Overcoming the Overhead Myth with Crowdfunding

Modern nonprofits don’t operate like the charities of old. They blend attributes of social enterprises, educational institutions, microfinance banks, and volunteer organizations.

While these non-traditional models are having bigger and more lasting impacts, it means that these nonprofits have unusual organizational structures and often a higher proportion of funds going to overhead, a four-letter word to donors. There are initiatives in the nonprofit world to overcome this, such as the Letter to the Donors of America penned by the leaders of the country’s three leading sources of information on nonprofits – GuideStar, Charity Navigator, and BBB Wise Giving Alliance, but the stigma runs deep.

Donors have been well-trained to shy away from a relatively high overhead ratio. One nonprofit I work for, a social enterprise that trains women to run their own businesses, directs a high proportion of funds towards overhead: training, planning, administering microloans. This has made it very difficult for it to meet the requirements of funders.

It’s All in the Story

Because it doesn’t meet the traditional expectations of funding organizations, it has trouble putting up a strong showing on applications. It does much better when it has a chance to tell its story, to explain what it does and how, and to specifically address the ‘unbalanced’ balance sheet.

If your nonprofit faces similar obstacles, take the time to make sure your story comes across. For many, this simply means taking the time to explain yourself fully.

It also means being upfront about your financials. Don’t try to massage the numbers. State them as they are, acknowledge the ‘imbalance,’ and make a point of addressing it. Explain that you value investing in a sustainable impact, which means investing in your overhead to make sure you have quality staff that sticks around and the resources to continue bringing in necessary funding.

Crowdfunding lends itself very well to this approach because it gives you a powerful platform to tell your full story, uninterrupted and in the order and presentation you prefer.

Get to the Donor

When you’re going through a system with a lot of gatekeepers, sometimes certain numbers can set off red flags that will get you filtered out without a lot of consideration. That’s why, as much as possible, it’s important to find a way to reach your donors directly.

Traditionally, this might mean trying to find a connection in the funding organization who can vouch for you and look out for your application to make sure it gets the attention it deserves. It might also mean fundraising dinners and one-on-one meetings that allow you to explain why your high overhead is really a good thing.

Again, crowdfunding provides a solution to the problem of gatekeepers because it allows you to get your story directly in front of the people who will be supporting your project.

Educate Your Donors

Don’t be afraid to educate your potential donors. You are, after all, the expert, and as long as you are honest and not patronizing, explaining that your overhead ratio is not a good measurement of your performance will help donors make better funding decisions, both now and in the future.

For-profit businesses aren’t judged by how much they cost, but by how much they produce. Nonprofits should be judged by the same standards. Pointing this out to donors can help them shift their views and avoid fixating on the overhead ratio.

Communicating the reality of how your structure works, and even the technical breakdown of your balance sheet can go a long way to helping donors see the light.

You can also recruit the support of the leaders of the country’s three leading sources of information on nonprofits—GuideStar, Charity Navigator, and BBB Wise Giving Alliance–by sharing the Overhead Myth Letter to Donors, which is published under a creative commons license (www.theoverheadmyth.com).

Educating your donors takes some work and you need a consistent platform. Social fundraising through crowdfunding, social media, and a blog, provides the perfect opportunity to do this. For some ideas, check out this video by Dan Pallotta, which sparked the discussion surrounding the new perspective on the overhead myth:

Focus on What Matters

Once you’ve made the point that high overhead isn’t necessarily a bad thing, you need to spend some time illustrating the positives of investment in your organization. Highlight how staff development makes you a stronger nonprofit and how capacity-building is essential to ensuring your impact is effective and sustainable.

Point out that you should be judged based on the results you have produced, your transparency, the quality of your leadership and vision, and the actual effects on the beneficiary.

The paradigm is shifting in nonprofit funding; donors are getting wise to the fact that the overhead ratio does not tell the whole story. There is still a long way to go, however, and many donors still fixate on the magic ratio.

The key to overcoming this is to focus on telling your full story, not trying to hide the numbers, and taking the time to educate donors and remind them what really matters. Crowdfunding, providing direct access to donors and a great opportunity to tell your entire story, is an excellent way to address the overhead myth and get the support you deserve.