New nonprofits don’t make the same impact everywhere. In most places, there’s enough money to go around to support new ones.
The nation’s 1.5 million nonprofits do everything from fielding Little League teams to funding orchestras.
Despite all the good these organizations do, some donors worry that the nation has more nonprofits than it can sustain. In America alone, more than 36,000 of them provide programs and guidance for youth and over 53,000 are health care facilities, for example.
Having too many nonprofits could potentially spread donor dollars too thin, making it hard for these groups to raise the money they need to run effective programs. For instance, how many youth-focused organizations does one town require?
A growing sector
Nonprofit employment is growing too. An estimated 11.9 million Americans, about a tenth of the private workforce, worked in this sector as of 2015.
Not all nonprofit leaders applaud this growth. As F. Duke Haddad, who leads the Salvation Army’s fundraising in Indiana, recounted in the specialty website NonProfit PRO, foundations and philanthropists increasingly tell him they feel overwhelmed by the increase in requests for funding from an ever-growing pool of nonprofits. “It does feel that in certain markets there could be a point of diminishing returns due to a flood of nonprofits,” he wrote.
How to figure it out
Most of the researchers trying to answer the question of whether there are too many nonprofits until now have tallied how many nonprofits operated in specific communities.
Together with scholars Laurie Paarlberg, Seung-Ho An and Justin Bullock, we tried something new. We looked into whether having more nonprofits in one place – probably competing for the same funds – affects their financial health.
That is, we tried to determine whether they have money to keep running for several months without getting new donations.
We researched this dynamic across the nation by breaking it down geographically. Using complex statistical techniques, we examined 291,320 nonprofits located across 3,141 counties and county-equivalent jurisdictions in 2011. We assessed the relationship between the aggregated financial health of all these groups and county-specific characteristics, such as nonprofit density, the size of the local population and poverty rates.
We found that financial health increases with the number of nonprofits per 1,000 people in a given county until there are three nonprofits per 1,000 residents. After that, the financial health of all organizations diminishes with the establishment of new nonprofits.
It turned out that creating yet another nonprofit in the places with the greatest number of nonprofits per thousand residents made all of its peers financially weaker. Importantly, the vast majority of counties had fewer than three nonprofits per thousand people. Those places could, we found, support additional nonprofits and adding a new one appeared to benefit the financial health of the older nonprofits.
Room for more
To see why the emergence of a new nonprofit doesn’t have the same impact everywhere, it might help to think of the nonprofits in a community like a herd of deer in a forest. Since the forest’s potential to sustain the heard is finite, if the herd gets too large, some of the deer will get weak and starve.
The important question is whether the environment – the forest – has enough resources to support the herd.
Similarly, a town or another community has a finite amount of money – often obtained through donations – available to support local nonprofits. At some point, the number of nonprofits could get too big, outstripping local donations and financial resources.
Our findings, which we published in the Nonprofit and Voluntary Sector Quarterly journal, indicate that nonprofit financial health starts to worsen when a county already has three nonprofits per 1,000 people and gets another one.
The average county, however, only has one nonprofit per 1,000 people. So adding one or two nonprofits typically may actually improve the financial health of all the nonprofits.
The addition of more nonprofits can lead to greater collaboration and sharing of information and resources among nonprofit leaders. New nonprofits can potentially attract new donors and volunteers that other nonprofits have not reached. It also means more organizations to share information with the public about the work nonprofits are doing in the community.
In short, we believe we have found evidence that very few communities have too many nonprofits. In fact, most places could probably support more nonprofit organizations.
Returning to the herd analogy, we also found that herd size is just one consideration.
The way funding is distributed among the herd also matters, because that also affects competition. We found that when nonprofits clustered into one area are all funded at similar levels, starting a new nonprofit there can hurt the financial health of the rest. That’s because it increases competition for donations and other sources of revenue.
However, our data indicated, if one or two larger nonprofits get most of the regional funding, establishing a new, smaller group poses little competition.
In other words, our research suggests that anyone who is worried about whether there are too many nonprofits should focus on density and competition instead of how many of these groups are located in one place.
Robert Christensen, Associate Professor, Romney Institute of Public Management, Brigham Young University and Rebecca Nesbit, Associate Professor of Public Administration and Policy, School of Public and International Affairs, University of Georgia