Some Thoughts on Nonprofits

The nonprofit sector currently stands at about 5% or so of US GDP and hasn’t experienced any profound growth over the past several years. Donations are being scattered to many firms that support the same initiatives and firms are forced to squeeze their overhead costs until they are hardly able to operate (let alone expand their operations).

Why do we believe that nonprofits have to spend nearly every penny that we donate directly to the cause that we are supporting? Take a look at the for-profit sector — successful firms are able to invest their revenues back into their growth, into R&D, and into hiring the best talent that they can afford. This system weeds out the inefficient firms from the efficient firms and ultimately fuels growth for any given industry.

What if nonprofits were not judged based on what their overhead is, but how well they are able to use donor money to create value for that specific cause? This doesn’t mean that overhead is a completely irrelevant metric but that a much more holistic approach must be taken when evaluating a nonprofit. Instead of judging a breast cancer research fund based on how many pennies on your dollar are being donated directly to the research endeavors, it is more important to understand how the nonprofit is utilizing overhead to drive cutting-edge initiatives and hiring the brightest and most talented scientists that they can afford. We’re conditioned to believe there is a negative correlation between a nonprofit’s overhead and the efficiency of a nonprofit; however, this is dead wrong and is choking nonprofits into what the Stanford Social Innovation Review calls the Nonprofit Starvation Cycle.

We need to give nonprofits some breathing space so they can make more significant strides. The relationship between nonprofit and donors needs something that all successful relationships need: transparency. We need to be able to have more transparency on how our donations are being utilized so that donors can make well informed decisions on which firms they feel make the most positive net impact. Instead of sitting on the sidelines and placing donations into a “black box” of sorts, donors need to take a more active role in understanding what impact their donation is making and how the nonprofits they support are leveraging their donations to create more value. Instead of worrying strictly about overhead, the real questions should include: What talent is the nonprofit hiring? What research endeavors are they up-taking? What marketing campaigns are they embarking on to expand their reach?

This transparency will allow deserving nonprofits to flourish and mismanaged nonprofits to wane off. If a larger percentage of donations are going to the nonprofits that flourish, the nonprofit sector as a whole will inevitably experience growth as a result of better-appropriated donations.

Sure, this whole approach might sound risky but in the end it is just an application of capitalistic concepts to the nonprofit sector. Free enterprise works and this shift in mindset has the potential to result in massive growth for the nonprofit sector. When it’s all said and done, isn’t that all that matters?

I want to help drive a solution that results in more transparency within the nonprofit sector. I truly believe that the “overhead myth” is dispelled and if donations are appropriated to more efficient firms, the nonprofit sector will experience significant growth. If you’re interested in helping, feel free to reach out to me @haroonchoudery.

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