Everyone’s heard stories about the tech company started at a kitchen table that then raises millions of dollars and is sold to Apple or Google for large sums.
In the busy halls of Silicon Valley, everyone is eyeing the exits. For start-ups, exits (including mergers, acquisitions, or going public) hold the possibility of significant profit for the founding team, investors, and other equity holders.
But for nonprofits, the same dynamics don’t apply, so mergers and acquisitions rarely happen.
When they do occur, they are more frequently the result of a disruptive event — the loss of a major source of donations or the departure of an executive director — rather than a “heroic” exit that might be celebrated by investors and the press. To say one has successfully founded and left a software start-up prompts congratulations. Conversely, to say one has founded and exited a nonprofit might prompt “What happened?” or “Oh, I’m sorry.”
This doesn’t need to be the case.
Like for-profit start-ups, nonprofits exist within an ecosystem that supports their growth, encourages their founding, and benefits from their existence. Foundations, along with individual donors, provide injections of capital that fuel a nonprofit’s ability to do good. Social-enterprise incubators and academic programs provide templates for new social entrepreneurs to identify and create value for underserved communities. Many of the components that fuel a healthy and growing ecosystem are there, but gaps exist.
In contrast to the for-profit world, nonprofits have a big problem in that social entrepreneurs don’t have a clear path to follow in moving on from the organizations they started. Likewise, for the people they have attracted and the intellectual capital they have developed, there isn’t a common blueprint for combining and capitalizing that value to enable a strategic exit. Nonprofits are, by definition, not started with a profit motive at their core. This can be invaluable: Capitalism is far from the best approach to all problems, even when it can be effective in supporting certain kinds of social missions.
But the lack of profit-based incentives has its downsides. If a founder, senior leaders, and board members get nothing in return for a strategic exit, why leave behind the prestige and psychic rewards of running one’s own mission-driven organization? If social entrepreneurs lose their organization’s brand in a merger without a corresponding reward (psychic, monetary, material, or other), why risk the loss of control that frequently results from a merger?
Even worse, we often see struggling nonprofits become zombie organizations, barely scraping by and sapping resources. Other successful nonprofits compete hard to get funding to amplify their growth. That competition for resources means nonprofits have to show they alone are worthy of support — a situation that discourages them from experimenting with new approaches or merging with similar organizations to create something better. As more and more groups seek money, donors can’t provide enough funding for all, and resources don’t necessarily flow to the most successful organizations. In the end, it’s the public interest that loses out because the system is so broken.
But we can change how things work. We need to help founders change how they operate. This takes action from both foundations and nonprofit creators, Here’s what foundations need to do:
Provide support for every step of a merger. A handful of grant makers, such as Seachange Capital’s NYMAC fund, provide support for organizations pursuing mergers. This example offers a model by which foundations and individual philanthropists could help nonprofits achieve successful alliances by providing guidance from the early stages of consideration to the final steps of the complicated process.
Build the benefits of a successful exit into the nonprofit ecosystem. Could there be a grant or foundation that specifically supports itinerant social entrepreneurs? In the for-profit world, venture capitalists often create a runway for entrepreneurs to identify their next thing. Foundations could do the same thing, perhaps by providing funding for smart and savvy nonprofit leaders to develop a plan for a new organization or by creating “social entrepreneur in residence” programs to share knowledge with the rest of the foundation’s portfolio, thereby adding another incentive for founders to pursue strategic mergers and then move on.
Share success stories. How might we shift the narrative of nonprofit mergers away from failure and toward something more constructive and celebratory? Nonprofits are mission-driven organizations. Well-meaning founders and boards frequently do not see the mission benefits of exploring strategic mergers. Sharing stories of the ways nonprofits that merged have produced better results in achieving their missions could be transformative. Grant makers interested in the potential of strategic mergers could support efforts to trumpet such successes.
Nonprofit organizations themselves must also change. They can:
Provide tools to help founders and boards explore mergers as part of strategic-planning processes. BoardSource’s Power of Possibility is one tool that could be useful to more nonprofits. It provides guides for nonprofit boards exploring strategic partnerships and starting points for conversations and decision making at various stages of the process. Can we create other tools to educate both nonprofits and foundations about the benefits of strategic mergers, along with tools to support their implementation?
Recognize that the initial idea of a merger is like posing the possibility of marriage to someone you aren’t dating. Various types of collaboration that benefit organizations are, in effect, “dating” opportunities that could lead to a merger “marriage” down the road. Such collaborations include sharing back-office resources, joint ventures, and other kinds of partnerships.
Explore merger alternatives. Strategic partnerships can be a powerful way to build the capacity of nonprofits when discussions about a merger are premature. This might entail, for example, sharing data and operating systems or presenting a common brand to the public, as the federal government has been experimenting with through Login.gov, in which Americans can access services from a number of federal agencies though a single user account.
Today’s nonprofit world is filled with people who make decisions that go against their own self-interest to support the public interest, and they accomplish an incredible amount of good through that sacrifice. But nonprofits have seen failings as well, some of which were necessary but many of which were not. The question we face is not “How do we make nonprofits more like businesses” but rather “Can we analyze what works in other areas and adapt it to the world of social good?”
We think — and studies have shown — that strategic, well-executed mergers tend to produce better results than organizations can achieve on their own. Particularly with increased demand and potentially diminishing income resulting from the new tax law, it’s imperative that we find new ways for nonprofits and donors to do the most good, and that means we need more exit ramps.
Andrew Lovett-Barron is a public-interest technology fellow at New America. Previously, he was a principal designer and product manager at IDEO. Dahna Goldstein, a Bretton Woods II Fellow at New America, was the founder and CEO of PhilanTech and now teaches technology entrepreneurship at Georgetown University.