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October 08, 2013

Should Non-Profits Act More Like Tech Start-Ups?

by Alberto Escarlate

Nonprofits can be slow-moving organizations, with lots of decision-making layers and bureaucratic stickiness. Peter Drucker diagnosed it:

“Nonprofits are prone to become inward-looking. People are so convinced that they are doing the right thing, and are so committed to their cause, that they see the institution as an end in itself. But that’s a bureaucracy. Soon people in the organization no longer ask: Does it service our mission? They ask: Does it fit our rules?”

There are a number of young, small nonprofit organizations that mimic the traditional models of  established ones; they pick a cause, establish a clear mission, form a board of directors, recruit administrative and operations teams and go about doing what they proposed to do while constantly fundraising. But they could end up in the same vicious cycle described by Drucker.

Steve Blank, one of the inspirators of the Lean Startup movement, has said that “ a startup is not a smaller version of a large company” therefore it shouldn’t work, be structured or think like a mini large organization. It is now widely accepted that startups need different strategies, principles and skills than established companies. So should young nonprofits behave like startups?

The idea that a newly founded nonprofit can utilize the same methodologies as tech startups apparently works. The Winter 2013 batch from Y Combinator included  a nonprofit called Watsi and “ it worked wonderfully”, according to Paul Graham. Watsi followed the same program with all the other for-profit startups and were able to raise $1.2M at demo day.

This isn’t all news. In recent years a wave of online nonprofits has brought innovation to how charity work is done. Kiva (co-founded by Jessica Jackley, a limited partner in the Collaborative Fund) brought microfinancing to the masses. Donors Choose is another example where crowdfunding makes small school projects come true. These new nonprofit startups employ engineers, growth-hackers, data scientists, and all of the familiar roles we see in regular startups. And they operate very similarly - the flexibility and transparency that we see in lots of tech startups can be applied in the nonprofit sector. This thread is a good example.

But there are a few challenges. Can nonprofits attract the same level of talent and compete with startups paying big salaries, offering great perks, and equity with some chance of a big payoff? One can argue that if the cause is strong enough passionate people will come along (which seems to be the attraction for traditional nonprofits, anyway). Also, why should the traditional 501© model be the one used?

Why not establish a Benefit Corporation - meaning the company has to generate some other social benefit aside from purely maximizing shareholder value? Or even use a hybrid model like TOMS Shoes or Warby Parker?  

Perhaps startup thinking will help disrupt the nonprofit sector and we’ll start seeing more diverse models being tried. In fact, YCombinator will be taking more nonprofit startups in their Winter 2014 batch so I’m betting we’ll be seeing more innovation.

We, at the Collaborative Fund, are excited to see what’s coming and willing to support new models, so we’ll be watching closely.

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