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The Nonprofit Model is Broken

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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