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There's a particular kind of dread that comes with opening an email from your top funder. It's not always about the relationship. Often you have a great relationship or a good one. It's about the math. When One funder represents 30, 40, 50% of your budget, every interaction has a different weight than it should. That's what I want to talk about in today's episode. Welcome to the Nonprofit Mastermind podcast, where we name what's really happening inside growing nonprofits and what it actually takes to design a high impact nonprofit the right way. I'm Brooke Richie Babbage, longtime nonprofit strategist and coach. Each week I unpack the systems, strategies and specific mindset shifts that help growing nonprofits get smart and intentional about growing their impact without burning out along the way. This show is about moving beyond grit to design. It's about building organizations that have the systems, structures and leadership capacity to truly hold the weight of their mission. Welcome A lot of the leaders that I work with in particularly early seven figures, can describe their funding concentration in detail. They know exactly which funders are unrestricted versus restricted, which ones are in their third year, which ones are approaching a sunset. They know which relationships feel solid and which ones feel like they're maybe one board transition away from uncertain. That level awareness is great. It's really good. But awareness by itself is not infrastructure. Here's something I hear a lot. We know we need to diversify. We just haven't had time to do it. And I understand that. But I want to offer a different diagnosis because diversification doesn't mean one thing. It's not a panacea. It's not a solve for your fundraising challenges. And it can also be dangerous if you don't approach it the right way. And because not enough time is almost never the real problem underlying your fundraising challenges. The real thing to focus on both as you think about whether and how diversification is right for you, and as you think about what is causing your funding fragility. The real problem is structural. The organization doesn't have the architecture to support revenue diversification in the right way, so it keeps defaulting to what it already has. When you're under a million dollars, concentrated funding can be really uncomfortable depending on the size of your budget. It's a very natural stage of growth as you are developing your capital engine, as I call it. But once you are in the 1.5 to 3 million range, right? Once you're solidly seven figures of revenue and impact, concentrated funding becomes an existential risk. The stakes are Completely different. You have staff, you have programs, you have much more complex obligations. And a single funder decision can destabilize all of that. Now, that's not hyperbole. I've watched it happen over and over to really well run organizations that have strong leadership. They just lack a strong capital engine. So I want to talk for a minute about tracking versus building. Sort of back up for a second and explain sort of what I'm the lens that I'm using to help you think through the root of your fragility. So most organizations have a grant calendar and some kind of donor CRM, right? If you are really small and you have maybe not developed your funding engine, you have a spreadsheet. The really sophisticated ones have a CRM. They have deadlines, relationship notes, and a pipeline. That's all great, right? Wherever you are, great. That's tracking. That's what we call tracking. And tracking is not a capital engine. Tracking tells you what's coming in. An engine tells you how revenue gets generated across all streams of your organization, from what sources, through what mechanisms, and how those mechanisms reinforce one another or don't over time. Here's the analogy I keep coming back to. Think of a grants calendar, right? Or your tracking mechanism, your spreadsheet, your pipeline. Tracking is like a weather report for rain. It's really useful information, but it doesn't tell you anything about your irrigation system, whether it exists, whether it's designed to get water to the right places after it falls, whether it would hold up if the pattern changed. Tracking the rain doesn't tell you if you have the infrastructure or it doesn't build the infrastructure. You need to deal with rain, right? To protect yourself against it, to make sure it flows once it hits the ground. That's infrastructure. The organizations that I see break through the concentration risk aren't the ones who get lucky with a new funder. They don't scale because or scale in a sustainable way, which is really critical because they happen upon magic money. They're the ones who deliberately built a particular kind of revenue architecture, right? An engine. That means they made intentional decisions about which revenue streams to develop, which ones are right for them, and said no to the ones that aren't. They were strategic and intentional in what sequence, over what time horizon, and they paid attention to how to staff and resource those development functions. Right? I'm going to do that list again. They made intentional decisions about which revenue streams to develop in what sequence, over what time horizon. And they paid attention to the capacity needed to hold that development engine that's infrastructure. A capital engine has four components working together. A healthily diversified funder portfolio or revenue portfolio. Because sometimes it will be funders, sometimes it will be donors. There's earned revenue, there's government, there's lots of sources of revenue. But it has a portfolio that is diversified in the right way across revenue types that that are right for the organization. Foundations, individuals, government, earned. It has a cultivation pipeline that isn't reactive to deadlines, that is intentional and strategic. It has a relationship stewardship infrastructure that works together whether or not the executive director has bandwidth that week or is at a conference or is on vacation. And very importantly, it has a revenue growth strategy that's integrated into into the annual work plan, not separate from it. So I want to talk now about why diversification, if you don't think about it, the right way, fails, right? I talked to so many organizations as they're growing that think the answer to their funding fragility is just diversification. But like I said at the beginning, diversification means lots of things. Many of them are not right for your organization. So I want to talk about three traps that I see organizations fall into as they think about diversification as a response to building a funding engine, right? Building infrastructure. So the first trap is treating diversification as a fundraising problem or fundraising issue instead of a design issue. A lot of leaders approach revenue concentration, right? That concentration, vulnerability, fragility, by trying to write more grants or identify new foundations to cultivate, or throwing a party or an event to bring in new donors. That's a fundraising response. What's actually needed is a structural redesign. Who owns what, what systems support, which types of revenue generation? What is the board's role? What does your development infrastructure look like? And how will new revenue streams be identified and built over time? Those are all design questions. Before you even get to what is our campaign going to look like? Who are we going to invite? Where are we going to find the people who are the funders? You take a step back and you build the systems and you ask the strategic questions that tell you where to even aim your energy. Which funders are you looking for? Should you even be looking for funders? Or is earned revenue the right response to your revenue needs? Right. Fragility. When you skip this design work. Diversification efforts can produce activity and work, but not results, right? They don't necessarily make your fundraising engine stronger. The second trap is sequencing incorrectly. I see so many organizations trying to build individual giving programs while they are still entirely grant dependent without thinking about the steps of building a Strong individual giving program. Right. Without things like donor stewardship infrastructure to hold new donors, without taking the time to identify who their donor archetypes are. Right. Who they're talking to, who they're trying to reach. They go from most of our money comes from foundations to we're going to start raising money from people. And they do the. The functional equivalent of throw spaghetti against the wall, and then it doesn't work. And they think we can't raise money from people, which is almost never true. I just want to make sure you hear me say that it is almost never true. I have been on the board of so many different organizations that are like the opposite of raising money for baby seals. Right. We do technical assistance on a lot of the organizations that I'm on the of. And in every case, it doesn't matter how unsexy, how unpopular you think your issue is, organizations can raise money from people. Okay, that's my rant. I'm gonna get back to this. So they. They try to bring in a new type of revenue with. In the wrong order, but they don't build it in the right order. Right. The sequence is wrong. Another example that I see is pursuing earned revenue opportunities. This is really exciting for a lot of organizations. I think for many organizations, it's untapped. But earned revenue isn't free revenue. It's not, you know, it's not magic money. It's. It requires capacity, it requires a new workflow. It is often requires marketing infrastructure and expertise. So I see organizations pursue earned revenue opportunities when they're trying to, quote, unquote, diversify that require operational capacity that they do not have. And if they sort of pause to think about it, they don't want to build that organizational or operational capacity. Right. They don't want marketing people on their team. And that is something they realize after they've put the time and the energy into pursuing these earned revenue opportunities. Diversification. This is my point. Diversification has a logic to it. There is an order of operations as you are building a capital engine, a fundraising engine. I often call it a flywheel. It matters that you do the right things in the right order. You don't start, for example, with the highest effort, longest lead revenue stream, like corporate partnerships. That's a lot of effort and a long lead time. Those take months to build relationships, unless you're sort of looking for, you know, a $5,000 sponsorship. But if you're really looking for a partnership, foreign, If this is landing for you and you're wondering if there's a Next step to get my eyes on your organization or my help meeting the moment you're in there is head to Brookerichybabbage.com backslash fit check and fill out the three minute fit check. You'll answer four questions that'll give me insight into where you are and what you're navigating, and I'll point you in the right direction. I read everyone personally. Okay, let's keep going. That's a high effort. Long lead revenue stream. Maybe. You start by stabilizing what you have, identifying the capacity you have that you execute well, leveraging that and leaning in. You start by building the infrastructure, the systems to hold new relationships of whatever kind you're going to go after. And then you layer in the right new revenue types deliberately. So that's the second trap. The third trap, and this is a big one, is board avoidance. This one is almost universal. Boards at early seven figures, you know, say under 3 million, are almost always underutilized as a revenue asset. And not often because the board doesn't care, but because the infrastructure isn't in place for them to function as revenue generators. Sitting your board down and saying, find the people in your life that want to give to our organization is not activating them as fundraisers. And when they don't do it, a lot of the executive directors that I work with are deeply frustrated. Right? Because we know, I believe one of the core roles of any board member is to help bring revenue into the organization. Right? You have a fiduciary responsibility and fundraising is part of it. But fundraising means many things. And most organizations, 95% of the organizations that I work with, even really healthy boards that want to lean in, they don't actually have the right infrastructure in place to activate the board as expansive fundraisers to help them identify the right people, to help them understand how to cultivate the right people to help them understand what a good ask feels like and looks like. There are no defined giving expectations. There's no cultivation training. There's no structured way to surface and steward the right relationships. So the board can be sitting on a network that the organization can see, wants to activate but doesn't know how. And that builds frustration. Right. Building a capital engine without engaging the board the right way is like trying to run a fundraising program with one hand not even tied behind your back, chopped off. Right? You're under leveraging your capacity. Okay? So I've talked about what the fragility looks like and the causes and some traps that you want to be aware of as you Think about diversification as part of building your capital engine. So I want to talk now about what building a capital engine actually requires. So the first move is an honest revenue architecture audit, not a wishful future state list of revenue types you'd like to have an actual point in time analysis of what you currently have, what's stable versus what's at risk, where there are natural, natural growth pathways, what do you do well and why, and what the organization has the capacity to build and sustain in the next 12 months. This audit usually reveals something important. That the concentration problem is rarely just about your funder pipeline. It is almost always also the absence of systems to support any revenue type other than the one that you started with. So the audit is a really, really important place to start. The second move is defining your horizon deliberately, right? Your fundraising horizon deliberately, and the role that diversification is going to play. Individual giving is a long term play. It takes time to build meaningful individual donor programs from scratch. It doesn't mean it takes years to bring in revenue, but a robust individual donor program that identifies, activates, cultivates the right people and turns those people into ambassadors who are out in the world helping you find, cultivate and activate more of the right people. A really good individual donor program builds a community of raving fans and functions like a flywheel. It perpetuates itself even with the right infrastructure. That takes time and that's okay. But understanding that that's a long term play. For example, government funding has a completely different lead time and has a compliance burden that is bigger and more complex than foundation funding. So understanding if that ought to be part of your capital engine. Earned revenue, as I talked about, requires operational design that is often different from other kinds of revenue generation. So as you think about defining your capital engine deliberately, think about what types of revenue you are excited about and what they actually mean in terms of the infrastructure you will have to build, right? So the question isn't just how do we, you know, what are the elements of our revenue engine, right? Or how do we diversify? The question is what can we build over what time horizon and what do we need to put in place to build it? So the first move is the audit. The second move is defining your capital engine or the elements of your capital engine deliberately. The third move is restructuring how development work happens inside your organization. And not just what your development staff does, but also how the executive director's time is allocated to which types of revenue, how you are training and supporting and activating your board, how donor stewardship is Systematized and more globally, how the entire fundraising function is staffed relative to your revenue goals. Right? A $1.5 million organization trying to raise $3 million on a part time development coordinator and an executive director who's already stretched thin is not a strategy. It's hope, and it's going to burn some people out. So being really mindful of what does the redesign and restructure need to look like now, none of this is about eliminating necessarily the funders, the donors, the government revenue, the earned revenue that you already have. Concentration, risk, or that particular kind of fragility isn't solved by walking away from the relationships you have. You want to think about which of those are healthy and lean into them. They're your bread and butter. So we're not talking about replacing. What we're talking about is building enough infrastructure that no single funder decision or revenue shift is existential. That's the goal. Not fewer good relationships, but better architecture around all of the kinds of revenue that you want to bring in. So here are three questions worth sitting with as we wrap up. First, if your top funder did not renew next year, what would actually happen? And I don't mean the scary story version that we lie in bed thinking about. I mean the operational reality. Would you have a plan? Would you have a Runway? What levers could you pull to increase your revenue or decrease your spending? Would you have alternatives already in motion? Right. If your honest answer is no, that's a great indication of a starting point. Second, do you have the development infrastructure that is able to operate independently of the executive director's bandwidth? Or does fundraising essentially pause or slow down when the executive director is stretched? Most organizations in early seven figures, if they're being honest, are still running a development operation that's centered on the executive director and that creates a type of fragility, right? So as you think about your capital engine and the architecture that you need, think about capacity in that way as well. And that doesn't mean you have to hire a development director, but you do want to think about how you can build systems and processes and structures, automations, et cetera, that take weight, not just in terms of what the executive director does, that takes weight off of the executive director and spreads it across the team. And then finally, what is your board's current actual contribution to revenue? Not what they're supposed to do. What do they actually do? Meetings, access, gifts, introduction, donations, tickets to events. If your answer is not that much, think about the design of your board and how you how they are supported in being actual effective fundraisers. Think about the board governance infrastructure that needs to be built to activate them as a real revenue generating assets. These three questions together can give you a picture of where the fundraising or capital design deficit lives in your organization. I say this all the time. You can't solve a design problem with more effort. You have to solve it by redesigning the structure. And there is a method to the madness, right? It is not complex, it is work. And it takes deliberate effort and intentionality. But every design problem has a design solution. And what I walked through today is how to start to understand the actual design problem you might have with your capital engine. So if this episode is resonating, if you recognize your organization in the concentration trap that I talked about or the tracking and set of building patterns, then the right next move for you is probably a more structured look at your revenue architecture as a whole. And that is why I designed the Growth Readiness Check. It's a six question assessment that produces the design deficit snapshot of your precise design deficits including fundraising. You can Access it at brookerichybabbage.com fitcheck and if you are a right fit for my seven figure mastermind called the Next Level Nonprofit Mastermind, you'll get an invite to a clarity call for us to go a little deeper together again. You can get that@brooke richiebabbage.com backslash fit check. That is all for this week and I will see you back here next week for more Mastermind. Thanks for listening. If this episode resonated, leave a review. I read them and they do matter. And make sure you're subscribed so that you never miss a deep dive into building your resilient nonprofit. And finally, if you're ready to move from grit to good design, head to Brook richiebababbage.com strong to take the 90 second quiz and find out where to start.