The revenue diversification mantra runs far and wide in the nonprofit world, and the logic is usually intuitive: diverse revenue streams help organizations protect themselves from the dramatic revenue fluctuations that can be typical in a single source. An organization overly dependent on foundation dollars, for example, particularly if they are heavily reliant on one or a few large foundation grants, may really suffer when those foundations change priorities or lose a great deal of endowment value.

But the intuition is based largely on anecdote and extrapolation, and we’ve now got our first academic study interrogating those intuitions, specifically looking at “unrelated business income” ventures and their impact on organizational effectiveness and financial health. The Nonprofit Quarterly reported last week on the new study, which found that nonprofits running income-generating businesses tend to be less efficient in their mission work. The conclusions highlight what we think is a legitimate, predictable risk of “mission distraction” when groups maintain social enterprise side businesses or other unrelated business income ventures.

It’s not clear quite what the study results mean, though. It uses program expenditures as a proxy for organizational effectiveness, for one thing, which isn’t really a measure effectiveness at all. It’s much easier to measure inputs (program expenditures), of course, but what we should actually care about are the outputs (program outcomes). Whether intentional or not, the use of that proxy is predicated on the same logic that drives the “minimize overhead expenses” mantra, which we energetically resist. Program spending doesn’t tell us much about actual impact, whether we look at overall program spending or at program versus overhead spending. If you want to understand organizational effectiveness or impact, you have to look at the impact (or impact per dollar spent), not at spending alone.

Program expenditures as a proxy also misses effectiveness over the long-term. Are organizations with more diverse revenue streams more resilient over the long haul to fluctuations in individual revenue streams even if they seem less financial sound in any particular year? Does the experience of running what amounts to a private sector side business improve the business-running skills on the mission-oriented nonprofit side of the organization? Although the study found that organizations with business ventures unrelated to the mission were more likely to be experiencing financial distress (using a liabilities-to-assets ratio), the study doesn’t really tell us anything about whether those ventures are causing the distress, are caused by it, or are unrelated to the distress altogether.

And as the study’s author (Dr. Rebecca Tekula) speculates in the Nonprofit Quarterly blog comments, “nonprofits are seeing just as much difficulty with their income-generating activities as all corporations have during the last two years.” This highlights what I think is the most important question worth asking: under what circumstances do nonprofits successfully execute business ventures? I like the inquiry, and appreciate the study as a first stab on a complicated question, but I think the real value here is (hopefully) catalyzing the inquiry as opposed to any clear conclusions about when and how entrepreneurial ventures by nonprofits make sense.

The Fast Company blog had a nice piece a few days ago on what the Nonprofit Finance Fund Capital Partners call “philanthropic equity.” The basic premise of this approach involves using equity capital to fund nonprofit capacity building. Among the interesting angles: a nonprofit accounting system that tracks growth capital separately from general operating revenue. It doesn’t sound so radical but for most nonprofits, I’ll wager, it would dramatically shift the way they think about budgeting, accounting, and financial planning.

Nonprofit folks have heard for years about the importance of diversifying revenue streams, but outside of shifting from foundation dollars to donations and throwing in some events, I don’t have the sense that the nonprofit sector is pulling this off in any substantial way. Fast Company blogger Alice Korngold doesn’t talk much about what some of the creative approaches funded by the firm might look like. I think one of the challenges for this sort of effort to improve long-term financial viability for nonprofits is a lack of visibility for good examples of alternative revenue models. It’s not that the examples don’t exist, but they aren’t really part of the mainstream nonprofit conversation.

I suspect that the bigger challenges are cultural, though. Nonprofit folks often have a tough time conceptualizing revenue models that involve monetizing anything. It’s not a lack of imagination, but the norms of the sector itself – “We’re nonprofits . . . we don’t do that sort of thing” – can make it pretty hard to see some of the options. It’s not just the idea of monetizing that can be hard to get your head around, but accepting private investment capital and making large investments in long-term capacity (which looks a lot like what funders often call “excessive overhead”), well, the culture of nonprofits tends to resist rather than welcome.

One example of overcoming this resistance: A women’s leadership organization focused heavily on training recognized – thanks to a new board member with substantial corporate experience – that the market for their workshops was much larger than they had realized and willing to pay much than they were charging. They substantially increased their rates, generating a great deal more revenue while still fulfilling their mission of teaching leadership skills to women. To solve the access problem – making sure that women of all means could participate – they created new scholarship mechanisms, which turns out was easy to fund because of the increased revenue stream. This was a pretty radical shift, though, and I suspect that the conversations in the board meetings and among staff were challenging ones.

We’ve got a lot of work to do if we are serious about helping the nonprofit world think a little differently about how to approach the work of doing good.