Nonprofit Entrepreneurs

The Reality is that Nonprofit Leaders are Entrepreneurs

I recently came across another “finger wagging” blog of a nonprofit consultant asserting that: “It is important for nonprofit leaders to embrace the entrepreneurial mindset, because what works today will not necessarily work tomorrow. Nonprofits need to be constantly breaking new ground to inspire donors and make a greater impact.”

Again? How many times is this myth rehashed? Implied in that statement is the condescending idea that the typical nonprofit leader is neither strategic nor thinking with an “entrepreneurial mindset.” Because I have encountered this sentiment more than once, I feel compelled to address this myth head on. I can start by saying that, in my consulting practice, I’ve yet to encounter a nonprofit leader that does not display some level of entrepreneurial leadership.

Let’s start with the data. There are a number of places you can get macro data on the nonprofit sector (such as the IRS, Urban Institute, Guidestar). For this short illustration I am drawing from data points an IRS Data Spreadsheet. Considering a sample of 501(c)3 tax returns for 189,433 agencies, the spreadsheet details that almost 60% of the organizations in the sample have assets of $500,000 or more and these same agencies manage more than $1.6 billion in revenues. How is that possible without entrepreneurial thinking? Add to this data, the study suggesting that, in 2010, nonprofit sector employed 10% of total workforce in the United States, making the sector third largest workforce behind retail trade and manufacturing. No entrepreneurial leadership? To generalize that nonprofit leaders lack entrepreneurial thinking is not only condescending but its inaccurate.

I will not dispute the fact that many small or start up nonprofit organizations do fail — and yes, this failure is often due to the lack of entrepreneurial thinking and/or skills to execute on strategy. However, the same charge can be leveled against the nearly half of small business owners unable to transition from start up to stable enterprise and fail before 4 or 5 years. The point is simple. Entrepreneurial failure is agnostic to the IRS tax code.

The flaw in the argument that pits the differences between “for-profit” versus “nonprofit” organizational leaders is a misunderstanding the nature of nonprofit organizations. The funders, business leaders –who are sometimes board members, and consultants who criticize nonprofit leaders’ “lack entrepreneurial thinking” are evoking nothing more than an ad hominem diatribe. Somehow nonprofits are misperceived as being genetically different that for-profit entities and that a nonprofit designation alters the fundamental concept of running an enterprise. It does not.

Nonprofit organizations must transition from start-up to stable organization in much the same way that a for-profit business must. Nonprofit and for-profit start up organizations share the same challenges of 1) proving an idea 2) attracting operating and growth capital, 3) building production and distribution systems, 4) mobilizing human capital, 4) marketing programs and services, 5) building a client base, 6) evaluating its efforts, and 7) continuing to innovate and improve.

If anything, nonprofit organizations require more entrepreneurial thinking and not less. In addition to hiring paid staff, most nonprofit organizations must also manage a volunteer labor force. Access to financial capital markets for growth is more difficult for nonprofit organizations and revenues are often uncoupled from the delivery of products and services. This means that nonprofits must pay attention to two constituencies, clients receiving goods or services and a “secondary customer” who actually pays for the product or service delivered. Finally, unlike many for-profit organizations, nonprofits are managed by an external board of directors responsible for the overall governance of the organization. Taken together, the business acumen of a nonprofit leader must often exceed that of a for-profit counterpart.

More than once I’ve encountered a nonprofit board of directors who failed to recognize the tremendous business attributes of the organization’s executive director. In those situations, the atmosphere is often charged and the relationships are strained. We create a level playing field by deconstructing the myth the nonprofit leaders are not entrepreneurial. Instead of an adversarial approach where the business leader (or consultant) is chiding the nonprofit leader to be more “businesslike” the nonprofit  leader’s existing business skills need to recognized and that recognition allows the formation of a meaningful partnership for leading and growing the organization.

Are there weak nonprofit entrepreneurial leaders? Yes. Just as there are weak for-profit entrepreneurial leaders. The difference is that a nonprofit board has a responsibility to deal with that weakness. If “strength” can’t be mentored, coached, or taught, it is up to that board to find a leader who can fill the requirements of a nonprofit entrepreneurial leader. Instead of telling nonprofit leaders to think differently, boards need to support the entrepreneurs running the enterprise. But make no mistake, an executive director who has managed a stable or growing nonprofit for 5, 10 or 20 years, cannot sustain such performance by accident. Most nonprofit leaders are high functioning entrepreneurs.

As a consultant, if I can get nonprofit leaders and their Board of Directors to wrap their head around this concept, it becomes much easier to create a win-win partnership that is essential to developing organizational strategy. When it is recognized that “running an enterprise” is “running an enterprise,” regardless of how profits are distributed, it becomes easier to focus on organizational improvement rather than organizational blame.

Perhaps this blog will be perceived as a rant and, in part, it is. However, the importance of this strategic conversation about leadership should not be underestimated. My experience has taught be that the highest performing nonprofit organizations have supporters and board members that validate the skills and competencies of its organizational leaders. Where such understanding and validation exists then the delegation from the board is clear, trust is strong, and performance improves. In the absence of such entrepreneurial trust, the organizational outcomes are much more uneven.

 

~ Mark

Photo Credit: Startup Stock Photos

 

Mark Fulop
Mark founded Facilitation & Process in 2009 to help organizations and communities bridge the gap between where they are today and where they want to be tomorrow. He’s led dozens of Portland nonprofits, government agencies and philanthropic organizations through complex change initiatives including strategic planning, revenue planning, board development, collaboration, and facilitation.

4 Comments

  1. Love this article!

    My organization has proven to be consistently entrepreneurial because my board and I share that ideal. We have learned to be creative, open-minded, flexible, and nimble because we all believe that this makes us more effective and better partners. This shared philosophy is gaining us successes we could have only dreamed of five years ago.

    Thanks, Mark!

    1. Thanx Kim. I always welcome your thoughts. Enjoy the chemistry of a strong Board – ED match because, as you are aware it is not universal.

  2. Mark,

    This is a very thoughtful article and I am glad that I chanced upon it. I wondered in your experience if you have been coming across more organizations which are hybrids or benefit corporations, that want to do well by doing good so to speak and, if so, what is the best way to accomplish this, e.g., public benefit corporation, B corp, for profit/non-profit hybrid? I will look forward to your response and I may also contact you off-line as well.

    1. What I am suggesting in this post is that running an enterprise for social good / public benefit takes business acumen regardless of the tax status. All enterprises need to deliver products and services, stay legal, grow, earn a profit, and achieve the public benefit. It is up to the entrepreneur to determine the relative merits of which corporate structure to assume. It depends on a lot of facets compliance, governance, capital markets, nature of the products and services delivered… I could go on. The best way is to engage in a thoughtful planning process that weighs the advantages and disadvantages of each.

      Taking one of the considerations, for example, imagine a psychologist entrepreneur wanting to work to help couples in martial crisis. If the psychologist entrepreneur can identify a client base in a affluent suburb that has insurance and can manage co-pays, s/he might choose set up their practice as a for-profit business. If successful, s/he earns a profit and provides social good. If the same psychologist entrepreneur wants to provide help couples in martial crisis –who are also uninsured and living in public housing, s/he may need to identify a revenue stream that is uncoupled from the client’s ability to pay, which might lead him/her to pursue setting up a nonprofit as the legal identity so s/he can solicit donations and grant support to provide social good.

      So in my opinion, there is no “best way” to deliver social good.

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