In my years of working as an entrepreneur and impact investor and having a ringside view of entrepreneurial journeys, I have learned that the nature of social entrepreneurship, the problems we need to solve, and the challenges of scale have important similarities across both for-profit enterprises and nonprofit organisations. I have seen this most clearly in the trajectories of many microfinance institutions, a sector that transformed from a nonprofit activity to banking within a decade. However, when it comes to questions of scale, nonprofits have some unique challenges.
The increased focus on scaling an organisation in the nonprofit world has tremendous implications on the breadth and depth of impact, as well as perceived and real obstacles. While capital and talent ultimately tend to be important, this article covers other challenges to scale. It is based on some of the observations I shared during a session at The Nudge Foundation’s celebration of their incubation of 100 non-profits.
Structural challenges that nonprofits face
To begin with, here are reflections on three structural challenges that nonprofits face when addressing questions of scale, along with potential solutions drawn from the world of impact investing and for-profit enterprises. This is not an exhaustive list, but one based on personal experience.
1. Capital partners
The biggest challenge nonprofits face—and I believe this is one of the fundamental reasons for the paucity of scaled organisations in this sector—is the lack of long-term capital partners. By capital partners, I mean donors, funders, or funding organisations that provide grant support to an organisation, not just its programmatic work.
This situation is markedly different in the for-profit world, where a few key capital partners/investors tend to stay with an investee company for multiple rounds of funding. Elevar Equity has been the largest shareholder in various companies, starting with the Series A round and through subsequent financing rounds. Having access to this kind of long-term capital relationship disproportionately improves an organisation’s ability to make difficult decisions, build itself, and take appropriate risks. Nonprofits lack access to this kind of long-term, multi-year support. If available, it could help them grow their organisations, recruit senior talent, and make difficult decisions in the long-term interests of the individuals, households, and communities they seek to impact.
2. Currency of success
What constitutes ‘success’ for nonprofits and the metrics for impact are often not clear, and certainly not standard when it comes to internal and external stakeholders. This is complicated further as external stakeholders may seek different outcomes and benchmarks. In the for-profit world, there are straightforward indicators that are related to commercial returns as well as indicators that define success. Even in the world of impact investing and the companies they fund, there is a greater degree of clarity when it comes to communicating the impact of the organisation.
Funding agencies and nonprofits need to align on metrics of impact and access.
While the challenges of raising capital and identifying the currency of success exist for all entrepreneurs, nonprofit leaders face unique challenges independent of the issue of not having long-term capital sources. In the nonprofit world, because of capital constraints, different currencies of success are used, such as the perceived credibility of the organisation, general awareness regarding its work, the impact it seeks to create, and other such proxies. This holds true even for nonprofit leaders, who often feel compelled to maintain a high level of visibility and measure their success by how well-known they are. Funding agencies and nonprofits need to align on metrics of impact and access, which can help them attract differentiated sources of capital.
3. Finding talent
Recruiting and retaining talent is complicated. Attrition levels tend to be high in both for-profits and nonprofits, despite the perception that the key challenge facing nonprofits is compensation. Attrition rates in the commercial world are not very different, which shows that financial considerations and compensation don’t paint the full picture. The for-profit and nonprofit sectors are plagued with the same challenges, though perhaps for different reasons. Typically, the answer lies in finding the right talent rather than in remuneration. Every organisation needs to identify a unique currency that serves as a differentiating factor and convinces people to join and stay, regardless of how well the organisation pays compared to the market.
Personal lessons about scaling organisations
Now, let’s pivot to what works—and what does not—in the scaling journey. These are a few of the practical lessons from my own experience of helping organisations think through scale.
1. Scaling the bad with the good
One must remember that while scaling, you scale the ‘good’ and the ‘bad’ within the organisation. One can never scale only the good. Most entrepreneurs (myself included) have the hubris to believe that we can start by scaling the ‘good’ and will figure out and address the ‘bad’ in the process. Unfortunately, it doesn’t work that way.
Therefore, before embarking on the path to scale a programme and amplifying its impact, entrepreneurs need to ask themselves a few pointed questions:
1. Why do you want to scale?
2. What does scale mean for your organisation?
3. Why are you the right person or organisation to drive this scale? For example, it is possible that another organisation is engaged in similar work and is better positioned to scale this model. In such cases, you might need to consider a different approach.
2. Elevar’s frameworks for scaling organisations
Based on our work at Elevar Equity, we have identified two frameworks that help us build the pathways for scale. Tweaked a little, they may be useful for organisations in the development sector as well.
Framework One: The three stages of an organisation’s journey
Organisations undergo three stages of growth. The first is the ‘proof of concept’ stage, where the organisation must focus on creating an effective and replicable model that works in the context of its impact and success. Do not think about scale at this point in time. Instead, focus on getting the model absolutely right. The second stage involves building the organisational platform, which includes developing the team, processes, governance, systems, technology, and risk management—all necessary to scale up.
Too many founders and entrepreneurs are advised to start the scaling journey after the completion of the first phase (figuring out the model). But the most important phase starts after developing the model. During the second stage, take the time needed to strengthen the organisation. In my view, this—and not the first stage—is the riskiest phase. In the third stage, with a working model and a well-oiled organisational machinery in place, the key focus shifts to scaling the organisation (built in the second phase) and the model (built in the first phase).
Framework Two: Twin flywheels
Most strategy tends to be inward-looking and organisation-focused, that is, it hinges around the question of “What is it that we want to do?” In the impact space, a scaling strategy must be outward-looking, focusing on the individuals, households, or communities one seeks to impact.
The twin flywheels framework developed at Elevar helps break this inward-focused approach and encourages entrepreneurs to think of both the organisation and the people they serve. Metaphorically, there are two invisible flywheels: one driving the organisation’s performance and the other driving the success of the people that the organisation works with. Often, these two flywheels operate at different speeds and are not necessarily aligned. But if the strategy can be premised on the needs of the community or customer, and if their success is aligned with the organisation’s, the twin flywheels accelerate and the foundation for scale is established. This requires patience, discipline, thought, and replicable execution.
3. Choose whom you talk to
There are far too many people willing to give advice. Based on my experience, building a great board—one that can challenge and listen—goes a long way. Beyond that, seek two to three generalists who may or may not be on your board. In addition, find a specialist to assist in understanding and addressing the specific issue or problem area that the organisation seeks to solve. In essence, I suggest shrinking—instead of increasing—the number of people to talk to. Engage with people who have experienced the challenges of scaling, as the scaling journey is messy.
More importantly, think of all advisors as equals. For example, I am uncomfortable with the idea of mentorship, given the inherent power dynamic. An entrepreneur takes the risk to solve the problem; a mentor does not. All your conversations as entrepreneurs must be conversations between equals.
In conclusion, one should always remember that scale is not elegant; it is not beautiful. It is very ugly. Scale is a question of execution, not vision. It has to come from within you as an individual and as an entrepreneur, and then go outward into the world. Many people speak of innovation, but innovation is an execution challenge, not an idea challenge. Contextualise the idea in the situation that you’re dealing with and move forward to find that path of execution, always keeping the person you want to impact at the centre.
There are far too many visionaries who are unable to build anything worthwhile. Scaling is a step-by-step process that requires discipline , and it is surrounded by all the chaos that happens within an organisation. There’s no such thing as a perfect organisation; ultimately, the goal is to strive to do what is right. But the reality is that scaling will always be complex.
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