Commentary: When a nonprofit should – or shouldn’t grow

A few weeks ago, Benefits Data Trust announced its imminent closure, blind-siding staff and sending shock waves through the Philadelphia community. Last week, New York’s Grand Street Settlement announced it was expanding into the Bronx, thereby increasing its budget to $64 million up from $15 million when Robert Cordero became CEO in 2015. These announcements seem very different, yet together they raise the age-old question facing nonprofit leaders: to grow or not to grow?

In our lending, grant-making, and advisory work, SeaChange has seen first-hand that rapid growth is one of the four horsemen of the nonprofit apocalypse that are usually to blame when organizations falter. (The others are real estate, leadership transition, and payment delays by government). Yet mission-driven nonprofit leaders feel a strong urge to grow, given the large gap between their organization’s mission and the part being met by their current programs. Many will understandably leap at the opportunity if offered the money by philanthropic or government funders. However, rapid growth is not an unalloyed good. Growth is challenging to manage and once started can be difficult to stop given the financial and emotional cost of retrenchment (e.g., laying people off, breaking leases, disappointing stakeholders, etc.), the need to present a brave face to funders, and the risk that magical thinking will delay tough decisions until it is too late.

While I don’t have any inside information, BDT’s audited financials certainly suggest that a failed growth strategy contributed to its demise. In 2019, BDT was a roughly $14 million, break-even organization that had grown gradually since launching in 2005. From 2019 to 2020, BDT received about $18 million in large multi-year grants from Blue Meridien Partners ($5.5 million), the Ballmer Group ($5.0 million), and others. In March 2022, Mackenzie Scott gave BDT another $20 million.

With this $38 million windfall in hand, BDT grew rapidly. By 2022, expenses had more than doubled to $35 million (up from $15 million in 2019) while “normalized” revenue (i.e. excluding the $38 million of one-time grants) had increased to $25 million (up from $14 million in 2019). With expenses up $20 million but revenue up only $10 million, BDT had a “normalized” deficit of almost $10 million in 2022. BDT’s financial results since 2022 are not yet public but if the $10 million deficit has continued then it would have largely exhausted the Mackenzie Scott money by the time of the closure announcement.

From the outside, BDT looks like a cautionary tale, but I am not suggesting that all nonprofits renounce their growth ambitions in favor of the quiet life. I respect those funders enthusiastic to grow high-performing organizations as the societal benefits probably outweigh the costs incurred by those that fail in the attempt. However, nonprofits poised for rapid growth must go in with their eyes wide open. As Adrian Ellis explains, they should consider the impact of expansion on the balance sheet and on cash flow; analyze the full (rather than the marginal) cost of program growth and find ways to communicate this effectively to the outside world; think about the organizational requirements (e.g. technology, governance, HR, etc.) for growth; be explicit about what type of funder base, capital structure, and balance sheet will be required to continue at their new, larger size; and develop several possible scenarios, rather than a single “plan”, when considering the risks and rewards, including an explicit retrenchment strategy if things don’t work out as hoped.

My conversations with Robert Cordero and a review of his board materials suggest that Grand Street Settlement has done these things. The organization has analyzed cash flow, indirect cost rates, lease exposures, start-up costs, staffing, and communications. It has considered various scenarios for when its new Federal Head Start contracts come up for renewal in five years. Overall, the growth plan appears to build on its fiscal, operational, and programmatic strength, undergirded by long-term funding.

So, it seems things will work out for Grand Street, though only time will tell. Even the best-laid plans are worthless unless actively managed and regularly reevaluated given the dynamic environment in which nonprofits operate and their miniscule margin for error. I’ll reconnect with Cordero next year to see how things are going. Fingers crossed.

In the meantime, nonprofits eager to grow but nervous about whether they can pull it off might explore opportunities to increase their impact – perhaps by working together in a formal long-term way with others – without growing their organization and thereby bearing all the risks associated with “growing it alone.” This could be through joint programming, training others in their program, sharing a back office, or even something more fundamental like combining with another organization. As an example, just last week Cypress Hills Local Development Corporation and United Community Center announced a merger that will deepen their impact in East New York. SeaChange’s New York Merger and Collaboration Fund was established to support nonprofits in exploring these type of opportunities.

Leaders chomping at the bit for growth should also remember that while “growth” means “to scale” it also means “to mature and develop”. In situations where growth-as-scaling is difficult, growth-as-development may still be possible. This type of growth – less visible, less glamorous, more difficult to measure than raw size – may nonetheless sustain mission-driven organizations unsatisfied with standing still.