• Stein Strategies LLC

Time to dismantle the nonprofit starvation cycle

At larger institutions, it’s common for major gift fundraisers to encourage restricted programmatic gifts (restricted scholarships, endowed lectureships, individual programs, etc.) – and not to promote giving opportunities that support the capacity of the organization (unrestricted department funding, financial aid, etc.) – much of which has led to the crisis we see today within higher ed (see my previous post regarding the ineffectiveness of the pure restricted endowment).

For smaller nonprofits, donors tend to hyperfocus on an issue or program and the nonprofits don’t make the case for capacity. Whatever the size of the nonprofit, it is common practice for fundraising solicitations and dollars to support programs, not capacity.

Just what is capacity? “Capacity includes competitive salaries, technology, financial solvency with reserves, [and] adequate infrastructure with an eye for growth. Great programs cannot be implemented without great people, modern technology, [and] professional development.”[1] In other words, it’s the overhead spending. And donors really care about how much is spent on overhead, often questioning the fiscal responsibility of nonprofits that can't accomplish their work with very little overhead.

This expectation has led to what is known as the “nonprofit starvation cycle,” “nonprofit neglect,” or the “built to break” syndrome. In The Nonprofit Starvation Cycle[2] the nonprofit starvation cycle is articulated as: “The cycle starts with funders’ unrealistic expectations about how much running a nonprofit costs, and results in nonprofits’ misrepresenting their costs while skimping on vital systems—acts that feed funders’ skewed beliefs…Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.”

So here we have a perpetually fulfilling cycle that begins with unrealistic expectations on behalf of society and donors and is reinforced by organizations reporting artificially low overhead costs.

I find this curious because as a society we don’t have expectations that for-profit businesses can be successful and continue to grow without having adequate people, infrastructure, and technology, but as a society we expect this from our nonprofits.

The expectation today is that nonprofits shouldn’t spend more than 20% of budget on overhead. Although some organizations brag about overhead as low as 5%. Society wants nonprofits to accomplish big missions, but only spend at most 1/5th of the budget on IT, human resources, operations, fundraising, finances – to name a few costs of doing business.

Here’s what happens when donors only fund programs and not capacity: “Among their many dismaying findings: nonfunctioning computers, staff members who lacked the training needed for their positions, and, in one instance, furniture so old and beaten down that the movers refused to move it. The effects of such limited overhead investment are felt far beyond the office: nonfunctioning computers cannot track program outcomes and show what is working and what is not; poorly trained staff cannot deliver quality services to beneficiaries.”

Anecdotally, I’ve seen this play out. Low salaries, no benefits, high expectations = high turnover; inadequate databases; inadequate resources to cultivate/steward funders; inadequate marketing; depressing offices; and old technology. It’s commonplace in the nonprofit world. There are so many great nonprofits with compelling missions, but they are not able to really implement their mission due to lack of overhead.

Not only are we, as a society, ensuring nonprofits cannot accomplish the missions we believe in through the nonprofit starvation cycle, but I believe this cycle has led to a significant disparity of resources within the nonprofit world. Data from The Urban Institute showed that “just 5% of U.S. nonprofits have annual revenues of $10 million or more, and this group accounts for 87% of charitable expenditures.In other words, out of the 1.5 million nonprofits in the US, 75,000 charities get 87% of ALL fundraising dollars. Do we really want such resource inequality within the nonprofit industry? And does this remind anyone else of other statistics around fundraising proportions (like the 90/10 rule)?

I find the current state of US nonprofits distressing.

So what now? From my perspective, it lies with first the frontline – the foundations and government funders in addition to the financial and wealth advisors, estate planners, and philanthropic consultants who work with donors. Foundations and governments should provide flexible grants lacking the stringent restrictions on overhead costs (the Stanford Study referenced above found that the average government grant restricted overhead spending to 15%).

The wealth management and estate planning community who offer some level of philanthropic expertise should be incorporating the capacity versus programming funding as part of the conversation (as my work with financial advisors does), asking donors to think about overall outcomes, not just costs.

As fundraisers, we should be making the case for overhead support – educating our donors on our mission and all that it takes to accomplish that mission as well as accurately reporting overhead so as not to perpetuate a myth.

It’s time to reframe how we expect nonprofits to operate and how we support the organizations we love.

[1] Grantmakers for Effective Organizations,

[2] Gregory, Ann, The Nonprofit Starvation Cycle, Stanford Social Innovation Review, 2009.

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