So, You Want to Start a Nonprofit?

In my 20s, living in Chicago, I chose to pursue my MBA with a grand vision of starting my own nonprofit organization. I took courses in nonprofit management and social enterprise with eagerness and passion. Then, one day during a class lecture, my instructor said, “Many of you probably want to start a nonprofit, but don’t. There are enough nonprofits. The best thing you can do for the nonprofit sector is get a high-paying job and donate.”

This short, well-intended statement dramatically changed my career trajectory. Instead of starting my own nonprofit, I pursued a doctoral degree so that I could empirically examine assumptions, like this one, about the nonprofit sector.

Here is what I’ve found: It’s true that the number of nonprofit organizations has been increasing rapidly. There are now more than 1.5 million nonprofits in the United States. Historically, this growth has been due to increases in government contracts and grants available to the sector. The proliferation of nonprofits is felt by nonprofit leaders and many complain of intensifying competition for funding.

However, there is another side to the story.

Some research indicates that, despite there being more nonprofits, competition is not necessarily increasing. This is because the U.S. population is also increasing, along with demand for nonprofit services. Further, nonprofit organizations in the U.S. tend to be very small and these small nonprofits are not vying for large donations and grants.

My research supports this latter position that we may need more nonprofits. I looked at what happens to the total financial resources available to the nonprofit sector when there are more nonprofits. I wanted to know if the increase in nonprofits was being met with fixed resources or if it was possible for more nonprofits to increase the resources available to them.

In essence, I was asking whether additional nonprofits had the power to increase the size of the sector’s pie.

The answer is yes, they can. To understand, take this simple hypothetical example – under pressure to consolidate the sector, two nonprofit organizations merge with one another. Prior to the merger, one donor gave $500 annually to each organization, a total of $1,000. Following the merger, that same donor is likely to give $500 to the new organization (not the total of $1,000 that was given prior). From a revenue standpoint, it was in the best interest of the sector for these organizations to remain separate.

Of course, there is one catch.

My findings suggest that each new nonprofit increases the size of the pie — but not enough to maintain the average revenue size of all nonprofits. This means that new nonprofits do “steal” some funding from existing nonprofits, but they also bring in new funding. I would argue that having more, smaller nonprofits is a good thing. Small nonprofits are focused on their local communities, building social capital and customizing the services for their beneficiaries rather than trying to grow and expand. But this localization comes at a cost and we have to be comfortable with forgoing the economies of scale that come with large nonprofits. Personally, I would rather pay more for higher quality services for my community. You get what you pay for.

So, if you’re like I was, and you want to start a nonprofit. I say go for it. If you see a social need in your community that isn’t being met, go out there and solve it. Through your connections and efforts, you will bring in new funding to the nonprofit sector. You will also experience some competition for funding and steal some resources away from other nonprofits.

To maximize the incremental funding you bring to the sector there are several things you can do. First, you can clearly differentiate your efforts from those of other nonprofits both in practice and in your fundraising. Second, you can cooperate and partner with similar nonprofits rather than trying to compete with them. Finally, you can use smart fund-development strategies. For instance, you can raise awareness among donors of the need for funding in an issue area, helping them understand why more donations are needed. You can also be purposeful in developing a diversified funding portfolio that encourages donors to make contributions, rather than discouraging them and allowing crowd out.

My instructor changed the course of my life that day. Now, I study and teach about how nonprofits can be organized and managed for social change. And I hope you can use this knowledge to help make the world a better place, especially if you’re thinking about starting a nonprofit.

References:

Barman, E. A. (2002). Asserting Difference: The Strategic Response of Nonprofit Organizations to Competition. Social Forces, 80(4), 1191-1222.

Beaton, E., & Hwang, H. (2017). Increasing the Size of the Pie: The Impact of Crowding on Nonprofit Sector Resources. Nonprofit Policy Forum, 8(3), 211-235.

Bekkers, R., & Wiepking, P. (2010). A Literature Review of Empirical Studies of Philanthropy: Eight Mechanisms that Drive Charitable Giving. Nonprofit and Voluntary Sector Quarterly, 40(5), 924 - 973.

Grønbjerg, K. A., & Paarlberg, L. (2001). Community Variations in the Size and Scope of the Nonprofit Sector: Theory and Preliminary Findings. Nonprofit and Voluntary Sector Quarterly, 30(4), 684-706.

Harrison, T., & Thornton, J. (2014). Too Many Nonprofits? An Empirical Approach to Estimating Trends in Nonprofit Demand Density. Nonprofit Policy Forum, 5(2), 213-229.

Lecy, J. D., & Van Slyke, D. M. (2013). Nonprofit Sector Growth and Density: Testing Theories of Government Support. Journal of Public Administration Research and Theory, 23(1), 189-214.

McKeever, B. (2018) The Nonprofit Sector in Brief 2018. The Urban Institute.

Seaman, B. A., Wilsker, A. L., & Young, D. R. (2014). Measuring Concentration and Competition in the US Nonprofit Sector: Implications for Research and Public Policy. Nonprofit Policy Forum, 5(2), 231-259.

Siino, R. (2003). The Incredible Shrinking Donor Base. Stanford Social Innovation Review, 13.