On Wednesday, the nonprofit news and politics site The Washington Independent announced that, after just under three years of publishing, it’s closing shop. Its state-based sister site The New Mexico Independent said it would reduce its staff to just one part-time blogger.

News organizations open and close all the time, but this one hit home for me. I joined The Washington Independent in late 2007 as its managing editor and went on to be its top editor before joining the Lab. Several of my former colleagues have already lamented the loss of a valuable news organization; I could do the same, but in the spirit of the Lab, I’d like instead to look at what went wrong financially and what lessons could be learned by other nonprofit publishers from its experiences.

To get a sense of what happened, I spoke with my old boss, David Bennahum, the CEO of the American Independent News Network, which publishes the Washington and New Mexico sites plus a network of six other sites. Back in January, Bennahum told me that in the first five years the organization existed, he’d raised $11.5 million. With that kind of impressive fundraising, what went wrong? And what kind of outlook do other nonprofit news sites have? Here are three contributing factors to the closing:

Nonprofit organizations are no less susceptible to the pain of an economic downturn. In the past two years, foundations and other donors regularly cited shirnking endowments as a reason for not renewing gifts or initiating new giving. That forced the network to spend less and still dip into reserves to cover costs. “It’s actually quite difficult to get these [nonprofit news sites] funded and get them to run,” he said, no matter the editorial success of the site. “It just never gets easier.”

In an email Bennahum sent to his staff, which he forwarded to me and is published in full at the end of this post, he broke down the numbers like this:

• In 2006, 2007, and 2008 we raised $8.3 million and spent $6.5 million.
• We ended 2008 with a surplus of $1.6 million.
• In 2009 we raised $2.7 million and spent $3.1 million, eating into our reserves by $400,000.
• In 2010 we will raise $1.9 million and spend $2.7 million; we expect this to leave us around $400,000 in reserves.

Going forward, each site in the network will need to generate enough fundraising to support its operations — successful fundraising for one site will no longer support other nodes in the network. The Washington and New Mexico sites were the two not pulling in enough to cover their costs independently. They also both launched in 2008 with a similar structural problem. In Washington’s case, a single $600,000 donation largely got the project off the ground. New Mexico launched with the backing of a small pool of donors. Those early donors didn’t renew another year.

Bennahum says in hindsight, he should not have launched without multi-year commitments from big donors, even if it meant starting off smaller. For example, had he negotiated the $600,000 donation as three $200,000 grants over three years, The Washington Independent would have been smaller, but more stable. “We would have been half the size — which means today, instead of this position, I might have had several hundred thousand more dollars left,” he said. “We probably wouldn’t be closing The Washington Independent.”

The Washington Independent launched with two full-time editors, about ten reporters (a mix of full and part time) and a substantial freelance budget. By the closing announcement, the staff was down to one editor and four reporters. “You have to have your own diet. If someone puts out a big buffet in front of you, you have to think twice,” he said. “That’s a lesson I’ve learned that we’ll just never repeat again.”

Bennahum says the next year will focus on what he described as “a more diversified mix of journalism projects that work in recessionary times.” Earlier this year he launched a site called The American Independent that aggregates stories from around the network and runs original content from states without standalone sites. The idea is to produce new content without the commitment of launching a new state-based site. Currently, reporters file stories from North Carolina and Texas. The funding for those reporters ends in January 2011, which they understood when hired on contract. The site, though, will continue to operate.

“The incremental cost to adding reporters [to The American Independent] is potentially a much lower price than you could operate a newsroom,” he said. “It creates a much more organic and gentle growth path.”

The network will continue operating sites with small staffs of one to three reporters in Iowa, Colorado, Michigan and Minnesota. The Florida Independent received a grant from the Knight Foundation this year for $175,000 (the network’s largest donation) and will continue to operate with a staff of five.

Bennahum says he wants to experiment more with syndicating content across his sites to see if even a site with one reporter can serve a community. “It’s just a great thought experiment,” he said.

So what does The Washington Independent’s demise say about the growing nonprofit sector of journalism? Bennahum said that, for now at least, journalism still isn’t in the same category as the sort of nonprofit entities that get long-term foundation support, like hospitals or schools. Philanthropists are still watching where the news industry is headed.

“‘Let the market sort it out,’ is a lucid response, and not necessarily wrong,” he said. “For the foreseeable future, success [in nonprofit journalism] is going to be the exception to the rule.”

—

David Bennahum’s staff email:

Dear Team Members:

In four years, we have built an extraordinary news organization. We can proudly track 600,000 monthly readers, and cite dozens of stories that have had a demonstrable impact in the communities we serve. Along the way, we’ve also received over 40 awards for excellence in journalism. We have pioneered a model that melds the benefits of the Internet (speed, voice, dialogue) with the discipline of serious investigative journalism.

I am proud of all we have accomplished together.

It is all the more remarkable for how we’ve done this in the worst economic climate since the Great Depression.

So I want to be transparent with you in regards to our financial position, as it will have consequences for 2011. Here’s the arithmetic:

• In 2006, 2007, and 2008 we raised $8.3 million and spent $6.5 million.
• We ended 2008 with a surplus of $1.6 million.
• In 2009 we raised $2.7 million and spent $3.1 million, eating into our reserves by $400,000.
• In 2010 we will raise $1.9 million and spend $2.7 million; we expect this to leave us around $400,000 in reserves.

Thus we have, for two years, been self-financing from reserves accrued during better economic times. I am grateful for these reserves, and that we could use them judiciously over 24 months. However, it is no longer possible to self-finance the gap between income and expenditures, for the simple reason that our cash reserves are too limited to do so.

Much of the shortfall in our income has to do with the larger economic climate. But not all. Here are some other factors that I, frankly, underestimated: We agreed, in the past, to open programs without multi-year commitments from supporters. In some cases, these supporters have not renewed their commitments, yet we have kept operating the programs at close to scale. In particular, this is the case both for The New Mexico Independent and The Washington Independent.

We are approaching our fifth year of operations; some of our founding supporters have, understandably, felt that the time has arrived to shift their support elsewhere. This is a relatively predictable pattern in philanthropy: 3-5 years of support from any given source is a safe assumption. Replacing this support with new support requires a 9-18 month development cycle. In this economic climate, it is closer to 18 months. The net result is that we see, in addition to a shortfall, our most conservative estimates actually coming true. For instance, in the summer of 2009 we did a worst case scenario for 2010, with regards to income, and projected $1.9 million in revenues. This is precisely what happened.

So going forward, we must adopt a new set of rules, to ensure our overall viability through an economic crisis that persists, and may persist for several more years:

Institute “pay go” budgets: programs must be supported. When they are not, they have to be either closed or operated at the level being supported. In the case of new programs, require multi-year commitments as a precondition for operations. This is what we have successfully done in Florida, where the program has two year commitments.

Be more innovative in terms of leveraging the “network effect” to help smaller programs operate with limited budgets. We pioneered this in Minnesota, where we’ve learned to operate a robust site with one full time reporter. The site is successful thanks, in part, to the way we can syndicate content throughout the network from our sister sites.

Using this framework, there are two programs that, unfortunately, are no longer sustainable at their current levels: The New Mexico Independent and The Washington Independent.

In the case of New Mexico, we are going to institute the Minnesota model, with the aim of working to rebuild support over time. In the case of The Washington Independent, we are going to merge the site with The American Independent, and now have one national place (instead of two) for all our reporting. Over time, we aim to build up our reporting capacity in Washington as support develops.

And going forward, we will be looking to a different architecture with regards to how we create new sites: more of our programs will live as “state pages” on AmericanIndependent.com rather than as stand alone websites. This will provide us with more flexibility and leave us less vulnerable to sudden changes in support levels.

More details in terms of how these changes will affect you will be forthcoming shortly from the editorial team.

I know that this news is hard, and the decisions that led to this did not come easily. We have learned to work with less, and done so admirably, but I am taking the prudent course that will ensure our network and its mission can thrive. And if things improve faster than anticipated, I look forward to having that good problem on our hands.

Please know that you can come to me with any questions about this situation.

Thank you.

Best,
David