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Open a coffee shop, they said. You'll make lots of money, they said.
Nonprofits today face intense pressure to diversify their income beyond traditional grants and donations. With government funding cuts, donor fatigue, and rising costs, board members, funders, and consultants alike often urge organizations to pursue alternative revenue streams, whether it’s launching a fee-for-service program, starting a social enterprise, or jumping on the latest digital fundraising platform. This challenge is about managing those new models of revenue generation. In plain terms: How can you chase new money-making ideas without derailing your mission or stability?
Unlike other challenges addressed in this series, for this one, there will be three posts because I want to emphasize the reality nonprofits often face when they try to pursue new revenue models. In this post, I will talk about those threats. In the next, I will talk about what’s changed since the publication of my book, Managing Your Nonprofit for Resilience. In the final post, I will talk about what nonprofits should do about these issues.
It’s easy to see why new revenue models look attractive. Who wouldn’t want an earned income “cash cow” to fill budget gaps? Yet rushing into a new business venture or platform without proper planning carries strategic risks. If the idea isn’t aligned with your mission or you lack the capacity to run it, you could end up with more problems than dollars.
We touched on related issues in our earlier mission creep post. Chasing funds outside your core purpose can dilute your impact. And as discussed in the donor base squeeze blog, shrinking traditional funding is real. But launching a coffee shop, product line, or app in haste is not a magic fix. In fact, it can backfire badly, threatening your nonprofit’s resilience. Here are some potential challenges.
A shiny business idea can lure you away from your core mission. Research shows that if an earned-income venture is unrelated to your mission, it can detract from your impact and even, in worst-case scenarios, sink the entire organization. When nonprofits view a social enterprise as a money-maker, they risk losing sight of their purpose. This overlap was a theme of our mission creep discussion. Here, it’s specifically about revenue projects that don’t embed into your mission. If the activity doesn’t directly advance your charitable purpose, think twice.
Running a business is not a side gig. Nonprofits that jump into selling products or services often underestimate the required skills, staff, and systems. You may need to hire people with for-profit experience or divert your scarce staff time. That can overextend your team and budget. Remember, most for-profit businesses fail early on; about 45% fail within five years. Starting a business is inherently perilous. Treat new revenue projects as high-risk endeavors, because they are.
New revenue streams can create unforeseen financial issues. A hastily planned fee-for-service program might actually lose money once you factor in all costs. Worse, if a revenue venture does take off, it could trigger tax and regulatory concerns. Generating lots of commercial income that isn’t related to your mission can lead to Unrelated Business Income Tax (UBIT) or even threaten your 501(c)(3) status. (Yes, it has happened – the IRS looks at this stuff.)
Additionally, nonprofits have fewer financing options, and getting bank loans or startup capital for a nonprofit-run business is notoriously hard. All these factors underscore the need for caution and due diligence.
Every minute and dollar spent on a new venture is time and money not spent on your existing programs and donor relationships. A new initiative can become a distracting “second job” that pulls focus from your main mission. If staff are already stretched (hello, burnout), layering an entrepreneurial project on top can hurt morale and performance. And if the venture flops, it can damage your reputation with stakeholders.
In short, plunging into alternative revenue without proper planning can compromise the very resilience you seek. It’s ironic – the effort to become more “sustainable” can make you less sustainable if you’re not strategic.
Risk Alternatives enhances the resilience and sustainability of nonprofits through comprehensive tools, training, and support. For inquiries about conducting a risk inventory or other matters, please contact Risk Alternatives at info@tedbilich.com.