Government is a common funding source to rapidly scale effective nonprofit programs. New initiatives such as social impact bonds and President Obama’s Social Innovation Fund seek to further support rapid nonprofit growth. Yet, we lack an empirical understanding of the organizational impacts of rapidly expanding nonprofit programs in this way. On one hand, quick growth and dependence on government funding can lead to efficiency gains, particularly lowering the fundraising and management costs of maintaining multiple revenue streams. On the other hand, such dependence on one funding source reduces an organization’s revenue diversification and financial health. This can cause greater financial instability and fewer services during economic downturns and government cuts – times when those services are in greatest demand. Are the efficiency gains from government funded rapid scaling worth the risks to nonprofit financial health and the communities they serve? We propose to analyze this efficiency-stability tradeoff to inform public sector grantmaking practices and new initiatives to rapidly scale nonprofit programs.

To analyze the impact of rapid scaling on nonprofit financial efficiency and stability, we use unique panel data of over 7000 government grants from six State of Georgia agencies combined with IRS 990 data on human service nonprofit grant recipients from 1998 to 2009.  We measure government funded growth rates and examine the time-lagged fixed effects of this variable on financial health and efficiency measures and subsequent program service cuts during the economic recession. We expect rapid growth to be positively correlated with short term financial efficiency because organizations will be able to leanly operate on one dominant revenue stream. However, we expect this variable to be negatively correlated with revenue diversification and other financial health indicators in future time periods and to organizations’ ability to maintain service expenses in during the economic recession and government cuts.

This study has a number of important implications for policy and management. If rapid scaling through government grants leads to short term efficiency gains but long term instability of human service programs, the efficiency-stability tradeoff may produce greater costs than benefits. If, however, rapidly-scaling, government-dependent organizations perform as well as or better than other organizations through the economic recession, policies to promote efficient rather than stable growth may produce overall benefits and better serve communities through continuing to rapidly scale effective programs.