Wednesday, March 4, 2009

Starting a nonprofit organization, Part 2 (hard)

So my "part 1" post illustrated how relatively easy it is to start a nonprofit on paper. This post is dedicated to the hard part of starting a nonprofit: developing a viable business plan.

Let's start with why I'm saying it's hard. I don't have the specific figure handy (but you can go to to find out yourself), but there are tens of thousands of 501c3 public charities registered with the IRS that do not file Form 990 because their revenue has not exceed the minimum threshold of $25,000 (threshold figures and filing requirements are changing this year; see a discussion about the new 990 requirements for more info). This simply means that they never got off the ground in a meaningful way by pulling in at least $25,000 in operating revenue.

The basic problem is that it is relatively easy to start a nonprofit and no one - not the IRS, not your Secretary of State, your local Chamber of Commerce, etc. - will say you can't start your nonprofit (unless you are a health care enterprise and fall under your state's certificate of need regulations) if you don't have a good business plan. So, you begin operating and wait for all of those donations and grants to pour in because you have a great mission and great ideas. And, in most cases, the donations and grants don't pour in like you expected.

So, what is a business plan and what makes a good one for a new nonprofit? In essence, a business plan details two essential things: 1) the nonprofits social value (clear need, market and its purported impact and evidence-based plan for achieving it) and 2) viable funding plan. New nonprofits tend to make key mistakes in both areas:

- Not doing sufficient market research, i.e. to see how the need is already being met by other nonprofits

- Not planning programs and services that have an evidence base or represent some recognized best practice or are so compelling in terms of innovation that they attract start-up funding

- Making wild assumptions about grants and donations, not assessing the competition for such forms of revenue (i.e. understanding the growth in giving in their community, the success rate of grant applications for particular foundations)

- If forecasting operating revenue based on third party reimbursements (e.g. Medicaid) and contracts, not realizing the working capital that is needed to a) develop service infrastructure and b) pay staff until earned income starts arriving.

- Obtaining a 2-3 year start-up grant from a foundation yet not having a viable plan to sustain funding after the grant expires (foundations are typically not in the business of providing ongoing operating support)

- Grossly underestimating the amount of time it takes to do good fundraising and not realizing how hard it is to divert charitable giving away from well established nonprofits (think Boys and Girls Clubs, the YMCA, Art Museums, faith communities, hospitals, etc.)

- Assuming that "honeymoon" effect start-up fundraising efforts portend ongoing support.

Those are just a few of the mistakes.

Now, I'm not dismissing the idea of starting a nonprofit altogether. Here are some reasons why starting a nonprofit might be an OK idea:

- The nonprofit is going to be primarily volunteer-driven. The relatively modest amount of funding you may need will be well leveraged with the value of in-kind services.

- There really is not an existing nonprofit meeting the need which your nonprofit will meet AND this need is considered a high priority by key decision makers in your community (i.e. local elected officials, foundation officials, United Way)

- You are able to offer a professional service that will form the basis of competition for contracts (job training, mental health services, etc.) AND the contracting agency is actively seeking agencies to bid.

- You are able to offer a professional service for which there is a stable source of operating revenue that covers a significant amount of your operating costs (e.g. charter schools that receive public subsidies per enrolled pupil, health or mental health providers that will bill for third party reimbursements via Medicaid, Medicare and other sources).

The essential point here is that you 1) need to meet a clear need and 2) are reasonably assured of securing steady revenue streams that cover a large part of your operating costs.

Lastly, if you think you want to start a nonprofit, ask yourself, "Is there an existing nonprofit in our community that is financially stable, enjoys broad public support and has a mission well aligned with our intentions?" If the answer is yes, consider meeting with the CEO and Board Chair of this nonprofit to initiate conversation around starting a new program or project.

In fact, far too often, when I hear people say "I want to start a nonprofit", they typically have a particular program in mind, not an entire organization. It is far easier to fit a new program in an existing nonprofit than to construct and sustain an entire new organization around an innovative program idea. The reasons are myriad: poor economies of scale for nonprofits, immense competition for grants and donations, difficulty recruiting talented and engaged board members, etc.

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