Funding digital transformation (and how to do it right)
Jump to sections within this theme:
Intro | Core before project | Knowledge gaps | Sustainable funding | Finding internal funds | Crowdfunding | Conclusion | Recommendations | 6 slide summary
INTRODUCTION
Conversations about change programmes inevitably turn to the need for investment at some stage. Lack of funding has often been blamed for the slow rate of (truly transformative) digital progress in non-profits, but whilst the scars of the punishing recession years remain visible, the sector has proved its resilience through a tenacious capacity to do more with less, And now, in 2015, there are tentatively optimistic feelings emerging around sector finance.
The creation of organisations like Big Society Capital have led to a proliferation of new funding providers and they’re looking for projects to fund… So, problem solved? Not quite… it’s never that straightforward! As the sector knows, what there aren’t more of is grants: the grant funding model that so many organisations relied upon has been decimated.
The money that is increasingly available instead is social finance - the use of repayable finance to achieve a social, as well as a financial, return. The New Reality’s funding experts, and contributors from organisations who have sought funding, made it clear that the sector is still struggling to make the best use of this new bounty. Similarly, the funding organisations within this space and are not always finding it easy to match the money to the right initiatives, or to balance the need for core funding with financing new products.
There is already a huge body of literature about fundraising - and more recently about digital fundraising (the Zone digital fundraising handbook is an excellent starting point) – but here we’re going to focus on the state of external sector funding and potential new models for finding investment. Exploring what’s holding organisations back from both getting - and giving - investment to support tech-enabled transformative work, this funding theme reviews the available options put forward by the New Reality’s contributors.
Fund core operations not additional services
Across the New Reality’s interviews there was a resounding call to funders: in order to achieve digital transformation programmes organisations need funding to support core operations, not for novel ideas.
Contributors suggest that getting funding for individual products and services is rarely easy, but that getting funding for digital change programmes and core tech capabilities is nigh on impossible – and it appears that established organisations are the least likely to garner support:
“It’s hard to have proper digital capacity in charities. I think it’s probably because it’s much harder to fund good digital people from core funding than it is to get funding for specific project ideas. It needs to be the other way round because one often comes from the other.””
If more funding doesn’t become available to support building a digital skill and talent base within organisations (either through hires and / or training), then digital transformation programmes could stall. Funders and organisations know that core costs aren’t immediate donor-builders, and they are often harder to track in terms of impact, but many of the organisations involved in the study believe that funders are not doing enough to provide support in this area.
Grant making organisations like Esmee Fairbarn clearly do support this type of core funding, but can only afford to support a fraction of the bids they receive. Perhaps the answer is for organisations to stop looking for grants when social finance might be a workable option.
Another funder pointed out that digital transformation programmes may pay for themselves through efficiencies, so a loan might be as useful as a grant in the short term and may even come with fewer strings attached:
“Anyone who tells you that there isn’t money to support a digital transformation programme maybe hasn’t asked for it in the right places. It’s a no-brainer for us in comparison to some other areas - most digital transformation projects will ultimately make that money back through efficiency gains.””
So if this is a numbers game, should organisations keep fighting for grants when social finance might be a workable option for some? The sector is in the early stages of the debate right now, but given the funding parameters, it’s hard to see how this option can remain on the fringes for long - and all of the funding organisations who contributed to this study believed that a blended approach to social finance would become increasingly common.
In light of these developments - and particularly where non-profits are ignoring the winds of change and failing to adjust to new and increasingly hybrid investment opportunities - awareness raising is critical. By way of response, Esmee Fairbarn have recently merged their social investment and grant making teams in order to facilitate this change:
“What we have done here is merged our grant making and our social investing team so it’s one team. Now when an organisation comes in we can look at them and say over the next 3 to 5 years we’ll help them transition. What you start off with might just be a grant, but by year 3 it’s a grant and a loan so you can start learning about how this affects your cash flows, your balance sheets, your business operation. And by year 5 it’s actually just a loan, because now you have a track record and some experience behind you.””
Plug your Knowledge Gap
“I’d love to speak to some of the funding organisations and ask them “why are you funding some of these things?” One funder was notorious for giving out tremendous sums of money for projects that barely lasted a year””
Although the sector is still in the early stages of trying out and understanding how funders can and should invest in digital-for-good projects, there are examples of tech-enabled projects getting funding and going on to be highly successful (see the Nominet Trust’s Social tech 100). However, there is a much longer list of projects that had potential, but never succeeded in attracting the funds they needed to get off the ground.
The New Reality contributors, on both the funder and the funded side, suggest that there is a systemic issue beyond the normal cycle of success and failure for ventures seeking funding. And when it comes to digital initiatives both those giving funding and those seeking it identified an apparent shortfall in the required level of technical knowledge needed to produce and assess a successful and sustainable digital service bid.
Gap 1: Lack of digital tech expertise among organisations seeking funding
Many small and mid-sized organisations are not yet set up to create and support tech-enabled projects even when they have the impetus and desire to do so. Funding experts highlighted this as a flaw that they regularly see in proposals that have a digital tech element:
“There’s a magic to digital that blinds organisations from undertaking the normal level of scrutiny involved in structuring a funding bid. When it’s an established organisation wanting to do a digital project they seem to apply less rigour, and it’s often more a leap of faith.””
“We sometimes see naivety of people seeking funding for digital ideas - they jump into making something without questioning how it can become sustainable.””
It’s apparent that there are great ideas out there built on solid tech knowledge, but which lack a clear vision for how those projects might become sustainable in the future. This indicates that for many organisations (particularly smaller ones) the level of digital knowledge and skill is not yet good enough to support the scale of associated ambition. This misalignment will continue to create a stalemate between those awarding and those seeking funding until the knowledge gap is plugged.
“The funders that get it are picking holes because they can see that maybe organisations themselves don’t have good enough digital capability.””
Big Issue Invest is a funding provider that helps scale-up social enterprises and charities by providing social finance. They provided The New Reality with a stark example of the difference between organisations who are ready to get funding on tech initiatives and those who are not:
CASE STUDY:
A comparison between two social care organisations seeking funding for tech-enabled services
Doing it right
Cornerstone is a charity in Scotland that provides care and support services for adults, children and young people with disabilities and other support needs. They came to Big Issue Invest with a funding proposal to help support a major 3 year digital transformation programme that would overhaul and connect up all areas of their business from service delivery to safeguarding to central accounting. In advance of the funding bid Cornerstone had commissioned external consultants to help rigorously scope the project, and had fully engaged the board, their staff, and customers in the plans. They also brought in someone who had already delivered a systems transformation process to be part of the core team. Cornerstone has been granted the funding and is working in partnership with Big Issue Invest on the project roll out.
Doing it wrong
Around the same time another mid-sized care charity came to Big Issue Invest with a proposal. This charity needed over £1million for a tech-led extension of their core business. The fundamental idea was sound enough, and well within their expertise in terms of audience and topic. So what was wrong? Even though the main focus of the project was the creation of a major technical infrastructure system, the only person with technical experience that had been involved in the investment proposal process had been a mid-level day-to-day IT support worker from the charity – and he had not even been made part of the main project team. The funding bid was rejected on the basis that the charity was unlikely to create the platform in a way that was robust or sustainable enough to fulfil its ambition.
Gap 2: Lack of Digital Technology Expertise Among Fund Managers
A contrasting but equally concerning issue was raised by contributors around whether tech-enabled projects are being adequately and fairly assessed by funders:
“I think we may be missing opportunities, or that maybe we might be turning things down because we think it’s just a technology play when actually it’s not, and it could deliver major social impact. We see the word technology and hold back, because we’re not familiar enough yet.””
The relative new-ness of digital service provision means that grant and investment makers are playing catch-up with the required knowledge to judge funding bids. Even Nominet Trust - a tech-first funder – highlighted that they have to proactively work to keep their staff up to speed with the pace of technology change:
“We place a big emphasis on personal development and making sure we’re being outward looking. We have internal processes to make sure this happens including weekly meetings where people report back what they’ve seen, what they’ve been surprised by, what they’ve learnt, so that we keep our knowledge agile and dynamic.””
Funding organisations in the sector who have understood this gap are developing strategies for plugging it. Esmee Fairbarn - one of the biggest funders in sector, and primarily grant-giving - is answering this challenge by developing a programme of training for grant managers:
“One area we’re developing is skilling up grant managers to cope in this tech world that’s changing really rapidly. Otherwise how on earth - as technology gets used more and more - do you judge whether they are using the right technology or not? We don’t quite know fully what that looks like yet but we have started to do it””
Big Issue Invest, a smaller funding organisation that provides loans and capital to help established social enterprises scale up, are taking a different approach:
“There aren’t that many social funders like us, and we’re not a huge team so we can’t afford to have specialisms in all areas. We get round that by bringing in experts to make those assessments. If we’re buying a building we rely on the reports of a surveyor. If we’re assessing a tech-led bid we bring in a digital expert. What is needed for organisations like us is a network of reliable, objective advisors.””
These kinds of approaches are a significant step towards a fair and equal playing field for social investment in projects that have a strong tech element. However, for many funders there is still some distance to go:
“The sad thing is I’ve seen many funders who will still choose a physical school project over a digital service. There isn’t enough understanding of the real and tangible value that digital services provide, especially to young people.””
Until more sector funders have a strong grasp of both the potential impact of tech-enabled initiatives, and the ability to assess the nuts and bolts, it is likely that digital transformation progress will keep stalling.
Finding New Paths to Sustainability
Commercial tech start-ups increasingly seek venture capital to grow, often with an exit strategy to sell to the highest bidder, but non-profit organisations don’t have this option at their disposal. The challenge of keeping digital initiatives running beyond the initial investment that got them off the ground keeps many non-profits awake at night. If we accept that we are already at a point where digital is – quite literally – the New Reality, then we must also understand that there may need to be ongoing changes in the way this reality is supported.
A hefty dose of criticism was levelled at some funders for not supporting the sustainable development of digital-led initiatives. The criticisms revolved around short-sighted attitudes where funders are too focused on seed funding, leaving projects without support beyond year one – or unrealistic expectations that new initiatives would or could be self-supporting within an improbable timeframe:
“Start-up loans with no follow up isn’t good. What should happen is that funders look for 7 or 8 areas in the market where there’s real growth potential, and real social value, and then target infrastructure support and innovation support for those.””
Some of the New Reality’s contributors predicted a further blurring of the distinction, in funding terms, between “charity” and “social enterprise”, with new initiatives designed to be self-supporting through revenue generation streams:
“Everything should be built with some sort of revenue model - even micro amounts. We didn’t do that early enough with some of our products, but now it’s in every brief. At a macro scale you should also look at how you can take your organisation’s expertise (e.g. youth trends) - and package it up.”
”
“We’re seeing many more social enterprises and organisations who are recognising that it is possible to make a difference and make money. Those aiming for greater sustainability rather than limping from one grant fund to another are doing well.”
”
Some felt that the slow uptake of revenue-generating opportunities is due to a gap in strategic expertise within the sector, and others that non-profits are only just starting to be able to think of themselves in commercial terms without wincing! High profile successes in this area are still thin on the ground but a few examples were given:
Young Advisors was one of the few examples given of an organisation generating revenue around their core services. They help community leaders and decision makers understand how to engage young people in local decision making and improving services - and were praised for their white-label service which lets organisations pay to use the same model.
CharityClear the payment gateway service set up by Epilepsy Scotland was another example of an organisation diversifying their revenue models through digital services. CharityClear operates in the same way as any other secure payment service but 100% of it’s profits go to the charity.
At the bigger end of the scale British Heart Foundation have created a successful new revenue stream based on their existing offline retail business, simply by using eBay to sell some of the more rare items donated to stores.
“We’ve started an eBay part of our retail business. It helps us raise funds from niche items that arrive in our individual stores that won’t sell for much there. By using digital services like eBay we get a national audience where collectors of those items can find them. Last week a standard, 35mm camera made £100 because there’s not many of those model left. It would have made £5 in a store. If you replicate that over and over - there’s a new way to support the charity thanks to a pre-existing digital service.””
One of the ways that bigger funders are now seeking to ensure that the digital services they fund will be sustainable going forwards is by asking for them to be more fully substantiated up front. Some of the big funders, including Nominet Trust and Comic Relief, require digital projects to be at least at the prototype / alpha stage:
“The new Comic Relief Tech for Good fund sets the bar quite high in terms of know-how. You need a prototype, you need to have given some code to an open repository. NOT “I’ve got an idea for an app.”
”
CASE STUDY: FutureLearn - FINDING AN ALTERNATIVE BUSINESS MODEL
FutureLearn is an online learning platform set up by the Open University, and based at the British Library.
Matt Walton, FutureLearn's Head of Product explains how their ‘freemium’ business model works.
“We needed the initial investment from the Open University, but the idea is to become self-sustaining longer term.
Revenue generating ideas we’re trialling include asking Learners (service users) to pay for accreditation and certificates if they want them (but all courses are free).
We have the best of both worlds in that we have the commercial imperatives, which means we’re pretty efficient, but we have a benevolent owner who is interested in our mission as much as the profit. Some of the competitor platforms are owned by VCs so they’re going to have to make some interesting decisions in the future”.
Finding Internal Investment when Budgets are Tight
A number of contributors who have already embarked on digital transformation processes offered advice on how they had sought internal funds and buy in to support their work:
“In my experience at Amnesty it wasn’t always about asking for money, but about spending it differently. It’s as much about getting what you need by stopping doing stuff that isn’t core”
”
“It’s not always about investment - sometimes it’s the opposite. At Unicef there were legacy ways of doing things that by stopping investment on those, and accepting the bump on the way, there was a bigger prize that didn’t cost more overall.”
”
There is clearly both a need and a benefit to using the current flux as a prompt for reassessing performance of existing activities, and working out what really is – or isn’t – a sacred cow. Ceasing those functions that aren’t delivering may help to streamline working practice, or existing services, and create more efficiency in the process. However, organisations need to be alive to the possibility that diverting funds from one place to another may not be enough.
As we’ve explored in other areas of the New Reality, change can’t succeed without a foundation of support at senior levels. Interviewees identified that board support is a further critical factor in securing internal funding and many stressed the need to help board members understand why financial support is pivotal in digital transformation.
“I’ve just secured a substantial amount of funding from our board just by taking the time to share some proper insights from analytics about how our audiences are engaging with us. They’d never seen it explained to them in that way before””
START SMALL
Those who had been successful in seeking internal investment for digital transformation programmes focussed heavily on starting small: small projects, demonstrating small successes provided a safety net from which to grow. Contributors were adamant that this is the most effective way of both using available funds, and demonstrating the need and benefits of further increased investment.
“You can create digital transformation by immersing people in the process a step at a time. They get comfortable with it and it demystifies it and they feel invested rather than put-upon”.”
Crowdfunding: A Tech-led Alternative to Traditional Funding
Outside of traditional fundraising routes, another tech-based alternative was lauded by the New Reality’s cohort: crowdfunding is no longer new, but the speed of its growth was noted by many who see it as a viable option for funding and launching social projects:
“We’re just in the nursery slopes of crowdfunding but it’s fast becoming a major alternative. That’s really exciting.”
”
“The matching platform philosophy is central to the future way our society is going to function. Kiva is one of the greatest non-profit organisations to emerge in the last decade.””
Healthcare services in particular are achieving dramatic successes using crowdfunding platforms – from individuals raising money to pay for specific medical treatment (for themselves or others) to new medical technologies being developed. In the US the crowdfunding platform MedStartr's average successful project raises more than $13,000 immediately and $405,000-plus in the following six months, according to a company report.
The crowdfunding opportunity has significant potential to enable people to support and champion the things that are personally meaningful to them. But if people can increasingly fund the projects they want to see directly, why will they need established non-profits to do it for them?
Alongside the excitement building around these platforms, there was also an expressed concern that established non-profits were not paying enough attention to the power of crowdfunding platforms, and missing the risk that these channels, unless embraced, may start competing with - rather than complementing - the efforts of established non-profits.
Crowdfunding is not the answer to everything. As identified elsewhere in this theme it is funding for core costs that is most needed to support organisations’ digital transformation programmes. Crowdfunding is unlikely to be able to offer this, but it does provide a path for supporting project funding in a way that avoids the huge, and often fruitless, efforts required to get finance from established funding bodies. It also provides a way to stay engaged with audiences who may otherwise feel they no longer need a non-profit organisation to act as middleman.
Conclusion
The options for seeking funds to support digital transformation programmes and for growing digital service offers are changing. Organisations that still hope to survive on grants alone will find the work required to do so increasingly tough. Those who adjust their funding strategies are likely to reap the benefits. For some this may mean thinking with a more commercial mindset and finding an entirely self-supporting revenue model. Others will be able to manage this transition through reallocation of internal funds. For most it will mean embracing new hybrid models of funding – a combination of any or all of: internal funds, grants, revenue-generation, social finance and crowdfunding.
For funding organisations the pressure is on. Grant makers and social investors need to be ready to support significant digital transformation programmes – by having the knowledge to assess tech-led bids (either in house or in partnership with experts) and in some cases by refocusing funds away from product ideas towards core costs.
The conversation between funders and organisations around investment for digital transformation programmes is best managed before the disruption really kicks in. The non-profit landscape is changing, and the funding structures that exist to support it need to change too.
RECOMMENDATIONS
For funders
- Choose to fund core. Digital transformation programmes are 90% about internal infrastructure, culture change and people, and only 10% about digital services and products: there needs to be more funding for core costs – can you help? If you decide not to make this a strategic priority, be clear about what the potential outcomes will be
- Have a plan. If you haven’t already got a strategy around funding digital transformation projects, start planning now
- Get the skills. Train your staff or bring in ad-hoc expertise to support your assessment of funding bids - make sure you’re not discriminating against digital / tech-enabled projects through lack of knowledge
For organisations seeking funding
- Know your onions. Until you have an internal person on your team with sufficient contemporary experience - who understands what it will take to both produce a high quality digital service, and to keep it running, don’t approach a tech enabled project
- Consider revenue streams. From the get-go, explore whether there is a revenue model that could cover some or all of the cost of running the service
- Stop doing one thing. Before seeking funding, scrutinise your internal products, services, or infrastructure systems and consider what would happen if they could be cut or reshaped in order to free up both money and resource to work on digital transformation
- Collaborate. Consider the broader landscape and start considering whether you can actively be part of building a positive coalition around digital transformation with other like-minded organisations. What support do you all need? How can you be part of a the shift? What stories are you sharing internally and externally to support positive change?
