There Are Way Too Many Nonprofits. What Are Funders Going to Do About That?

The nonprofit sector is filled with waste and duplication, and things are getting worse, not better.

Think of any cause and chances are that multiple organizations are tackling it. Innumerable groups work a big area like education, the environment, or democratic reform—jockeying for funding and attention. But even more specific issues such as gun control, animal rights, or science education can also be crowded with different nonprofits pursuing roughly the same mission.

To be sure, each of the groups can tell you exactly why they are different than other places, and often the diversity of groups really does ensure that every angle of an issue is covered. Multiple groups can also feed an echo chamber that helps move an issue, or mobilize different donors and serve different constituencies.

But the waste along the way is simply staggering. That's because each nonprofit needs a certain level of organizational capacity to get anywhere—starting with an executive director and including staff to handle administration, finance, communications and development. Oh, and don't forget office space, legal fees, insurance, subscription services, IT systems, and so on. As somebody who helped build a national think tank from scratch, I can attest to just how expensive and time consuming it is to build any sort of basic infrastructure—to say nothing of doing actual program work.

Meanwhile, the sad fact is that most nonprofits never reach the necessary scale to have the impact they desire. Many reach a level where they're able to do some good work and sustain operations, but never develop the capacity to break out. The nonprofit sector has too many small organizations that are just getting by, and too few big ones that can really solve problems.

Unfortunately, there aren't natural incentives in the sector toward consolidation.

In the private sector, entrepreneurs with small businesses have an incentive to sell out to bigger companies, which is a driving force in consolidating markets and creating large corporations that can exploit economies of scale. And an unforgiving bottom line weeds out many smaller, less competitive outifts.

In the nonprofit sector, the incentives are the opposite: No executive director wants their group to merge with another group if it means losing their job, taking a cut in income, or having less autonomy. Which is why few nonprofits merge, except when faced with extinction.

And because metrics of effectiveness are often fuzzy or nonexistent, weak nonprofits can often survive for many years, plodding along doing mediocre work and pulling in just enough money to get by.

Which brings us to the funders, who are deeply implicated in this mess. Foundation grantmaking strategies tend to fuel duplication and fragmentation in the sector. Why? Because many funders dole out their money in scores or hundreds of program grants, and many are terrible at saying "no." Instead of pushing similar groups to consolidate, some big foundations just fund all of them.

I'm constantly amazed, looking at grants lists, how thinly foundations slice their grantmaking dollars, spreading the money to an absurdly large number of grantees. And I'm not just talking about large foundations; many smaller funders do the same thing, divvying up, say, a $5 million grantmaking budget among 100 groups—with none getting six-figure grants.

Now, if you ran an orphanage, you'd want to stretch your food budget to make sure that every kid gets fed. But if you run a foundation, you want to have impact—even if that means some nonprofits die of starvation.

The good news is that we're seeing more foundations that understand this, and which make a relatively small number of big grants every year to a handful of organizations they believe can have impact. Many of these foundations are run by living donors with business backgrounds, but not all of them.

I hope that more philanthropists arriving on the scene emulate this model. I'm also hoping that reform will come to big legacy foundations, and they'll get better at saying no and focusing their money more narrowly and strategically.

One other thing foundations can do is incentivize more mergers by laying out enough money to offset the downsize and, in effect, compensate the losers in such situations.

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