Nonprofits: The Quick, The Dead and The Zombies
Updated: Mar 29, 2022
Nonprofits are hard to kill.
There were predictions when the pandemic started that more than a third of nonprofits would close as a result. Now the twin threats of rising inflation driving up costs and falling stocks have many nonprofits saying that 2022 will be another challenging year.
Despite that, The IRS database indicates that more than 1400 new nonprofits have been approved in Texas just since the beginning of 2022!
Thank God for optimists. Otherwise, there might be no nonprofits. The people who found them see a problem and start a nonprofit to solve it. They hardly ever look at costs or obstacles when they decide to launch their nonprofits. They nurture them with the confidence that, if they do good, funding will follow.
For some, growing in size and donations are not terribly important. Many work with a specific population or cause and don’t need to be larger to accomplish wonderful things. In the case of an executive director I met last week, her nonprofit is 100% funded by the founder. Her annual fundraising drive involves a phone call.
However, in most cases, nonprofits start small and need to grow to have real impact. It isn't easy.
The field is crowded. There are about 1.5 million 501(C)(3) nonprofits in America.
Most are small. Barely 10% have budgets over $500,000. As Dahna Goldstein put it, “While $500,000 can sound like a lot, think of that in terms of staff, resources, rent, travel, server costs, security, insurance, inventory, and overheard. Even a half million doesn’t go as far as one might think.”
The subject of Goldstein’s article was "Zombie Nonprofits.” As she describes it, when the “financial oxygen” is squeezed out of the room, it can leave smaller nonprofits gasping for breath. They may have enough money to keep the door open and committed supporters who will volunteer, but their impact is limited.
Technically, a nonprofit is still in existence until it fails to file with the IRS for three consecutive years. There is a more formal process of dissolution, but the IRS statistics track when it formally revokes nonprofit status after three years, and that takes three years. The IRS also tracks new nonprofits through its determination letters. Neither database is very easy to work with, but based on my analysis, this is a comparison of the number of new nonprofits vs. the number that lost nonprofit status for the last eight years (the total number of new nonprofits in 2021 wasn’t readily available).
What does it show us?
It is too early to really know how the pandemic really changed the number of nonprofits. The approval process can take a long time. Most of the new nonprofits started their applications before the pandemic, and the three-year wait to revoke means that we won’t see the impact on closures for a couple of years.
We can’t measure the zombies! There are an untold number of nonprofits that are minimally functioning or simply on hiatus. They may come back, or they may simply fade out of existence.
Optimism is still alive. On average for every five nonprofits that went out of business, eight more sprung up. No matter how difficult it is to manage one, every nonprofit represents someone's dream and commitment to make a difference.
What does this mean to your nonprofit?
Don’t be intimidated by the number of nonprofits in America. You hear that there are 1.5 million nonprofits and think, “how can we ever compete for funding?” Remember that most of those nonprofits aren't raising very much money. Instead look at the ones that are raising money for a cause that is similar to yours. Philanthropy is still a very personal process involving connecting individual donors with individual nonprofits. If you are mentoring youths, it really shouldn't matter to you how much the ballet and wetlands preservation nonprofits are raising.
Find your niche. We covered this in a blog last week and it is worth stressing. If your mission is to provide free books and reading tutors to one elementary school, a $20,000 budget might be enough to impact a whole generation of students. The key is to set your goals and measure your progress.
Be a “realistic optimist.” In the words of William Arthur Ward: