Why Philanthropy IS a Business Model

While "nonprofit" is not.

Why Philanthropy IS a Business Model
Image provided by Richard J. Tofel of Second Rough Draft.

By Richard J. Tofel

[Note: This commentary, originally published at Second Rough Draft, is reproduced here with the permission of Dick Tofel.]

As nonprofit news has grown in importance over the last two decades, one bit of wisdom (or cynicism, depending on the tone) you will frequently hear dispensed is that “nonprofit is not a business model.” That’s true, and it has important implications: Nonprofits, too, need to be run like businesses, especially in that, over time, revenues must at least match expenses. In a sense, you might think of the nonprofit structure as setting the target profit margin at zero. That’s a lot easier than the 30%+ target margin of monopoly local newspapers in the before-times, but it’s still a number managers have to hit.

Recently, however, some have suggested also that “philanthropy isn’t a business model,” and this simply isn’t true. This week, I want to dive into how that’s the case, what the limits of the philanthropic business model are, and why it matters.

First, and most simply, philanthropy is most certainly a business model, or at least the core of such a model, because it is at the heart of financing nearly every private university and almost all of the country’s leading cultural institutions, from museums to the performing arts, as well as most organized religious institutions. That being the case, it seems to me a mystery why philanthropy couldn’t be at the heart of the business model of some successful newsrooms—and, voila, it is.

What they really mean when they say that

When otherwise smart people say that “philanthropy isn’t a business model,” and especially when those people work in institutional foundations, I think what they really mean is that “permanent dependence on a small set of institutional funders isn’t a business model,” and that is true.

But what they overlook, and what too many people in nonprofit news miss, is that while foundations where paid staff give away the money of dead benefactors was once the essence of American philanthropy (think Ford, Rockefeller, Carnegie, etc.), that is no longer the case.

Instead, philanthropy, broadly speaking, has three leading strands. The largest of these are what are often called “major gifts,” bigger contributions from wealthy people, often from fortunes recently made in tech and finance, and frequently dispensed either by the people who earned the money, their immediate family or a small number of staff members whose duties are primarily ministerial—that is, they often aren’t the key decision-makers. The disbursing entity may be a personal checking account, a donor-advised fund or even a private foundation, but such giving is not (at least not yet) institutionalized in practice.

Major gifts, in the aggregate, have greatly exceeded the second strand— grants from older-style institutional foundations— in recent decades, but institutional foundations still play an important role. They often claim to be “risk capital,” although few actually behave that way. Rather, at least in the news business, they tend to be primarily second-wave funders of ideas pioneered with major gifts, but not yet at sufficient scale to be sustainable. 

Thus, in nonprofit news, while there were a few exceptional early institutional funders, ProPublica, the Texas Tribune, the Marshall Project, CalMatters and the Baltimore Banner all began with major gifts before they attracted much institutional foundation support, but then sought to deploy such support to help attain and maintain scale.

The third strand of philanthropy is individual contributions, usually online, with large numbers of small gifts ultimately making a significant mark. Here, nonprofit news has followed in the steps of politics, where Howard Dean, Barack Obama, Donald Trump and Bernie Sanders revolutionized the financing of presidential campaigns, and showed that small dollars can yield big sums. Paywalls for nonprofits should be seen as analytically similar—reader revenue of another sort, even if more transactional.

All of the above— and more

The most important factor with respect to sustainability is that both major givers and smaller donors tend be loyal in their support, at least so long as an organization (including a newsroom) stays on mission. Unlike institutional foundations, individual donors (large or small) don’t experience leadership turnover, and don’t tend to feel compelled to change strategies every few years. Think about your own personal charitable giving: I expect it’s been fairly stable in terms of recipients over the years. Moreover, the number of donors considering journalism as a charitable priority is building, as awareness grows of the business crisis in news. 

When I and others insist that philanthropy can be—and already is—a business model in nonprofit news, we mean an approach that draws on all three strands. We also don’t mean to rule out sources of “earned” revenue, including advertising (where the opportunities seem quite endangered right now), events (which are very difficult to execute in a way that is meaningful financially), training (although this runs risks of distraction for key talent) and content syndication (although only at real scale for those with huge amounts of content, or in targeted fields such as trade publications).

What, then, is the proper continuing role of institutional foundations in nonprofit news? This seems a particularly important question as we begin to march through the five-year time clock on Press Forward, which now has less than 1800 days to run. While it aspires to lure major gifts, Press Forward’s money so far is very largely institutional.

The imperative of enduring institutions 

There is a temptation in institutional philanthropy to pretend that nonprofits can be spun up and then sent out to spin perpetually on their own. More sophisticated institutional philanthropists (and almost all major donors!) understand that is not true. They recognize that the most important enduring institutions are not the perpetually-funded funders they lead, but the pillars of the social sector their grants have helped to nurture. This, for instance, is the critical insight of the Ford Foundation’s BUILD program, which has now granted $2 billion over 10 years. As Ford president Darren Walker observed in launching BUILD in 2015,

Building durable institutions and networks will be among our highest priorities because, as we’ve seen throughout our history, they represent the infrastructure on which movements for change are built.

That remains true. It is, for instance, why Ford has made 33 separate grants to Human Rights Watch over the last 17 years, or 14 grants over the same time period to the PBS NewsHour. (Kudos to Ford for making all of this easily searchable). The point is not whether you or I would make the same specific choices—it’s that steady support recognizes that sustainability for some sorts of organizations may require continuing commitments. It is also true that Ford in 2022-23 seems to have provided about one half of one percent of the funding for Human Rights Watch, and less than one percent for the parent station of the NewsHour. True sustainability also requires that nonprofits ultimately build broad bases.

Nor is this approach limited to Ford. The “enduring commitment” portion of the MacArthur Foundation’s support for journalism— the part that came befre Press Forward and seems likely to endure afterward— is another significant manifestation of the same concern for institution-building. That becomes especially critical in an era when, as MacArthur president John Palfrey recently told the Columbia Journalism Review, “it is time for us to declare in local news that the predominant business model is nonprofit or little profit.”

I know why some in institutional philanthropy would like to be relieved of the imperative to provide some funding to those newsrooms which bid to be indefinitely sustainable. For one thing, it limits their freedom of action a bit; for another, it undermines the temptation for new leaders to pronounce new strategies. And, reduced to its essence— “people give us money and we spend it”— philanthropy as a business model sounds almost too simple to work. But the hard part of business models isn’t articulating them, it’s executing them. That’s as true in news as in anything else.

Dick Tofel of Second Rough Draft was the founding general manager (and first employee) of ProPublica from 2007-2012 and its president from 2013 until September 2021. He was also assistant publisher at the Wall Street Journal, is the author of numerous books, and teaches at the Harvard TH Chan School of Public Health. Read more of his bio here.