The Problem With Nonprofits

I put off writing this post because it felt like a betrayal after spending 15 years in the nonprofit sector. I worked in Haiti, served in the Peace Corps, and started two nonprofit startups. During that time, I worked alongside extremely kind and generous people whose hard work and sacrifice made the world a better place. I also ran into systemic challenges that made it feel like I was swimming against the tide of human nature.

Nonprofits suffer from the principal agent problem. The sector relies on donors and nonprofits deciding what's best for other people by deciding what to fund and work on, instead of empowering people to decide what's best for themselves. This is similar to how communism empowers the state with the impossible task of central planning instead of distributing decision-making power to citizens via the freedom to transact in a market or vote in a democracy.

"Communism with family, socialism with friends, democrat with state, republican with country, and libertarian with the world." At a small scale, nonprofits work wonders because human relationships keep everything in check. It's only at scale that things break down, which is why it's absurd so many donors and orgs are obsessed with growth.

Nonprofits get big by raising money, which requires focusing on fundraising at the expense of helping people. In a sense, nonprofits get big by ignoring the people they exist to help. Compare this to a business where the only way to get and stay big is to make your customers so happy that they decide to keep buying your product.

Nonprofit diseconomies of scale are similar to those in politics, whereby politicians tend to be decent at the local level, but in order to reach the highest levels, incentives push them to increasingly prioritize fundraising and campaigning over governing.

Nonprofits often rationalize their inefficiencies by saying, "at least we're still helping some people, even if we're not doing it as efficiently as possible. If we didn't help, no one would!" Unfortunately, the end doesn't always justify the means, especially with nonprofits.
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Giving is currently a zero sum game. Donations have been 2% of US GDP for the past 50 years. Capitalism, labor and technology grow the economic pie but nonprofits that rely on donations keep getting the same small cut of it. When a big nonprofit sells out in order to raise more money, they cut off a bigger piece of the pie, leaving less money for smaller, better nonprofits that don't spend as much effort fundraising. It's a race to the bottom that is exacerbated by the fact that people donate for various reasons.

Lots of people donate because they truly want to help others, and helping to elicit and exemplify this trait is one of the most impactful things nonprofits do, but humans are complex and there are often other motivations at play. Sometimes donors want to offset guilt, make themselves look good, set an example for their family, get their kids a job, market their business or just have a good time at a gala. This isn't bad per se, if you're going to donate why not get a little extra benefit on the side? But it creates a situation where the nonprofits that raise the most money often do so by appealing to these extra benefits. A lot of nonprofit mission statements would be more accurately described as, "we exist to make donors feel good."

Inefficient organizations rarely get called out. Beneficiaries don't complain because $1 of free stuff is better than no free stuff, nonprofits don't say anything because jobs are on the line, and donors don't ask hard questions because who wants to invest time and effort to find out they made a bad giving decision? I should add that it's very rare for nonprofits to help no one, they have to help enough people to get testimonials and photos for their annual report. The issue is that the worst ones are incredibly inefficient, like how the Red Cross raised $500M for Haiti and built 6 homes (and is still in business).

Nonprofits are audited, but auditors are paid by the nonprofits they audit (similar to how the banks responsible for the 2008 crisis paid the ratings agencies to give them good scores) and they are searching for fraud, not inefficiency. Many of the most expensive auditors are actually known for helping nonprofits fudge their numbers to look more efficient than they are (eg by manipulating time tracking and broadening the definition of certain expenses, "crunching vanity metrics for a fundraising proposal isn't fundraising, it's impact assessment!").

Even if all these stakeholders were incentivized to improve nonprofit impact, as Effective Altruists attempt to do, it would be ineffective because nonprofit donors and executives have lived experiences and opinions that are often very different than the people they aim to help. Having donors, no matter how smart, try to measure which nonprofits are most impactful is like hiring a grad student to create a formula to determine whether a McDonalds's cheeseburger is better than a Burger King cheeseburger. It's subjective and it's much better to let customers (or in the case of nonprofits, the people they aim to help) choose services based on their own priorities.

Walk into the offices of the largest nonprofits that rely on donations as their primary source of revenue and it's soul sucking. These are places with grey cubicles where employees send a total of two emails a day. Then walk into a small, broke nonprofit office that barely has time to fundraise because everyone is so focused on helping other people and it's hard not to be inspired. Most regular small-dollar donors, who fortunately make up the bulk of giving, intuitively know this and instinctually support small nonprofits where they have personal connections.

If you want to solve a big problem, start a business. If you can't start a business, vote for the government to use your tax dollars to solve it. If neither of those options work, start a nonprofit as a last resort. If you start a nonprofit, empower beneficiaries as much as possible to increase accountability to the people you aim to help instead of whoever pays your salary. Put beneficiaries on your board, charge something so there's real signal on the value you deliver, and dedicate yourself to transparency.

Philanthropy is a tiny part of the economy at just 2% of GDP (the largest nonprofits are de-facto businesses like universities and hospitals so the true % is lower) while government is 23% and business is 75%. Despite constituting the vast majority of GDP, capitalism and democracy are not perfect, and nonprofits are well-positioned to help people who fall through the cracks, along with R&D testing ideas that those larger systems have yet to adopt.

When I zoom in and talk to someone whose life was saved via philanthropy, it's hard not to think that nonprofits do the most important work in the world. And yet, contrary to popular nonprofit mission statements of the, "we're going to end poverty" variety, when I zoom out, it's equally clear that nonprofits should remain a very small part of the solution to the world's biggest problems.