NESsT sees fundamental flaws with the current paradigm in which nonprofit, civil society organizations (CSOs) compete for a limited pie of existing philanthropic resources. This reality makes many CSOs heavily dependent on short-term, project-based funding and prevents them from focusing attention on the longer-term, strategic development of their organizations and missions.

The for-profit capital market includes a rich variety of financing sources (e.g., banks, venture capital and private equity funds, etc.) and financing instruments (e.g., bonds, equity, loans, etc.) for capitalizing the various stages of enterprise development (i.e., start-up, expansion and continued growth). Meanwhile, despite the tremendous diversity within the nonprofit sector, the nonprofit capital market relies predominantly on one single financing instrument -- the grant/donation -- for providing capital to organizations of various sizes, types, and stages of development. Many CSOs - particularly those smaller organizations working for social change and development -- remain highly vulnerable, underfunded and unsustainable.

NESsT believes that the nonprofit capital market faces the following key limitations:

  • a strategic focus on philanthropic "fundraising" versus a wider, more holistic approach to organizational "financing";
  • a mentality that "one size (i.e., the grant) fits all" financing requirements of nonprofit organizations;
  • a focus on diversifying sources of fundraising (e.g., individuals, foundations, corporations, governments, etc.), not on diversifying types of financing;
  • a heavy emphasis on funding for start-up/innovation in the nonprofit sector (versus long-term sustainability of nonprofit organizations);
  • a primary focus on projects/programs, not organizational development;
  • an "equity gap" due to the non-profit, non-distribution constraint (i.e., nonprofit organizations may not have shareholders or ownership as in the for-profit world);
  • "weak" balance sheets (i.e., nonprofit organizations have tremendous difficulty in acquiring hard assets or carrying over liquid assets from year to year due to terms and conditions of donor grants);
  • limited availability and application of comparable, standardized performance measurement metrics and systems.
While these limitations exist in the nonprofit capital market throughout the world, they are more acute in the "developing" and "emerging market" countries in Africa, Asia, Central/Eastern Europe and Latin America where poor economic conditions, political instability and/or different cultural traditions have hindered the development of a rich philanthropic sector. 		 

"To become more sustainable, CSOs need not only a variety of sources of financing but also a variety of types of financing appropriate to their needs and stage of development."
- Lee Davis and Nicole Etchart, in Profits for Nonprofits (NESsT: Budapest, 1999).

The nonprofit capital market: the tortoise versus the hare

Typical nonprofit financing
the short-run approach

  • short-term project cycles
  • limited, competitive pool of donor resources
  • difficulty securing on-going core operating resources
  • constantly shifting donor priorities

NESsT vision of nonprofit financing
the long-run approach

  • more steady flow of secured income
  • diverse funding sources, decreased donor dependence
  • more "unrestricted" income allowing wider freedom to allocate resources to defined organizational needs
  • ability to think and plan more strategically and long-term

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