Diversification Reconsidered: The Risks and Rewards of Revenue Concentration

<title>Abstract</title> In the search for sustainability and stability, a central tenet of social entrepreneurship holds that revenue diversification is desirable. Business and nonprofit researchers have long argued that by establishing and maintaining multiple streams of funding, including some combination of earned income, government contracts, foundation and corporate grants, and individual contributions, organizations are able to avoid excessive dependence on any single revenue source, stabilize their financial positions, and thereby reduce the risk of financial crises or interruptions in funding. By studying a large sample of nonprofit organizations in the US, this paper investigates whether this basic claim about the desirability of revenue diversification is both correct and complete. Against the dominant trend in the literature that focuses on the risks of revenue concentration, we find that nonprofit organizations that have highly concentrated and specialized forms of revenue actually experience some significant benefits, in the form of lower administrative and fund-raising expenses. However, these savings are associated with greater exposure to swings in an organization's financial position. Based on our study of the broader world of nonprofit organizations, we conclude that social entrepreneurs likely face a more complex set of choices about the composition of their revenue than previous research has suggested.