Brad Hargreaves | Building Things

Brad Hargreaves on entrepreneurship, community and life

The Nonprofit Model is Broken

with 10 comments

When someone at a tech event pitches me on a nonprofit, I have a tendency to tune out. It’s not because I’m a terrible person. It’s because small nonprofits often combine the professionalism and scale of early-stage startups with the stakeholder motivation and agility of Fortune 500 companies.

The nonprofit model has its place. The structure works for charities, for instance, where the entity doesn’t need to do much beyond raising and distributing money. But it’s a poor fit for entrepreneurs who are trying to scalably effect social change by building a socially-motivated enterprise.

It shouldn’t be this way — after all, most founders who structure their companies as 501(c)(3) nonprofits are simply trying to change the way something works for the better. Usually they have backgrounds in large corporations or academia rather than startups. Thus, they don’t necessarily think about economic incentive — one of the most critical aspects of starting a successful company. The 501(c)(3) model removes economic incentives by eliminating stock and setting market-driven salary caps for employees and board members, preventing anyone associated with the organization from earning meaningful returns.

Sure, people are motivated by things other than money — such as the potential to do good in the world. But successful businesses are able to quantify success, and most measures of social good are difficult to quantify. The social enterprises I have seen accomplish the most are able to align their profitability with social good, which gives them a far more tangible target. They can also give their employees financial incentives for hitting targets that are aligned with the organization’s social goals, a double whammy of motivation to get things done.

Combine all this, and the nonprofit model makes it difficult for companies to recruit top-tier talent. Unlike top-quartile workers ten years ago, employees today understand equity, options and other incentives. They know the value of their time. An all-star developer might volunteer on the weekends for a nonprofit but is unlikely to choose it as a full-time job over a position at a startup or big company. The inability to score top talent is a positive feedback cycle, as a new potential hire is unlikely to want to join an organization filled with mediocre, unmotivated people.

Ultimately, companies are measured by the social good they accomplish, not their tax structure. It makes no sense for a social enterprise to let the latter limit the former.

Written by Brad Hargreaves

December 19th, 2010 at 12:02 pm

  • Marc Bush

    Hi Brad u2013 I agree that the rise and popularization of for-profit social-mission businesses (and the associated supporting infrastructure groups, incubators, and funders) is an exciting trend. And I also think that you raise some good points about nonprofit organizations. But Iu2019m not ready to accept that the nonprofit model is broken.nnA few examples of successful nonprofits come to mind for consideration. Donors Choose, Kiva, and charity: water are all nonprofit organizations that have used tech in a new or novel way, and have been able to scale and have success. Iu2019m not an expert on any of these groups, but I would imagine that theyu2019ve been successful by creating great organizational cultures; attracting, managing, and retaining talent; and engaging employees and other constituents through mission-centric work environments. You could have these elements with either for- or non-profit corporate structures. I donu2019t think that thereu2019s anything inherent to the non-profit structure that prevents large-scale impact. (In some cases, the nonprofit structure offers benefits over for-profit structure – in terms of funding and/or legal considerations.)nnOne byproduct of the for-profit social-mission movement has been that nonprofits are becoming more savvy and forward-thinking about business and management issues. Theyu2019re thinking more and smarter about how to be sustainable u2013 through exploring earned-income programs, attracting and retaining employees through competitive compensation, and other practices. At the same time, private businesses are thinking about being more purposeful (beyond pure profit-seeking) and mission-driven. The line between for- and non-profits is continuously becoming fuzzier.nn- Marc Bush

  • Eric Cantor

    Thoughtful piece, Brad. I’d be interested in knowing which social enterprises you have seen accomplishing a lot by aligning profitability with social good. E

  • Brad Hargreaves

    Thanks. A few examples / categories off the top of my head:rnrn1) All the microfinance companies (e.g., Grameen)rn2) Green products, including green energyrn3) One stealth startup building new software products for human servicesrnagencies

  • Lee Grebstein

    Brad,nnYour posts are insightful and you clearly spend much time thinking deeply about various issues surrounding entrepreneurship. If I could voice one criticism, it would be that your writing is high on abstraction and low on concrete examples and anecdotes. Employing a few well-chosen examples (even contrived ones meant to illustrate your points) would go a long way in adding impact. Just some food for thought…

  • Paul Foster

    Brad I think I would disagree with you. I think in many fields, health and education are two that come to mind ,it is not that difficult to identify key benchmarks for success that have nothing to do with finances. There are people who are motivated by wanting to bring about social change. benchmarks can be anything from wanting to provide rural heath care to people in rural Kenya to making primary schools accessible to more children in Tanzania. The list of objectives is endless. What is critical is having effective systems and people involved who know how to foster social change . I would argue that profit is not necessarily an element in making many programs ( many that are non-profit) hugely successful and meaningful.

  • Brad Hargreaves

    The nonprofit model is fine for charities and similar models (that is,rnentities that raise funding and either distribute the funding or spend itrndirectly on individual projects [e.g., an irrigation system or a school]rnrather than platforms [e.g., a microfinance site]).rnrnIt doesn’t work when people try to apply it to non-charities that are tryingrnto build more scalable mechanisms for creating social change. In thosernmodels, there’s a need for a diversity of ways to incentivize people, sincernyou need more different skill sets to achieve success.

  • Ryan Witt

    I disagree here, in that health and education are more easily quantifiable. Those are two of the most unquantifiable industries there are. (We still have issues in this country measuring quality health and education.) I agree with Brad in that non-profits need a succinct value pitch — X money comes in, this is the result/action. This works with building schools and “projects;” however, I’m not so sure how well it works for more long-term change. However, I think grant money and government funding is ideal for these (more long-term and investment heavy/socially conscious) projects. Even with a for-profit company, you need a succinct and focused business plan, value pitch, etcetera. Moreover, most for-profits want a fast IRR. If they don’t want the ROI fast, then they want a big one… And, most socially-conscious startups aren’t exactly the Googles, Facebooks or Groupons (big money projects).nnThoughts?

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  • hellosailor

    I think this is a little unfair. Sure, non-profits do face special challenges, but I don’t think most are filled with “mediocre people.” I do think that sometimes there is a lack of corporate business experience, but my husband came up through the non-profit world (because he cares a lot about doing good) and he and his colleagues (he is now on the corporate side) are very astute business people. Of course, he has done a lot of work with entrepreneurship, so maybe that’s why.

  • hellosailor

    Aha! My husband has worked in microfinance. Maybe that is why, but I still have a hard time believing that most non-profits are so incompetent. (Anyway, I’m really late to the party, but am enjoying reading your blog.)