What’s Wrong With The Nonprofit Sector?

I’ve become disillusioned with the nonprofit sector lately. I came out of grad school excited about the role technology could play in rethinking the challenges we face in international development. How might we design for low resource environments from first principles, with technology enabling novel and lower cost interventions? I started to consider how to shift Silicon Valley philanthropists towards such opportunities, with valuable technical expertise to contribute in addition to dollars. But there are a number of seriously problematic attributes of the sector that are giving me pause.

First, fundraising. Fundraising brings a host of challenges, including scaling, management attention, and strategic distortion. It’s extremely difficult to raise enough philanthropic funding to get to scale as a nonprofit. Software focused nonprofits have a shot at it due to the economics of their products, but for others with even nominal marginal costs per recipient, it’s a huge challenge (software focused nonprofits are limited for different reasons, coming up next). Organizations that scale to reach millions of people almost invariably require multi-million dollar budgets, and it’s difficult to get grants at that scale from traditional donors. Foundations tend to have a limited time horizon for funding any particular organization, and their strategies shift frequently. In addition to these basic issues of raising sufficient funds for scale, the fundraising process takes up an inordinate fraction of leadership’s time. Moreover, most foundations restrict the use of their funds, focusing on programs that are aligned with the foundation’s goals over what is best for realizing the nonprofit’s mission. In the most pernicious cases, nonprofits will define programming based on where foundations are most inclined to give instead of a strategy to realize an overarching mission, seriously corrupting the organization. Some nonprofits can sidestep these issues with earned revenue models, but fundraising presents a big challenge for most.

Second, talent. It’s an uphill battle to attract top talent, especially top technical talent. This makes it incredibly difficult to build technology with impact at scale. Exceptional management and technical talent have opportunity costs upwards of a $500k a year. A nonprofit would get excoriated for paying those kinds of salaries (this challenge is well articulated in Dan Pallotta’s powerful TED talk). Some might be willing to take a pay cut, but many can’t or are only willing to do so for a short period of time (which leads to another issue: turnover). The competition for talent is fierce between startups in Silicon Valley. The mean salary for a software engineer is more than many nonprofits pay their Executive Directors. Senior engineering talent at top tech companies can make seven figures a year. How is a nonprofit supposed to compete with that? A nonprofit might be able to hire senior talent that’s already made enough money to no longer care, and junior talent might be willing to do tours of duty at a nonprofit, but building a large scale development team in a nonprofit is inherently extremely challenging. Nonprofits then, seem to be massively inhibited in their ability to build large, world class teams that can drive an organization affecting millions of people.

Finally, stepping away from the micro issues facing any particular organization, there is the macro issue of the relative size of the sector itself. The scale of the nonprofit sector is dwarfed by the for profit sector. According to the National Center for Charitable Statistics, there are 1.1M nonprofit organizations today, with $1.73T in revenue in 2013 and representing 5.3% of GDP in 2014. Compare that to the Fortune 500, which together total $12T in revenues, and represent two-thirds of US GDP. I’ve heard that reaching the Sustainable Development Goals the world has just established for itself will require a total investment of $4 Trillion dollars over the next fifteen years. $600B of that will come from traditional aid sources such as the World Bank, Development Banks, the IMF, and bilateral organizations (I’m looking to verify this). The rest has to come from private financing.

All of this has led me to focus my attention currently on the emerging “fourth sector” of the economy: for benefit enterprise. Or social enterprise. Or conscious businesses. Or sustainable business. There are so many names for it. Such organizations, at minimum put purpose on par with profit, and have an earned revenue model. The revenue model, of course, gets around the fundraising issues. The acceptance of for profit level compensation and opportunity to give equity means that entrepreneurs and employees don’t have to seriously trade off income generation for purpose. Which in turn means such organizations can attract large teams of top talent. And the fact that these companies have profit and exit potential means that the sector can draw from a much larger pool of capital than nonprofits alone.

I would like to believe I am wrong here, and welcome comments refuting my points. I know there are hugely important problems in the world that simply cannot be solved through business model driven interventions, and we most certainly need to attract our best resources towards solving them. But for now, I’m working towards driving more of our top talent and resources away from traditional for profits and into this new, earned revenue based sector. I think the opportunity is immense and I’m excited to play a role in its development.

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