3 Reasons Why Nonprofits Fail and How To Avoid Them
In the United States, about 1.5 million nonprofits exist. But, then a natural question is how many of them fail? As we know, during the COVID-19 pandemic in 2020, as many as one-third of nonprofits were at risk of closing their doors. While it’s hard to pinpoint a number specific to nonprofits, I think we could use the business failure rate as a guide, as sourced from the U.S. Bureau of Labor Statistics.
- About 20% of small businesses close their doors within the first 12 months.
- About 50% of businesses fail within five years.
- About 33% remain open after 10 years.
As we know, nonprofits are businesses. They have to operate as businesses. The 501(c)(3) status is a tax designation, allowing for charitable deductions and tax exemption. Successful nonprofits can make a profit, but they aren't permitted to give it to shareholders. Any profit goes back into the nonprofit work.
Nonprofit founders start nonprofit organizations with their hearts in the right place. When I founded my nonprofit, before creating and developing several social enterprise brands, I wanted to help make life better for people. Still, I'm highly aware of the fact that my organization was one of the few that not only survived but thrived — with revenue above $70 million annually.
So, what are the top reasons nonprofits fail—aside from a situation like the pandemic? And more importantly, if you're a nonprofit leader and founder, how do you avoid it happening?
A Lot of Dreaming (Not Vision) and Not Enough Reality
First and foremost, I think that one of the top reasons nonprofits fail is because there’s a lot of dreaming. Vision is different than dreaming. Vision is the values of a nonprofit in support of its mission. Dreaming is truly limited to images and ideas that happen when you sleep.
In short, your nonprofit needs a mission and vision based on real business and nonprofit best practices. For instance, aside from the programmatic work, as a nonprofit founder, you have to consider the financial investment for your organization. The reality is that it takes money to create a thriving nonprofit.
How To Avoid The Dreaming Failure
If you want to create a nonprofit that impacts your community, you have to treat it as a business. Sure, you need to go through the appropriate activities to establish a nonprofit. However, you have to do everything to make it a thriving business. That means you want to get the right group of people around you, including talent. And you have to spend at least 50% of your time raising money for the work.
Recruiting a Board That Actually Understands Board Leadership
Unfortunately, at times, nonprofit founders and leaders recruit board members with zero experience as nonprofit board members. Moreover, they also recruit friends, family, and people who may not have expertise or experience in the mission or critical functional areas, such as finance, marketing, programs and fundraising.
This is a profoundly bad mistake, and leaders must avoid it at all costs. Nonprofit leaders should carefully consider who they recruit as nonprofit board members, representing the organization, and having fiduciary responsibilities. Also, just because you lean on someone doesn't mean they need to serve on the board. Consider adjunct advisers.
How To Avoid The Board Level Leadership Failure
Every person you recruit must be someone who adds value. Also, board members must be diverse and representative of the community (i.e., women, LGBTQ, people of color, etc.). It’s vital to have people who have professional expertise, such as financial experts and marketers. And it's also essential to have people who represent the community, like persons impacted by the work, on the board.
Hiring and Paying Competitively—Especially for Soft Skills
There was a time when people were recruited, and leaders looked at experience heavily. Sure, experience matters, but certainly not as much as it used to in the past. While hiring someone who has experience soliciting major gifts, for example, makes sense, if you seek a director of development, other skills supersede experience.
Soft skills matter and relate to how people play well with others. Why is this important? It's simple. Technology is disrupting things quickly, and you need people who have mastery over themselves. People with high emotional intelligence, for example, care about tech and also ethical artificial intelligence, which affects your organization.
How To Avoid Recruiting Failure
Recruiting is more science than art in the digital world, and past experiences don't indicate future success. Remember that. So, use technology to measure qualified candidate rates, response time and the costs of hiring, for instance. But, also lean into hiring for soft skills — essential for the modern workplace.
Finally, there's one other reason nonprofits fail, and it's because founders and leaders don't want to raise funds. They might love the mission and the programmatic work, but they don't want to ask for money. Not being front and center in the fundraising operation is a mistake. As the leader, you want to get your nonprofit the resources it needs.
So, if you have a fundraising team, partner with them. Your chief fundraiser will love knowing that you're not opposed to meeting with donors and even asking for money. Practice makes perfect, and the reality is that fundraising is an essential and substantial part of a top nonprofit leader's day.
Wayne Elsey is the founder and CEO of Elsey Enterprises. Among his various independent brands, he is also the founder and CEO of Funds2Orgs, a social enterprise that helps nonprofits, schools, churches, civic groups, individuals and others raise funds, while helping to support micro-enterprise (small business) opportunities in developing nations and the environment.
You can learn more about Wayne and obtain free resources, including his books on his blog, Not Your Father’s Charity.