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Top 5 Reasons Why Nonprofits Fail

5 Reasons Why Nonprofits Fail

Here’s a factoid you’ve probably heard before:  The majority of small business startups fail within the first 5 years.  Sadly, the same is true for nonprofits.  There are a multitude of factors that come into play that help to determine success or failure.  Here’s the top 5 reasons nonprofits don’t make it, and how yours might beat the odds.

Introduction

The estimates for the overall failure rate of nonprofit startups varies wildly.  It really depends on who you ask.  Dr. Ben Carson claimed during his Presidential run a few years ago that the failure rate was greater than 90% in the first 5 years.  The organization tasked with actually keeping up with the data, the National Center on Charitable Statistics says the failure rate is over 30% within the first 10 years.  Why such a wide spectrum there?

A big part of the reason is how you define “fail”.  Statistically, failure is recognized as the dissolution of the entity.  In other words, shutting down operations and dissolving the corporation are considered failure.  That’s the NCCS number.  What Dr. Carson is talking about, however, is a total lack of organizational impact.  Call it failure to launch, if you will.  That’s the real failure rate.

Regardless of how you define it, failure is not the outcome any founder wants for their new nonprofit.  Let’s take a look at the top 5 reasons for failure, in no particular order:

1. Lack of a Plan

I prefaced this list by saying it would be in no particular order.  That’s mostly true, though I have to say that this one probably does top the list.

Failure to plan is a plan to fail.  That’s a great quote, one I wish I could take credit for.  But regardless of who thought it up, it’s absolutely the truth.

Having worked with many thousands of startup nonprofits over the past 27 years, we’ve seen and heard it all.  And sadly, one of the things we see fairly frequently is someone starting a nonprofit with a great idea, but no plan.  It’s a great looking skeleton, but there’s no meat on the bones.  It’s almost the old Field of Dreams thing of “build it and they will come”.  The problem is, it never really works out that way.

The reality is this:  there is ZERO practical difference between starting a nonprofit and starting a business, at least when it comes to planning.  If you don’t have a plan for how you are going to operate, who your target audience is, how you’re going to fund it, what technology needs need to be locked down…I could go on and on…your new nonprofit has virtually no chance of getting off the ground.

Before you even start, put together a solid business plan.  There’s great books out there that can help you with that, as well as some solid software packages that can walk you through it.  But you must do it, if you want to succeed.

2. Unrealistic Expectations

The next one on our list we see quite frequently, as well.  And this one can easily plague even those startups with a good business plan.

Unrealistic expectations can take on various forms.  It might be grossly overestimating the need for your proposed solution.  Or, if you’re right about the need, maybe it’s grossly overestimating your nonprofit’s ability to address the need.  We often see very unrealistic expectations regarding fundraising targets.  Founders think potential donors will be just as passionate about their cause as they are, and sometimes that’s true.  But often it’s not.

As difficult as it may be, take off the rose-colored glasses.  It’s great to be an optimist, and frankly you have to be.  That’s an essential ingredient to success.  But never let optimism substitute for realism.  Be positive, but be clear-eyed.  This is going to be harder than you anticipate.

Look, I get it.  I’m the entrepreneurial, glass-half-full-to-a-fault kinda guy.  It drives my team nuts sometimes.  But tempering expectations to match reality, and having a realistic plan to work from, is a big factor in who makes it and who doesn’t.

3. Lack of Leadership

Number 3, a leadership deficit, often sneaks up on organizations as they mature.  Startups can feed off the energy of the founder in the early years, especially if numbers one and two above are pretty solid.

What happens is that as the new-creation energy begins to wane, a maturing organization must have strong, guiding leadership…and not necessarily from one person.  In fact, truly successful nonprofits almost always have a strong board of directors that take an active role in strategically guiding the organization, keeping the mission top of mind.

We tend to see the leadership vacuum issue arise when the nonprofit is really one person’s exercise.  There may be a board of directors, but they are uninvolved placeholders.  The organization’s success rises and falls exclusively on the leadership skills of the one running it all.  Sometimes that works, but more often it does not.

Know your strengths and be honest about your weaknesses.  Where you don’t possess needed skill, learn to share the leadership responsibility and you’ll reap the benefit.

4. No Money

It’s probably no surprise to you that these 5 reasons are all very interrelated.  And number 4…no money…is no exception.

A nonprofit finds itself short on funds most often because of the three issues above:  no plan, unrealistic expectations, and/or poor leadership.  While it is true that raising support is challenging, people love to give to causes that resonate with them, even in tighter economic times.

If your nonprofit is perpetually struggling with a lack of financial resources, I can almost guarantee you it isn’t because there’s a lack of money out there.  You’re either doing it wrong, or you have the least compelling cause ever thought of.  I’d wager it’s the former.

So what’s the solution?  Fundraising is a skill, one that your nonprofit can learn.  There are companies you can hire to help you.  A word of caution here, though:  Stick to companies that teach you how to fish.  There’s lots of professional “fundraising” companies out there who would love to host an event for you, or launch a cold-call campaign, in exchange for 50% or more of the proceeds.  In the end, the return-on-investment with those companies is pretty low.

If you need a place to start, check out Fundraising TV from our friends at Get Fully Funded.  It’s a great place to start!

5. Failure to Adapt

Our 5th and final reason is a failure to adapt to changing circumstances.  That’s a factor that has always impacted businesses, both big and small, for-profit and nonprofit.  And boy, did we ever see this during the height of the COVID pandemic!

Things change!  And failure to keep up with the changes will almost certainly doom any enterprise to failure.  Failure to adapt to the changing needs of your target population, failure to adapt to technology, to rising or (especially) falling economic conditions, to workplace expectations like hybrid schedules…all these things greatly impact an organization’s success and longevity.

COVID exposed these fault lines like no one could have ever anticipated.  How many businesses and nonprofits failed in 2020 and 2021 because they were not prepared to operate remotely on short notice?  Thousands upon thousands.  In fairness, some couldn’t operate at all in a socially-distanced manner due to the hands-on nature of their work.  But many others could have, but were not prepared to pivot quickly when circumstances required it.

The reality is, most adaption necessities come at us quite slowly, not overnight as COVID did.  Staying focused on the mission, while simultaneously eyeing the horizon for changes coming your way, is what allows for nonprofits to stay nimble and maintain their effectiveness, even in times of trouble.

Conclusion

This list could have had a dozen more entries, but it is our belief that most of the ones we didn’t mention are actually by-products of these.  Solve for these 5 pitfalls, and the odds of successfully beating the failure rate will be much higher for you.

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has One Comment

  1. Yet another excellent article by Mr. McRay. My only concern is the business plan reference; while the plan is a must-need resource, nonprofit sector business plans should not be the same as with the private sector, and there is little research/publications on nonprofit business plans.

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