Nonprofits are Perpetual Start-ups

Category: News

Do you consider yourself an entrepreneur? Love the start-up culture? Want to change the world? Maybe you’re cut out for nonprofit leadership. Or maybe not.

“Nonprofit organizations should operate more like a business.” It’s a common lament. If you’ve got talent for business, perhaps you could change the world. But what kind of business? The mom-and-pop corner market? A burgeoning craft brewer? A multi-national corporation? And how does business talent translate to the social sector?

Of course, “nonprofit” is a tax status, not strategy. Nonprofits adopt require many business skills like performance management, succession planning, risk management, financial controls and processes.

But, there are clear distinctions in nonprofit models, like fund accounting, transparency, and governance structure, that simply don’t apply—or won’t fly—in business.

Is it helpful—even reasonable—to expect business success to translate to the social sector? If so, the appropriate comparison is not a gleaming tech-sector star or venerable multi-national conglomerate. The typical nonprofit organization is a perpetual start-up. In business, entrepreneurs are celebrated celebrities where even struggling (i.e., “pre-profitable”) start-ups enjoy a certain cachet. Startups are judged leniently in terms of liquidity and capitalization, systems, processes, and infrastructure. It’s all about the innovative idea, known in the nonprofit world as the “mission.”

Nonprofits of any age and every lifecycle often display the good and bad of start-up culture. How are they comparable?

The core business doesn’t (yet) fuel the enterprise. “I hope it doesn’t rain tomorrow,” the executive director of a nonprofit was heard to say. “We’re having a golf tournament fundraiser and we need the money to meet next week’s payroll.”[1] Managing the flow of cash in and out of an enterprise is a balancing act. Day-to-day liquidity is hampered by seasonality of sales, or the need to build up inventory by manufacturing well in anticipation of future sales. As the business matures, reserves or lines-of-credit can help to even out cash-flow cycles. The nonprofit executive must anticipate fickle funders or delayed reimbursements, while also providing mission-critical activities that may never pay for themselves.

a meeting of nonprofit start-upsBoth are hungry for capital. Always. In startups, it’s “financing rounds” from angel investors, venture capitalists, or even family and friends. Nonprofits seek philanthropic investment from generous donors to bolster earned revenue. While start-ups face intermittent financing rounds based on business milestones, most nonprofits start an all-new financing round each fiscal year. Similar processes with similar objectives: although one is lauded as an investment model while the other can be denigrated as little more than “charitable welfare,” no matter how great the social impact.

People are stretched thin. “…long hours in the rush to high-volume production, mission creep, and a tense culture that reflects their visionary but indefatigable CEO…”[2] This description could be applied to many nonprofits of virtually any size or age—although it is actually a description of the talent challenges faced by Tesla.

Talent is inspired by mission and vision. “Chase the vision, not the money; the money will end up following you,” according to Tony Hsieh, CEO of online giant Zappos[3]. While entrepreneurs may dream of a big payday someday, they get up each morning to chase a dream, inspired by their belief in the product or service. It’s the same in the nonprofit world, where belief in the mission draws talented people who are inspired to serve—without the expectation of that someday payoff.

It’s hard for a leader to let go. Reams of studies explore the psychology of founders and long-term leaders who might describe the enterprise as their “child,” and find it wrenching to cede control to others. Whether its Uber or Turing Pharmaceuticals or a nonprofit, a board may need to step in to affect a transition.

There are differences, too.

Follow the money. “When a venture fund takes a large stake in a start-up, they insist on a seat on the board in order to exert influence,” says Amber Cutler, a partner at PwC LLP who lists several venture-backed startups among her clients. When philanthropists make a transformational gift, they may—or may not—have a tacit expectation of a board seat. They are almost certain to influence the purse strings through a gift agreement that designates the use of their funding. Imagine managing an investment that can be used only for R&D or marketing, but not salaries, travel or overhead. Nonprofit leaders do it all the time.

The bottom line. For the start-up, it’s straightforward: create financial value (more is always better). In a nonprofit, there are at least three bottom lines: income exceeds expense (profit), the desired impact is achieved (planet), and the human condition is advanced (people).[4]

nonprofit startups discussing challengesThe scale of the problem. Often, nonprofit missions focus on “wicked problems” that are challenging to define and nearly impossible to solve. As Frederick O. Andersson stated in his seminal article “Social Entrepreneurship as Fetish”[5], “…if business enterprises and their practices were any better than nonprofit or public agencies at solving social problems, why haven’t they already done so?” Tackling a “wicked problem” is rarely a profitable venture.

The Payoff. Most startups have an exit strategy to reward founders and early investors: an initial public offering or acquisition. If a nonprofit’s founders seek any reward, it is intangible, such as the satisfaction of propagating a beloved art form, or the gratification of helping others in need. Rather than wealth creation, the impact made by the successful execution of the mission and vision of a nonprofit organization becomes the reward.

Merger or acquisition are tough. Consider the trajectory of Ovarian Cycle, an upstart nonprofit inspired when founder Bethany Diamond lost a dear friend to ovarian cancer. With the help of others, she held fundraising events at spinning studios around Atlanta, Georgia. As the events spread, a formal 501(c)3 was established, a mostly-Millennial board recruited, and director hired. Then growing pains emerged: board members stretched thin by parenthood and budding careers, escalating overhead, and—most importantly—questions about the best use of the growing proceeds from the events. Upon reflection, the board concluded merging with the Ovarian Cancer Research Fund could best perpetuate their mission. They also learned that a nonprofit merger is complex with none of the fanfare that comes with a high-profile corporate merger, but all the toil. It took more than two years for the treasurer (the CPA mentioned earlier) to submit the final IRS 990, close out separate bank accounts and officially close down the organization with the Georgia Secretary of State.

Risk (In)tolerance Society (i.e.donors) don’t accept loss/failure on the “investment” in nonprofits. It’s an important distinction that isn’t much discussed. An investor can invest a billion bucks in a new Google product that goes bust, and well, that’s business. Not so for nonprofits. Loss of an investor’s (donor’s) money is not accepted.

Conclusion

Consider that in 2016, more than 225,000[6] businesses were founded. Some launched with high hopes of joining Amazon and Google as the next “big thing.” Others simply seek to fill a modest niche—like a corner market in a food desert, a craft beer that utilizes local growers’ hops, or a restaurant that employs formerly incarcerated men and women like Hot Chicken Takeover. (see https://www.politico.com/magazine/story/2018/06/28/an-ohio-startup-rebuilds-lives-one-piece-of-fried-chicken-at-a-time-218896). Three out of four will fail.[7] The resulting loss of an investor’s funds will be chalked up to the cost of doing business. And the most resilient of these opportunists will try again. And again.

And now consider that in 2016, 81,868[8] new nonprofit organizations registered with the IRS, also having aspirations that ranged from grand to granular. Some will earn the spotlight. Few will grow beyond $250,000 in revenue—although even these modest organizations have the potential to transform a handful of lives. Others will fade from existence after they file their first IRS 990, or fold into a larger nonprofit’s program portfolio. These nonprofit “entrepreneurs” will calculate ROI in terms of lives saved, beauty created, or knowledge gained. Their contributions to the common good shine in comparison to the latest tech gadget or app, and are worthy of the best entrepreneurial talent we can muster.

 

By Laura MacDonald, CFRE
President and Founder, Benefactor Group
Board member @ Giving Institute and Vice-chair of Giving USA® Foundation Board
©2018

[1] http://sponsored.bostonglobe.com/rocklandtrust/cash-flow-is-key-to-surviving-the-storm-in-nonprofit-world/

[2] Dana Hull, “Tesla, ‘stretched to the limit,’ sees key talent head for exit,” Automotive News, March 3, 2017, http://www.autonews.com/article/20170303/OEM/303039928/tesla-stretched-to-the-limit-sees-key-talent-head-for-exit.

[3] Richard Harroch, “50 Inspirational Quotes for Startups and Entrepreneurs,” Forbes, February 10, 2014, https://www.forbes.com/sites/allbusiness/2014/02/10/50-inspirational-quotes-for-startups-and-entrepreneurs/#48aee6ce6ef0.

[4] Rick Cohen, “Understanding the Meaning of the Triple-Bottom-Line,” Nonprofit Quarterly, April 21, 2011.

[5] Fredrik Andersson, “Social Entrepreneurship as Fetish,” Nonprofit Quarterly, April 11, 2012.

[6] “Entrepreneurship and the U.S. Economy,” Business Employment Dynamics, Bureau of Labor Statistics, last modified April 28, 2016, https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm.

[7] Deborah Gage, “The Venture Capital Secret: 3 Out of 4 Start-Ups Fail,” WSJ, Updated September 20, 2012, https://www.wsj.com/articles/SB10000872396390443720204578004980476429190.

[8] “Exempt Organizations Business Master File Extract”, Internal Revenue Service, last modified October 9, 2017, https://www.irs.gov/charities-non-profits/exempt-organizations-business-master-file-extract-eo-bmf.