Nathaniel Whittemore at change.org wrote a great post recently on “Why most people don’ t care about investing in non-profits.” There is a huge amount of truth in Nathaniel’s observation. On average, when people donate they don’t invest in nonprofits, they invest in causes. They invest in potential solutions to injustice.
Contrast this with what you find in traditional investing. There, understanding an organization’s past performance, the efficacy of its management team, and the value of its strategic positioning are all critical when making investment decisions. Indeed, we invest as much – perhaps more – in a company’s current and future organizational capacity as we do in the product or service it provides and the problems that it helps to solve.
I, for example, own shares in Paychex. Paychex is a relatively unknown company that does pretty mundane but important work – processing paychecks and benefits info for other businesses. I am obviously not a part-owner in Paychex because it is a sexy company that is doing earth-shattering things. Rather, I have equity in the company because they have a good reputation, they establish long-standing relationships with customers, and they have very strong internal financial management practices that allow them to pay generous dividends.
A little different than considerations among donors in the nonprofit sector, eh?
There is a wonderful (and free) article in the most recent Stanford Social Innovation Review that echoes this sentiment. Titled “The Nonprofit Starvation Cycle,” the article (written by Ann Goggins Gregory and Don Howard of the Bridgespan Group) confronts head-on the myth that nonprofit organizations can survive on the meager allocations to overhead that most grants and donors will tolerate (generally around 20%). In fact, the under-investment in “overhead” leads to a myriad of problems, including:
- An inability to pay competitive salaries for critical and leadership roles
- Little to no investment in staff training, which makes it difficult to grow the organization’s human capital and develop a strong pipeline of leaders
- Inefficient operations due to under-investment in information technology
- “Creative” reporting techniques utilized by nonprofits because overhead restrictions are unrealistic
These things are BAD! Nobody would disagree. So why do we subject our beloved nonprofits and, presumably, social enterprises to this kind of treatment?
Paychex spends roughly 30% of its revenue on overhead. Google and Microsoft spend over 60% (if you include R&D, which you should). Has this prevented these companies from growing, thriving, and more effectively and affordably meeting the needs of their customers?
Contributor Profile: Mike Shoemaker
Mike is a graduate of St. Olaf College in Minnesota and a former Fulbright Scholar at the Universidad de los Andes in Bogota, Colombia. Mike currently manages strategic alliances for a global consulting firm, is a volunteer and advisor to The Ayllu Initiative, and blogs at Human Ventures.
Twitter: @soccapital
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