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9.2 Special Funding Strategies

LEARNING OBJECTIVES

By the end of this section, you will be able to:

  • Identify funding strategies used by charitable organizations
  • Describe financing opportunities available to startups
  • Define bootstrapping
  • Describe the advantages and disadvantages of bootstrapping

It’s important to recognize that not all startups are Silicon Valley tech companies. These companies create high-profile products, such as applications and websites, which can take years to become profitable or even generate revenue. Much more common are the small businesses founded every day by entrepreneurs seeking to create value in their local communities. Moreover, not all startups are founded with a profit motive in mind.

Charitable organizations, or certain nonprofit companies, are often founded for altruistic purposes, such as advancing the arts, education, and science; protecting the natural environment; providing disaster relief; and defending human rights (Table 9.2).

Charitable Missions and Example Organizations
Mission Examples
Advance education Teach for America, Khan Academy
Protect the natural environment Sierra Club, Wildlife Conservation Society
Defend human rights Amnesty International, Human Rights Watch
Provide disaster relief American Red Cross
Support the arts Metropolitan Museum of Art, Americans for the Arts
Table 9.2

These goals supersede the profit motive that a traditional company would have. As a result, the funding strategies of these enterprises often differ quite dramatically from those of standard for-profit businesses. Without the emphasis on profit, it can be difficult to provide for the cost of ongoing operations. Thus, these organizations must develop a sustainable strategy—one that can maintain the organization’s financial stability.

In the United States, such organizations can qualify for tax-exempt status, meaning that if there is a profit from operations, it is not typically subject to taxes. Organizations seeking this exemption must apply to the Internal Revenue Service for tax-exempt status and provide information about what kind of mission the organization carries out—charitable, scientific, educational, and so on.

Consider a museum. What is its purpose? Traditional companies provide a product or service to their customers in exchange for payment, and typically fill a need their customers have. A grocery store sells food because human beings need to eat food to survive. Although viewing paintings and sculptures is not a physical requirement for life, this experience arguably enriches our lives and helps educate and shape our society. That is why museums are founded. Consider the original mission statement of the Metropolitan Museum of Art (commonly known as the “Met”) in New York City (Figure 9.3).7

New York’s Metropolitan Museum of Art’s mission statement is provided: To be located in the city of New York, for the purpose of establishing and maintaining in said city a museum and library of art, of encouraging and developing the study of the fine arts, and the application of arts to manufacture and practical life, of advancing the general knowledge of kindred subjects, and, to that end, of furnishing popular instruction.
Figure 9.3 The mission statement of New York’s Metropolitan Museum of Art summarizes the purpose of this entity. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license)

This is a different goal than that of most small businesses (providing a product or service in exchange for a profit) and, as a result, requires different financing strategies, such as a combination of program services, donations, and grants.

Footnotes

  • 7Charter of The Metropolitan Museum of Art, State of New York, Laws of 1870, Chapter 197, passed April 13, 1870, and amended L.1898, Ch. 34; L. 1908, Ch. 219. https://www.metmuseum.org/about-the-met
  • 8Calculated from the 2018 IRS Form 990 available on the Met’s website. https://www.metmuseum.org/-/media/files/about-the-met/990-forms/2017-irs-form-990-for-fy2018.pdf
  • 9National Institutes of Health. “Grant Basics.” February 21, 2017. https://grants.nih.gov/grants/grant_basics.htm
  • 10National Institutes of Health. “Annual Snapshot.” n.d. https://nexus.od.nih.gov/all/2019/03/13/nih-annual-snapshot-fy-2018-by-the-numbers/
  • 11TOMS. “One for One.” n.d. https://www.toms.com/improving-lives
  • 12TOMS. “Blake Mycoskie.” n.d. http://www.toms.com/blakes-bio
  • 13Francesco Schiavone. “Incompetence and Managerial Problems Delaying Reward Delivery in Crowdfunding.” Journal of Innovation and Economics Management. February 2017. https://www.cairn.info/revue-journal-of-innovation-economics-2017-2-page-185.htm
  • 14Securities and Exchange Commission. “Crowdfunding.” n.d. https://www.sec.gov/rules/final/2015/33-9974.pdf
  • 15New York Public Library. “New York Startup! 2019 Business Plan Competition.” n.d. https://www.nypl.org/help/services/startup
  • 16Mitchell Harper. “How I Got $248,000 in Pre-Orders before I Even Had a Product.” Medium. November 25, 2015. https://blog.markgrowth.com/how-i-got-248-000-in-pre-orders-before-i-even-had-a-product-b4080a3eb8ae
  • 17National Public Radio. “Real Estate Mogul: Barbara Corcoran.” How I Built This. May 14, 2018. https://www.npr.org/templates/transcript/transcript.php?storyId=610491305
  • 18Brewers Association. “Brewers Association Unveils 2018 Rankings of Top US Brewing Companies.” 2019. https://www.brewbound.com/news/brewers-association-unveils-2018-rankings-of-top-us-brewing-companies