Philanthropy is expected to boom in the next decade — with trillions of dollars available from the great wealth transfer from baby boomers to younger generations who are determined to make an impact.
Indeed, 91% of family office professionals predict that charitable giving is going to increase 29% in the next three years.
Yet they face a persistent challenge when choosing worthy organizations — the failure rate for new nonprofits is quite high. More than 12% of new organizations don’t make it past their fifth year, and about 30% don’t make it past 10 years, according to the National Center on Charitable Statistics.
Most recently, Empowering Youths of Iowa, a nonprofit founded in 2021 that provided one-on-one mentoring to students in Cedar Rapids, closed its doors because of a lack of funding.
That’s the principal reason behind nonprofit failures, said Tim Schroeder, a partner in the nonprofit group at the global business advisory firm Eisner Amper. “The main reason nonprofits don't make it past five years is the funding and financial stability,” Schroeder said, especially at smaller nonprofits with only a few donors.
“If you lose one of these donors,” he said, “it could be problematic.”
Other reasons run the gamut from empty optimism and mission creep to lack of innovation and a values vacuum, according to the National Association of Nonprofit Organizations & Executives (NANOE), which cuts to the chase in a recent report: Most of all, “The real reason nonprofits fail is because they should not have existed in the first place.”
The seeds of failure often begin the sprout before the nonprofit opens its doors, said Nathaniel Foster, a fourth-generation member of the family office Foster Holdings and a longtime consultant to nonprofits. He suggests that potential founders ask themselves: “ ‘Are we re-creating the wheel?’ If there are five other nonprofits in my area that do this already, then don’t do it.”
Foster cautions that people of wealth often get caught up in this instinct.
“It’s become very vogue to have an idea and start a nonprofit,” he said, “but it might siphon money away from nonprofits that are already doing the work.”
In addition, other mistakes cited by Foster, Schroeder and other nonprofit experts include:
Mission creep or chasing the money. For example, a nonprofit that serves kids ages 5 to 10 suddenly decides to work with parolees because a grant out there gives money to them. “I’ve seen it so many times,” Foster said. “It stretches your resources thin and puts you in the realm of competing with nonprofits that do it really well.”
Growing too fast or too slow. When nonprofits get a sudden round of funding, they sometimes think they can expand, “hire 15 staffers and assume that they’ll grow at the pace at which they hired,” Foster said. Then when they get low on money in six months, they suddenly have to lay people off.
The flip side of that is scarcity mindset, in which a nonprofit doesn’t grow fast enough. Often, Schroeder said, that can lead to a starvation mindset — in which a nonprofit spends most of its money on program services, knowing that donors keenly watch that number, without paying attention to administrative and operational capacities, staff development, investing in technology and fundraising.
“If nonprofits underinvest in those areas, the effectiveness of their organization can really suffer,” Schroeder said. “It makes it really hard to remain sustainable.”
A cultural gap between the workers who want to make a difference and the organization’s executives, who want to grow the program, said Foster. The program team may contend that they’re only there to do good and don’t need to act like a corporate entity that needs to focus on money. “But you have to ask them: “ ‘Do you want a salary?’ ‘Do you want to grow and have an even greater impact?’ ” Foster said. “Just because a nonprofit isn’t focused on profit, doesn’t mean that it doesn’t have to worry about money.”
Failing to regularly make sure their work is aligned with their mission. “Every service you provide has to be able to pass muster through that mission,” Foster said. “And if they don’t, then don’t do it.” He advises setting up screening tools to assess the nonprofit’s work, the impact it’s having and whether those outcomes fit with the group’s mission.
When it comes to funding challenges, the key priority is to look for sustainable revenue streams, say Foster and Schroeder. That can involve reimagining those funding sources — just as many of them shifted special events from in person to online during and after the pandemic.
To avoid the “year-five challenge,” donors can aid nonprofits through multiyear gifts that have clear outcomes but involve a level of trust. “Don’t restrict it so much that they can only buy toothpicks with it,” Foster said. “Trust that the nonprofit will know what it can do with the money.” One of those expectations can include that they diversify their funding.
And as for keeping tabs on that nonprofit, it doesn’t always make sense to require a small charity to assign one of its few staffers to write a long report that lays out in detail its outcomes. A phone call can be just as effective.
Said Elizabeth Wong, head of philanthropic advisory services at Foundation Source, “If you’re not going to read it, then don’t ask for it.”