Growing Up Nonprofit: Predictors of Early-Stage Nonprofit Formalization

Abstract

The nonprofit organizational life cycle literature has traditionally focused on the entry and exit processes; the intermediate organizational life stages between these bookends have received less attention. Almost half of all nonprofits at any given time operate in an early life stage with less than US$100,000 in revenue, minimal overhead spending, and no paid managers. This study examines the process by which nonprofits leave the small, informal, startup phase and begin the next life stage characterized by growth and formalization. We identify financial and organizational characteristics that predict whether the nonprofit will successfully transition out of the early and informal life stage. We find that investments in professional fundraising and access to government funds are predictive of the transition out of the start-up phase, while traditional financial predictors such as revenue concentration, equity ratio, fixed cost ratios, and the accumulation of unrestricted assets have modest to no effects.