Business vs. Nonprofit Models

I’m really struck by the clash between the mindsets of the various people who have been engaging in this debate. A while ago, I wrote about “old” and “new” philanthropists and the need to “harness innovation to wisdom” rather than throw out one model in favor of another. I wrote at that time:

"the positive outcome is not a result of each side politely
acknowledging each other’s strengths and then going their separate
ways. Rather the two sides are best served by engaging in verbal
combat, where the weaknesses in each side’s point of view can be
exposed and the strengths revealed."

And I quoted James Irvine Foundation CEO Jim Canales:

“We have to cultivate a culture of debate. Civility is a big problem.
We can’t have five board members present different points of view and
then have the chair say “Good debate!” and hand things off to the staff”

That’s how I feel about this debate. I generally agree with the “business” mindset being expressed in this debate. I think that funders should starve less effective nonprofits of resources and drive them out of business. I think that anyone who cares about nonprofits should want the field uplifted and weeding out the poor competitors is a needed step. On the other hand, I fully agree with this statement from Dave Chakrbarti of

A nonprofit is *not* a "business structured as a nonprofit". A nonprofit is an organization driven by a mission instead of a profit margin. Many nonprofit organizations are working to reduce the "market" that needs their services…the very opposite of a "sustainable" business, which often actively works to ensure there remains a market for their goods or services…

…This idea that a nonprofit needs to "make" enough money from its constituents to cover its costs is fundamentally flawed; how do you feed the poor on this model? Is it not sustainable to feed the poor?

Maybe systemic change results in the poor no longer needing to be fed after a certain period, which is a movement towards sustainable development but *not* sustainable if we think of the organization doing the feeding as a business, with that narrow definition of "sustainability". But the ecology is sustainable.

Dave was correcting me with his comment and I deserved it. Becoming a 501c3 is not just a tax election for a business. It implies an entirely different objective. Applying “business logic” to nonprofit work is useful, but the model does not translate completely. It would be better to think about “harnessing business logic to mission driven passion” or some other twist on the phrase.

The for-profit model is not superior to the nonprofit model and it is simply ineffective in many mission driven environments. But that being said, just because an organization is mission driven, does not excuse it from needing to be effective. I continue to support the idea that mission driven organizations should compete for resources and funders should allocate their scarce capital wisely. If you believe that philanthropy and nonprofits can make the world a better place, and you acknowledge the scarcity of resources, then you should cheer the failure of nonprofits that don’t do a good job. You aren’t celebrating their failure, you are celebrating the redirection of resources to effective nonprofits that do more good. The causes that nonprofits are fighting for are too important for us to worry about the egos of the failed nonprofit leaders.

I’ve quoted the Anne Fadiman quote a number of times now. I’d like to mention that as exciting as cross-disciplinary conversations can be, Fadiman points out that “there are interesting frictions and incongruities in those places”. Creativity isn’t painless. I’d like to commend the people who have shown up at this debate. I hope that this blog can continue as a platform for cross-disciplinary debate and maybe all of can learn from each other. To all of you who have participated, know that your comments are not going unnoticed. The last few blog posts here with their attached comments have been emailed through Feedburner, sent to Digg, tagged and noted by other blogs here, here, here, here and here.


  1. I don’t know if it’s necessary for funders to do anything as draconian as purposely driving nonprofits out of business. Funders already have enough to do. However, you are absolutely right that they should make wise choices and select high performing nonprofits that are delivering results. But more so, they need to open (and willing to share information) about their choices, the selection criteria they are using, and the data they are collecting and analyzing to show how specific nonprofits are performing against objectives. Also if funders share this information and agree, where practical, to pool resources and work together, then that increases the chances that the better nonprofits will survive, thrive, and grow stronger and deliver more and better services to those in need. In effect, I realize doing that can have the outcome you hope for — starving and driving the nonprofits out of business. But, like I said, no need to add that to funders’ to do lists. They should just concentrate on getting the job done.

  2. Holden says:

    I agree that getting the job done, with transparency, is all a funder needs to do. They need not go on the warpath against bad charities.

    But one of the obstacles to transparency is the mentality that “all these people are doing such wonderful work.” This mentality stops funders from being honest about why they didn’t fund someone, because they don’t want to be “badmouthing” them or hurting their feelings. It’s a pervasive and destructive mentality. That’s why the statement “Some nonprofits just suck” is not trivial or obvious, but important.

  3. stephen says:

    I think that funders should starve less effective nonprofits of resources and drive them out of business. I think that anyone who cares about nonprofits should want the field uplifted and weeding out the poor competitors is a needed step.

    I agree, but to add another wrinkle, I think this concept only works well if we assume funders’ interests are transparent and pure, i.e. 100% mission-based.

    However funders often have a variety of motives for funding the organizations and projects they fund, and not all of those reasons have to do with effectiveness.

    For that reason, I’m not confident about the philanthropic community’s ability or willingness to ensure that resources are allocated to the most effective efforts, and away from poor-performing organizations.

    Transparency is part of this, but are there not motives, interests and politics apart from foundations’ stated missions that drive their funding decisions? Are there not poor-performing but well-connected nonprofits that are perpetually well-resourced for reasons that have little to do with performance or progress towards eliminating social ills?

  4. Bruce, when I said “starve less effective nonprofits of resources” I just meant don’t give to underperformers. I agree that there’s not reason for funders to seek out poor performers. Although some people think they should.

  5. Stephen, thanks for stopping by to comment. Your point is well taken and I hope you continue to share your thoughts. To the extent that funders are not interested in impact, but have other motivations (personal connections, etc), you are correct that we can’t expect them to take the steps I advocate. But I’m talking about what I think funders “should” do if they are trying to be effective change agents.

  6. Gerry says:

    Of course, this brings us back to missions. You can really only employ metrics effectively between organizations with the same missions.

    Just what is it you are trying to maximize? Effectiveness is a quality not a quantity.