42 Stanford Social Innovation Review / Winter 2015
effectiveness of its core model or intervention. We believe that there Alice Gugelev is director of the GDI Social The authors would like to thank several
Enterprise Accelerator, a project of the Global colleagues who provided constructive feed-
are six endgames for nonprofits to consider—and only one of them
Development Incubator, an entity that supports back on earlier drafts of this article: Robert
involves scaling up in order to sustain and expand an existing service. organizations and initiatives that have the Fabricant, Matt Frazier, Chloe Holderness, Rich
potential to create large-scale social change. Leimsider, Beth Shiferaw, and Annie Simonds.
Nonprofits, we argue, should measure their success by how they are
Previously, she was a consultant at Bain & The authors also wish to thank colleagues
helping to meet the total addressable challenge in a particular issue Company and the Bridgespan Group. She is from Dalberg Global Development Advisors,
area. In most cases, nonprofit leaders should see their organization also the founder of the Muskoka Foundation. including Bhavana Chilukuri and Sneha Sheth,
who conducted research and analysis on the
as a time-bound effort to reach one of those six endgames. Andrew Stern is executive director of the nonprofit sector for the article, and Jennifer
Global Development Incubator and a former Mickel and Sara Wallace, who provided
So what is your endgame? Is it “continuous growth and ever partner at Dalberg Global Development Advi- editorial assistance.
greater scale”? In light of the enormous challenges that exist within sors. He is also a director and former co-chair
of the board at mothers2mothers.
the social sector, that is an easy and compelling answer for nonprofit
leaders to give. But it may not be the right answer.
The nonprofit sector, of course, has undergone a great deal of
THE PROBLEM OF ORGANIZATIONAL SCALE change in the new millennium. A new generation of nonprofit lead-
For nonprofit organizations that aim to scale up, the odds of success ers is implementing revenue-generating models that promise to
are long. If you held a conference on “managing large-scale organi- alter the scale at which their organizations can raise funding. Have
zations,” the number of for-profit CEOs in attendance would dwarf they made headway in narrowing the social capital chasm? It may
the number of nonprofit CEOs. Between 1970 and 2003, 46,136 be too early to tell; growth takes time. But early evidence does not
for-profit businesses in the United States surpassed $50 million in offer much cause for optimism.
annual revenue, whereas only 144 nonprofits did so. The situation To analyze this question, we looked at 142 nonprofits that receive
for nonprofits has improved only slightly in recent years: Between support from a group of leading US funders. We then focused our
1975 and 2008, just 201 nonprofits reached that $50 million mark.1 attention on 41 organizations that were founded between 2000 and
Today, more than half of all registered US nonprofits receive less 2007.4 These organizations have had at least five years to grow but
than $100,000 in annual funding, and only 7 percent of them receive are not so mature that their previous growth would account for their
funding of $1 million or more.2 In short, very few nonprofits are current size. For 39 of those 41 nonprofits, we were able to locate
reaching a significant degree of financial scale. More to the point, relevant, comparable data, and we found that those organizations
few of them are reaching a scale that is commensurate with the had achieved varying levels of financial scale by 2012: Two-thirds
scope of the challenges they seek to overcome. of them (27 of the 39) had reached $2 million, but only one-fifth of
In our view, a US-based nonprofit needs to reach an annual fund- them (8 of the 39) had reached $10 million. These organizations are
ing level of at least $5 million before it qualifies as having attained some of the most promising nonprofit ventures of the past decade,
“breakout scale.” Roughly speaking, an ideal nonprofit will follow a yet only a few of them are operating at a significant scale.
growth trajectory that goes through the following stages (with the
size of its annual budget serving as a proxy for its scale): start-up INSIDE THE SOCIAL CAPITAL CHASM
(less than $500,000), proof of concept ($500,000 to $2 million), There are several structural factors that distinguish the nonprofit
early scaling ($2 million to $5 million), breakout scaling ($5 million sector from the for-profit sector.5 Because of those factors, we argue,
to $10 million), and full scale ($10 million or greater). a well-functioning “social capital market” to support nonprofits
Foundations, which often serve as early-stage funders for non- through each stage of growth has not yet emerged—and may never
profits, have little or no incentive to support an organization through emerge. Here, we point to four challenges in particular that make
later stages of growth. Even if they want to provide such support, it difficult for nonprofits to scale up.
foundations often don’t have the financial means required to do so. Lack of ownership or equity | For structural reasons, nonprofits find
In fact, foundations were the primary funder for only 2 of the 144 it difficult to attract the sort of managerial talent that helps lead for-
nonprofits that passed the $50 million barrier between 1970 and profit companies through periods of significant growth. They can-
2003. Of those nonprofits, one-third of them depended primarily not offer deferred compensation packages that involve equity (in the
on revenue-generating programs, and one-third relied primarily form of stock options, for example), and therefore it’s hard for them
on government funding. 3 Other significant sources of potential to recruit high-caliber people during their early growth stages. For
funding—commercial lending, for example—are typically not avail- nonprofit founders, similarly, there is no financial incentive—no “exit
able to early- and mid-stage nonprofits. Those sources often require value”—that would encourage them to keep expanding an organization
a nonprofit to have a budget of at least $5 million. (Several years ago, until it reaches a given scale. The nonprofit sector also lacks the kind
we presented a nonprofit investment opportunity to a commercial of incentive structure that would promote scale-enhancing mergers
banker. The banker told us to come back when the organization in and acquisitions. There are no shareholders to reap the benefit of such
question had at least $100 million in funding!) transactions. Instead, there are senior managers, who often have little
In the for-profit sector, angel investors or venture capital firms to gain and much to lose when two organizations become one.
might fill this gap. In the nonprofit sector, organizations persis- Nonalignment between funding and service | In the for-profit sec-
tently face what we call a “social capital chasm”—a gap that yawns tor, the success of an organization depends on its ability to develop a
wide between them and the budget of $10 million or greater that product or service that will drive revenue. Its ability to achieve com-
they need to achieve full scale. (See “The Stages of Organizational mercial “impact,” therefore, aligns with its ability to raise money. Rich
Growth and the Social Capital Chasm” on page 43.) Leimsider, vice president of fellowship programs at Echoing Green,
Stanford Social Innovation Review / Winter 2015 43
describes this challenge: “In the social sector, you have to win two capital needed to develop certain core capabilities, they will most
games simultaneously: a product game (delivering real social impact) likely end up with an empty bank account and a great deal of unreal-
and a revenue game. And since the product users are not always the ized potential. For that reason, nonprofit leaders should shift their
same people as the revenue providers, that’s pretty hard to do.”6 focus from the scale of their organization to the impact that their
Bias against investment in growth | The now-common (and sometimes organization can help to achieve.
accurate) depiction of large-scale nonprofits as bloated and bureaucratic Paying close attention to social impact is, of course, a common
institutions has led to a trend in favor of supporting smaller nonprofits. characteristic of nonprofits today. Leaders of nonprofits routinely
Critics routinely malign large-scale nonprofits—those that, say, break develop not just a mission statement and vision statement, but also a
the $50 million annual revenue barrier—for being inefficient in their statement that outlines the organization’s “intended impact” and its
allocation of resources. Partly as a result, a general norm has emerged theory of change. Along with the use of traditional for-profit tools—
in the social sector that requires 85 percent or more of an organiza- from strategic plans to impact metrics—these statements have become
tion’s capital to go toward funding programs rather than operations widely recognized signs of a well-run nonprofit organization. Many
(also known as “overhead”). This norm strongly limits organizational intended impact statements cover a specific period (five or ten years,
growth, which hinges on investments in structures, processes, and for example), a certain number of beneficiaries (say, 10,000 children),
capabilities. Too often, funders want to contribute only to programs a particular location (such as Kerala, India), and a particular issue
that deliver direct, immediate impact. As other observers have noted, (such as vaccination). Here’s a noteworthy example of that approach:
this bias among funders destabilizes the sector and hinders the abil- “Over the next decade, Harlem Children’s Zone’s primary focus will
ity of organizations to scale up.7 be on children aged 0-18 living in the Harlem Children’s Zone proj-
A skewed grant funding structure | Instead of supporting an orga- ect, a 24-block area of central Harlem. … Harlem Children’s Zone’s
nization’s overall mission, funders often prefer to provide grants objective will be to equip the greatest possible number of children in
to programs that target a particular issue over a limited period the HCZ project to make a successful transition to an independent,
of time. Corporate foundations, in particular, often allocate capi- healthy adulthood, reflected in demographic and achievement profiles
tal to efforts that align with their own institutional goals but not consistent with those in an average middle-class community.” Other
necessarily with the broad goals of the nonprofits they fund. The nonprofits create broader impact statements. Habitat for Humanity,
International Institute of Rural Reconstruction, for example, can for instance, has announced its intention “to eliminate poverty hous-
easily acquire one-time grants to install solar lights in schools, but ing and homelessness from the world, and to make decent shelter a
it struggles to secure multiyear grants to train teachers or to oper- matter of conscience and action.”8
ate schools. Fundraising thus becomes a continuous scramble to The move toward developing intended impact statements has
meet annual targets, and nonprofits focus on applying for small, led the nonprofit sector to become significantly more focused and,
piecemeal grants—an effort that taxes their resources and further arguably, more effective. But these statements typically lack two
limits their ability to grow. crucial elements. First, they often fail to account for the overall scale
of the problem that a nonprofit aims to confront. As a result, they
FROM SCALING UP TO ENABLING IMPACT fail to reckon with the gap between what the nonprofit can achieve
Given these structural barriers and the unlikely prospects for over- and what the problem actually requires. A nonprofit might cite an
coming them, most social-sector organizations will struggle to reach intended growth rate in the range of 10 percent to 15 percent annu-
the breakout-scale stage, let alone the full-scale stage. Without the ally, for example. In the for-profit world, such a growth rate would
be quite impressive. But it will hardly make a dent in a
social problem whose scale would require a growth rate
The Stages of Organizational Growth and
of 500 percent or even 1,000 percent.
the Social Capital Chasm Second, and more important, these intended impact
statements do not specify how the organization in ques-
$20M tion will contribute to solving that broad social problem.
Is there a plan to replicate programs through a franchise
model, for example? Is there a path toward persuading
government agencies to take over a given program or
service? Nonprofits, in short, should take into account
not just the direct impact they hope to achieve, but also
BUDGET
10M
the sector-wide change they ultimately aim to create.
SOCIAL CAPITAL CHASM We believe that every nonprofit should define not only
its mission, its vision, and its intended impact, but also
5M
something that is no less critically important: its end-
2M game. Again, by “endgame,” we mean the specific role
.5M than an organization intends to play in confronting the
Start Proof of Early Breakout Full scale total addressable challenge in a certain issue area. In our
-up concept scaling scaling
STAGE
research on nonprofits, we have encountered very few
organizations that clearly define that role.
