their organizations, amplify their impacts, and elevate their staff, with particular attention to this challenge of revenue diversification.

Thanks for joining us Kristi. You’ve been in this nonprofit space for some time now, what are the changes and challenges you see? 

We’ve got a lot more organizations going after scarcer grant dollars in recent years and so, more and more of them need to think about their financial model differently. Our work aims to help organizations focused on delivering impact in communities to diversify their revenue streams beyond grants — to build capacity, build assets, and shift their mindset from scarcity to abundance.

I am hearing this “scarcity to abundance” shift more and more, why is that important for nonprofits? 

Nonprofit organizations can’t achieve long-term impact if they’re not financially resilient. But they’ve been told in so many different ways to operate on a shoestring. And this gets communicated very strongly from funders and donors and anybody who says, “Hey, this organization only has a 9% overhead!” As if that’s good? That whatever money comes in, 91% of it goes to programs?

That type of thinking and constraint has many impacts. Not allowing organizations to professionalize. Or pay staff competitively. Or run solid communications. To do all the things it takes to build and grow into a healthy organization… This is part of the culture that helps create that sense of scarcity.

Nonprofits can make profits, they just don’t exist to make profit, they exist to make impact. But when they become profitable, they can do things differently. They pay their staff better, they respond more quickly, they spot needs and launch experiments — all because they have the resources, the energy, and the confidence to operate beyond the limitations many nonprofits experience.

And so the work you do around revenue diversification is to carry organizations beyond those limits?

We need to resource whole organizations, not just programs and activities. We need to encourage organizations not to undercut their own profit margins, we need to help them build resilience.

Don’t lose the grants, the grants are crucial. But when we limit ourselves to grants, that’s when the scarcity mindset really takes hold. So many nonprofits get stuck in a one-year granting cycle. It becomes hard to ask, where are we trying to go long-term?

I talk to a lot of arts funders about this, and they’re on it. No one thinks, if we just increased granting by 10% we would tip into sustainability. And yet, from a policy perspective, that’s where all our energy seems to go — trying to increase granting however we can. Is it crazy to think we should try something else?    

Certainly, we do not advocate that earned revenue streams replace granting, but we should pay attention to and expand revenues. We need that mix of revenue streams. Diversified revenues is when you have an organization that can weather the shocks and changes. When grants are good, that’s great. But when they’re not, diversified revenues mean they don’t need to grind to a halt, cut programming, or struggle to serve their mission.

One place to start is by looking for positive deviance. Which organizations are thriving? What are they doing? How are they leading? There are many nonprofit organizations that are strong and steady, and others that are precarious, and they’re operating down the street from each other — the context around them can be similar — what is causing some to succeed while others struggle?

One challenge is that funders might not support the organizations that are doing well, putting dollars into the ones that are struggling instead. When organizations figure it out and start growing, instead of funders stepping back, that’s when they should be crowding in. Think about the private sector, when businesses do well, more capital, more resources, more attention goes into those businesses and successful enterprises have a greater chance of continuing to succeed. But in the nonprofit sector, I have witnessed the inverse.

So what’s the message for funding and policy here, strategically speaking?

There may be too many small organizations. It’s not just arts and culture specifically, I think the nonprofit sector needs to be thoughtful about the number of small nonprofits and understand why they stay small. People need to get together and consider opportunities for amalgamation, shared spaces, shared services. We need this sector to think strategically as a sector, as a system, because the system challenges can’t be solved by organizations themselves. Funders can take a look at their traditional approach and ask: is our approach engendering scarcity rather than building abundance?

And, I feel like I am becoming a metronome when I ask funders: how is your endowment or money invested in the world? What impact is it having? Is the 95% of your endowment invested in markets that are causing the very challenges that your 5% granting budget is trying to solve? How can you mobilize all your resources towards your mission and mandate? For arts funders, this may be making both grants and investments to support arts, culture, and associated enterprises (like affordable housing for artists, etc.) that all help build thriving arts communities. Just like nonprofits have to think and act differently, so do funders.

Getting to know arts funders, I think they understand that, they’re just also aware of how fragile some organizations are right now and don’t want to do more harm than good in trying something new. We might be adventurous with what we put on stage, but when it comes to exploring different ways of strengthening our operations, we’re a nervous bunch. Can we really try new revenue models, or should we stick to what we know? 

Arts and culture organizations have so many unique attributes within the nonprofit landscape. People are used to buying tickets, so they already have a customer base that’s used to paying. That’s a huge thing that most of the nonprofit sector doesn’t have. They have venues, which are often underutilized. They specialize in events — people love events, sponsors love to sponsor events. And arts and culture has a huge cachet, it’s prominent, visible, glamorous, fun, so it is attractive to donors. Arts and culture has so much going for it, especially when I reflect on talking to organizations that are working on challenging social issues and don’t have paying customers.

So, it helps to step back and think through all those pieces as questions. What will it take to build our organization into something more resilient? Where do we need grants? Where do we need sponsorships? Where do we earn revenue? What’s the gap between what our public can pay and what artists need to get paid, and other associated costs? How do we close that gap? Those are the pieces that come together in longer-term strategies for sustainability. Scale Collaborative operates a program, Thriving Non-Profits, that helps organizations think about these strategies and which mix could work best for your organization.

How do we start moving in that direction? 

Some people are exhausted. The grant hamster wheel is tiring, it’s so uncertain, it rarely feels like enough. People can get to the point where they just don’t want to do this anymore. So they either exit the sector or they think differently. That’s the work we do. Before leaving, leaders can think and do things differently. Nonprofits are not profit-seeking businesses, but they can make a profit and reinvest those profits back into their mission and mandate. They can challenge assumptions that reinforce or keep organizations in scarcity, and they can make a decision to add in earned revenue and build towards abundance — either through income or assets.

One line of thinking I hear from some folks is that we shouldn’t diversify revenue streams because that might reduce granting. Is that a concern you’ve seen in other nonprofit sectors? Are there things we can do to ensure this is clearly understood that this only works as an additive element, not a replacement?

I have heard this worry about the social enterprise sector too. That doing social enterprise work lets the government “off the hook.” Granting practices have changed and continue to change. For me, the question is one of control. By diversifying revenue streams, your organization increases its control over finances and future direction, reducing the uncertainty that comes from changing granting decisions or trends. I am not advocating for less granting but for organizations to strengthen their finances by adding revenue streams. And I am advocating for funders to help the organizations that do so by supporting the activities and capacity that make organizations financially resilient.

While the granting world is still struggling and still hasn’t got enough resources for the steady increase in organizations looking for money, there are ways for nonprofits to get stronger. How can you explore new paths to resilience? How can your organization become more resilient for your community, your organization, your staff? This is part of letting go of some of the “shoulds” I hear… “We should get funding for this.” Great, but I’ve rarely seen a “should” translate into more dollars. I see providing increased value to community do that and I see building stronger organizations do that. My work tries to help more nonprofits get there.

Kristi, thank you for the time, and the work you are doing in this critical space.

My pleasure.