The Problem With Nonprofits
[Listen to an audio version of this blog here.]
One of my acquaintances was starting a nonprofit. "I'm just getting the paperwork filed," he told me, "and working on a website and branding."
"How are you going to raise money?" I asked, a fair and important question.
"Raising money should be the easy part," he answered. If only it were that easy.
There are roughly 1.5 million nonprofits (501c3's) in the United States, employing about 10 percent of our workforce. This includes schools and churches as well as public and private foundations. Like the for-profit sector, starting a successful nonprofit isn't easy. After five years, nearly 50% of for-profit businesses have faltered, while after 10 years, 65.5% of businesses have failed. Similarly, nearly 50% of nonprofits are unsuccessful in year one and about 30% will cease to exist after ten years.
So there are a lot of nonprofits, and a lot of nonprofits that fail, but what about the ones that exist? Nonprofits run the gamut as far as size goes, with about 40 percent of all nonprofits operating within an annual budget of less $100,000 or less. Another 31 percent of nonprofits have annual budgets of between $100,000-$500,000, 9 percent have annual budgets between $500,000 and 1 million, and the last 20 percent have annual operating budgets of over 1 million dollars. Many of the largest nonprofits are in the health and education sectors, and some of the behemoth nonprofits (the United Way, the Salvation Army, St. Jude, Boys and Girls Clubs) have annual operating budgets in the billions, but I digress.
I wanted to know why so many nonprofits struggle, and I may as well be asking the question, why do so many businesses in general struggle? The biggest differences between for-profit businesses and a non-profits are their tax designations and optics. Non-profits are supposed to serve communities and fill gaps that governments and municipalities can't (or don't) fill. Whereas the for-profit sector exists to turn a profit, the nonprofit sector exists to both turn a profit and benefit our shared communities. After working in both small and large nonprofits, I came to understand some difficulties of the sector and the data doesn't lie. Nonprofits struggle because:
1. Some nonprofits struggle because the market is saturated.
Too many nonprofits are doing the same things. How many organizations serve the homeless? More than 36,000. As a fundraiser, I heard time and time again from donors how nonprofits should collaborate more, and it makes sense, doesn't it? Yes and no. Yes, because if all the housing organizations collaborated to find the best solution, we could probably better serve the homeless. But each nonprofit is competing for funds and very few want to change the way they do things.
2. Nonprofits struggle when they aren't run like a business.
Nonprofits are formed every day for any number of large and small issues. I found one that exists solely to promote being barefoot, and much of their work was in convincing businesses to allow barefoot customers (slow progress on that front). Nonprofits often rely on the heartfelt desire to make the world a better place while ignoring the fact that more money needs to be coming in that goes out.
3. Nonprofits struggle when they can't attract good employees.
The reasons they can't attract good employees are many: poor pay, poor leadership, rigid hierarchies, limited opportunities for growth. In an effort to keep overhead as low as possible, nonprofits often pay their employees less than they should. It takes money to raise money, but it also takes money to attract and retain good employees. And sometimes, employees are underpaid while CEO's are overpaid, just like in the business world. Take a look at the average earnings of nonprofit CEO's by organization size here.
4. Nonprofits struggle when they have poor leadership.
Businesses in general struggle under poor leadership. Nonprofit leaders can often exhibit “founder’s syndrome," to describe a founder’s resistance to change. Founders can also have trouble rescinding control, and thereby have their hands in too many things. Nonprofit boards of directors also play a key role in the success of an organization. But founders sometimes can't (or won't) manage a board well. Board member should not only want to be there, but should help the nonprofit grow.
5. Nonprofits struggle when they lack a clear mission and measurable outcomes.
In a recent Los Angeles Times article about Los Angeles’ Museum of Contemporary Art’s (MOCA) efforts to raise $100 million, a fundraising consultant said, “People like to give to excellence. It’s excellence, not need that generates big gifts." Excellence doesn't rely on anecdotal stories of happy clients. Having a clear mission and measurable outcomes proves that whatever a nonprofit is doing works, and that's important when seeking big funding. One nonprofit called Youth Village used evidence-based practices to help children in the foster system, and to prevent more kids from entering the foster system in the first place. Their results-oriented approach has helped them grow into 23 states, 101 locations, and have an 87% success rate.
P.S. Read one take on the utility of hosting a nonprofit event here, read about the difference between a public and private foundation here, or find top-rated charities to donate to here.