The Nonprofit Crash That’s Heading Our Way

You can build a city below sea level, and it might work for a while, but sooner or later, the water will win.

— Seth Godin

GameStop made headlines around the world this year. You might be wondering, as a nonprofit professional, what this has to do with the industry. What you’ll soon discover is that a nonprofit crash is in the making. Moreover, leaders in the social good sector who believe “it can’t happen here” are mistaken.

In January of 2021, GameStop, which had long since stopped being a market leader, found itself in a titanic short squeeze. As a result, its stock price rocketed to as high as $483 — an increase of 1,500%. What triggered this massive push were lower-dollar investors on the Reddit subreddit community, r/wallstreetbets. In short, through the use of a digital social platform, the subreddit group created an uproar on Wall Street and the mainstream media. For a few weeks, it was a circus.

In the nonprofit sector, many leaders have continued business as usual, which is a massive mistake. What happened to GameStop, in other words, an event entirely and utterly out of its control, is something that can — and will — occur in the nonprofit sector.

Let’s explore some of the possibilities that will lead to a massive loss of trust and belief in the nonprofit sector resulting in what I’m calling the nonprofit crash.

Donor Privacy and Protection

Donor privacy is one of the themes I explore in my book, "The Future of Fundraising," as well as in my day-to-day as an attorney. Unfortunately, most donors don’t have a true sense of the risk of their data within nonprofit organizations. For example, 68% of organizations in the nonprofit sector don’t have any policies in the event of a cyberattack.

Nonprofits are a ripe place for hackers. Why? Well, they have a lot of sensitive data and information but have not made the necessary investments to protect it. All that has to happen is for records of donors to be stolen — perhaps those of a few high-profile donors or maybe a class-action suit by injured donors against nonprofits, CRM companies, etc., will do it.

Social Discussions Moving to the Media and Public Awareness

As we know, there’s been a shift away from the idea that only nonprofits can make a difference in the philanthropic sense. Corporations are increasingly recruiting people who used to be in the nonprofit sector to join their corporate social responsibility (CSR) teams. New ideas and generations have no issue with cause-related marketing or impact investing for profit.

As social good work expands to include corporations and profit, the media will follow. As we know, the media’s always looking for a good story. Perhaps you’ve seen nonprofit professionals discuss what they think about the sector (e.g., low pay, no sense of boundaries, abusive, lack of diversity or experience at the leadership level, etc.) amongst themselves on social media. All it takes is one book or viral article to enter the collective consciousness.

Lack of Investment Allows For-Profits to Stake Leaders

For generations, really, there’s been a fundamental lack of investment in the nonprofit sector. Those who’ve worked in the industry or served as leaders understand the “nonprofit starvation cycle” coined years ago, which only continued to simmer. Unfortunately, the lack of broad institutional capacity building and many small nonprofits doing the same thing as the next organization has exposed a fundamental truth.

The truth is that the sector can’t continue the way it’s been. Technology allows organizations and corporations to do what was once the exclusive province of nonprofits — philanthropy. In short, a small-minded mentality, broad thought leadership, and vision for the sector as a whole (save for a few top leaders) means corporations and businesses can easily step into the space and do better.

Overleveraged Institutional Funders

If you go back to the 2008 financial crisis, it was the most massive shock to the system since the Great Depression. The primary reason for it was the excessive risk banks took, and governments had to bail them out, which came from all of our wallets. Well, we’re in the same over-extended situation. This time, leading foundations, including the Ford, MacArthur and Kellogg foundations, have taken on massive debt to the tune of $1.7 billion instead of tapping into their endowments.

On the advice of their money managers (yes, the financiers again), the thinking goes to allow enormous endowments to get more massive. At the same time, these foundations float bonds (debt) and make it a win for bankers and asset management firms. So, when the next financial crisis happens (and it will happen), don’t be surprised when governments (and you and me) are bailing out institutional funders.

What will happen to nonprofits then? They won’t get the money they need amid a financial crisis because of overleveraged funders who decided the best decision was to make bankers and financial managers wealthier and leave billion-dollar endowments untouched.

In sum, the nonprofit crash is coming. We don’t know when or what will trigger it, as is always the case when one reflects on transformational events. However, once the crash happens, the sector will undergo a more significant disruption and destruction. It’ll be interesting to see what comes on the other side of it. Nevertheless, it won’t be the same business as usual in philanthropy and the nonprofit sector.

Editor's Note: This article was originally published in the July/August 2021 print edition of NonProfit PRO. Click here to subscribe.

What's next? Paul addresses that in his subsequent post, "The Money Redirect That's Coming for Donor Wallets."