Sponsorship Revenue – Capital or Operational?

I often hear people talk about their upcoming capital campaign for the building of a new performing arts centre, arena, pool, or classroom block. They might need to raise anywhere from a few hundred thousand to hundreds of millions of dollars. And of course, they think sponsorship is the solution. “Hey, we will get ABC Bank to give us a million dollars and we will give them a sponsorship, including the building naming rights for 25 years. We will get the money up front and then we will have the $1million we need for our capital fundraising campaign.”

This is bad advice. If your consultant thinks it is a good idea, find another consultant. If ABC Bank or Telco wants to make a philanthropic gift of $1 million and give you the money up front, that is awesome. Take the money. But in case you don’t know, the law says it is a gift only if they get nothing (no recognition whatsoever) in return. And if I was a shareholder at ABC Bank, I would want to get something in return, like a naming right. And if ABC Bank’s marketing and communications folks are involved and this is actually a sponsorship marketing investment, then I am not paying up front. I am paying $40,000 a year for 25 years! (Who the heck pays 25 years in advance for a marketing investment? That is like you saying to your local radio station or newspaper, or even Google or Facebook, “Hey, I am going to buy ads from you and I have some extra cash around, so I am not going to pay you each month for the ads you run for me. Instead, I am going to pay you for those ads for the next 25 years in advance. You keep the money and do whatever you want with it and I will await the delivery of my ads for the next 25 years.” Really? Who does this as a marketing investment? No one in their right mind!) So, that is the first thing. If it is truly a marketing investment, your partner is going to pay you annually for the term, not up front. That means you don’t get the money to use in the capital campaign (unless you are using it to service debt on a 25-year mortgage!).

Let’s look at it from a practical perspective. Capital building projects are expensive. Typically these builings and rograms are even more expensive to maintain and operate! Operating budgets are never adequate. Ask any organization that builds a public swimming pool, hockey rink, or performing arts centre. They cost tens if not hundreds of millions to build, but over 40 years (average life expectancy of commercial buildings in Canada), operating costs escalate and will amount to 25 to 35 times the capital cost. So, you need that annual revenue from sponsors to help sustain your infrastructure and building from an operating cost perspective.

Here is what I have seen too many times. A consultant, and typically a philanthropic fundraising consultant or consultancy/agency that dabbles in sponsorship marketing on the side, or thinks there is no difference between a sponsorship naming right and a charitable naming right, or provides advice in an area they are not an expert in such as sponsorship, gets your organization into trouble. It could be tax issues with the CRA, but more often, it is about “raising all the capital campaign money we can.” They “sell off” everything in the name of the capital campaign. All the money is pledged and paid up-front or in the first few years of operating the facility. But the naming rights to the building, dressing room, or atrium, or alignment with the afterschool program or the mom and tot swim are all sold for a term of ten years or more. So basically, for the next 10 years, because everything was sold by the amazing consultants/staff managing the capital campaign, there is NOTHING left to sell for sponsorship on an annual basis for at least 10 years. All the money that came in went to pay for the capital build. But those brilliant consultants built you out a proforma or annual projection for the next 10 years in your operating budget showing $200,000 a year annually in sponsorship. Well and good—but you have nothing to sell for sponsorship— it is all gone. So that pretty line item of $200,000 in sponsorship revenue annually that gave you such confidence for your operating budget is a fraud. You cannot generate $200,000 a year. You have nothing left to sell. Now your annual revenue is $200,000 short. What do you do? In a few years, you end up going basically bankrupt because you cannot balance the books. And who wants to sponsor you in 10 years’ time when those assets open up? You are a shambles! But those capital campaign consultants—they did their job! They got you the money to pay for the building. What they failed to do was understand that sponsorship is not capital money—it is operational money paid annually—or money that comes in as value is delivered, not up front like a gift. They got the glory for exceeding the campaign goal, but your organization suffers and possibly closes because your advisors did not understand the difference between capital and operational revenue (which is ALWAYS harder to come by). That is why sponsorship dollars need to support operations, not capital fundraising.

Let me be clear. There are some amazing philanthropic consulting firms out there that get this. We work with many of them. They get that they are NOT experts in sponsorship, but rather experts in philanthropic giving. As we do when asked about gifts, philanthropy, capital and annual campaigns, they clearly state, “We are not sponsorship professionals—here is a list of great companies that can help you directly or that we can bring on board for this capital campaign to support your sponsorship program overall and integrate those opportunities into capital asks.” Whenever we are asked about areas in which we are not the experts, such philanthropic giving and capital fundraising campaigns, we share a list of great firms that can help them in those areas.

Like the soothsayer said, “Beware the ides of March.” I urge you to be wary of people and firms that say they can help you in your capital campaign through a sponsorship or corporate sponsorship naming approach. Sponsorship revenue is operational income, not capital income.

To learn more about this and other topics around sponsorship expertise, you should attend the Western Sponsorship Congress? Alberta Forum .

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