Fundamentally, like most people doing the ‘Tech For Good’ thing, we want to help as many people as possible in the shortest amount of time. I suppose the traditional approach to doing ‘social good’ would be to form a charity, get a board of trustees, and start looking for grants and donors.
For a variety of reasons, from raising money at the start, to avoiding a car crash at the finish, we don’t think this is the most sensible option. We think it’s better to operate as a standard for-profit company.
This was our thinking as we started out:
Raising some startup cash
It’s unlikely that we’re going to bring in enough money from the start to afford both a roof above our heads and lunch money. So, both chronologically and by importance, the first difference between a normal company and a charity/non-profit is our ability to raise some money to get going. So what do the difference fundraising environments look like for both charities and companies?
For a tech company in its early stage, with no tangible assets to offer as collateral, probably our most important source of funding would be selling equity to angel investors or other rich individuals. In the UK, the size of angel investment in smaller startup companies is estimated to be around £1.5bn per year, with an average size of between £500,000 and £1.5m. This funding source also seems to be growing, and comes with a series of tax incentives that we’ll get to later.
For the charity sector, in the past most funding has been given to organisations with assets, especially property. The higher risk types of funding used by newer, more innovative companies have only recently started to appear in social investments. So, despite headline figures of ‘£1.5bn in social investment’, the social investment market analogous to angel investment (‘equity-like’ products) provides less than £10 million annually.
Charities do have access to another source of early funding which is typically not available to for-profit companies — charitable grants; and with a pool of £3bn available each year, this is certainly not to be sniffed at. However, since the average size of these grants is only £10,000, and since many of these grants come with restrictions on how the money can be spent, they are unlikely to be a desirable source of capital for a fast-moving and time-poor tech startup.
Broadly speaking, there seems to be far less capital available to a new charity than would be for a new company.
Tax treatment
In the UK, one of the most important and recognisable features of being a charity or a non-profit is the special tax treatment that allows you to ‘gift-aid’ donations, effectively adding 25% to your donation ‘for free’. Across the UK, this added up to extra £1.2bn in 2015, since almost all types of donations are eligible for this tax treatment.
Gift-aid means that charities have had a phenomenal tax advantage when compared to private companies, and rightly so! But, with new government incentives for small business investors, this tax difference is no longer so clear-cut.
The SEIS (Small Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) grant wealthy individuals investing in new companies substantial tax rebates. The SEIS means an investor can give up to £100,000 to a new company, and can then receive 50% of this back as income tax relief. A company can raise up to £150,000 from this scheme. Under the EIS, a company can raise up to £12 million in its first 3 years, and investors can get 30% as income relief . What’s more, investors can claim capital gains tax relief for any profits they make from the investment.
If an organisation’s needs for capital are likely to be mostly in the first 3 years, and if most of the money raised will come from wealthy individuals, it seems the tax regime may actually be in favour of setting up a profit making company, rather than a charity.
Running the organisation
So assuming our organisation manages to raise enough money to get going, what would be the implications of being a charity on our day-to-day operations?
The biggest impact of being a charity is that the overall management control of the organisation is given to a set of trustees, who cannot also be employees of the charity. This does make sense for ensuring the charity is spending its money responsibly, but often means charities can take longer to make key decisions — since they require approval from a trustee meeting.
Previously, tech start-ups were run in a similar way. Once the original founders brought the company to a more solid footing, the board typically brought in a ‘professional CEO’ to provide ‘adult supervision’. However, in the past decade, this received wisdom has been challenged by investors such as Andreessen-Horowitz, who publicly stated that they prefer to fund companies whose founder will run the company as CEO. They highlighted several hugely successful examples where a passionate individual, with a feel for the company and a desire to innovate, can lead a more successful company than a more qualified outsider, with the obvious example of Steve Jobs at Apple, and Mark Zuckerberg at Facebook becoming one of the founders that benefited from this policy.
In fact, looking at private companies, there is now a growing mountain of evidence that companies who keep hold of founder-CEOs perform significantly better than other companies. Rather than encouraging this, a charity structure seems to force a situation where an initial founder has to resign control to a management body from the outset.
On the flip-side, recent events at a well-known taxi company have painfully highlighted the problems with this ‘founder-centric’ model. More broadly, this ‘founder syndrome’, where a founder’s passion and drive “becomes a limiting and destructive force, rather than the creative and productive one it was in the early stages” can be found across organisations of all kinds. Interestingly, when you Google ‘founder syndrome’, most of the results are about the issue in the non-profit sector, but there’s no denying that it definitely exists in for-profit companies as well, as pointed out in numerous lists of ‘founders that ruined companies’. At the extreme, this ‘founder syndrome’ can cripple an organisation, damaging internal morale and in the most high profile cases, causing potentially massive media backlash.
Clearly, there’s a balance to be struck. But, in general, it seems that earlier stages of an organisation’s life, or times of particular upheaval can benefit from the persistence and drive that comes with being especially ‘founder-centric’. Once an organisation is more of an established institution, then a robust infrastructure needs to appear that can exist without the driving force of the initial founder team. As for judging when this tipping point is, and having the sense to make the right decision at this moment, that relies on the self-awareness of the founders and the quality of the advice they receive.
A ‘pivot’
It’s one of the most maligned startup buzzwords, but a small and flexible organisation has a significant advantage over larger companies because it can change focus quickly when something isn’t working. Paul Graham, the founder of Y Combinator lists ‘Obstinacy’ — driving further down a dead end — as one of the principal mistakes a startup can make. And sometimes these direction changes can be pretty drastic, in fact, Twitter, Instagram and Groupon were all the result of a rapid shift in business focus that just wouldn’t have been possible for a bigger company.
This type of pivot is also unlikely to be possible for a charity. Charities are typically limited in what they can do by their statutes, and perhaps more importantly, by the restricted grants or donations that make up a substantial portion of their income. Of course, for an established charity, this makes complete sense — it would benefit no one for the Dogs Trust to suddenly switch to cancer research; but for a new organisation, which doesn’t yet know the precise direction and approach that will be most successful, it seems to be a hindrance.
What about for employees?
In hiring, firing and working, there aren’t that many differences between the day-to-day operation of a charity and a company. In general, employees at charities report higher job satisfaction, though if you control for gender and industry, this effect seems to go away. Charities don’t seem to be significantly better than private companies to work for, something that is perhaps indicated by the lack of super high performing third sector organisations on ‘Glassdoor’. And in fact, people in the voluntary sector generally feel more worried about their job prospects, and concerned about their ability to influence their organisation, though it is likely that this is driven by the same issues of capital availability and flexibility mentioned earlier.
What about the competition?
There’s a common idea that the private sector is more efficient than the public and voluntary sectors, because it has to deal with competition. If a company doesn’t make something people want, and do it at the lowest possible cost, it will go bankrupt. The suggestion is that charities do not face this same kind of pressure.
I’m sure if you spoke to any employee of a charity, they would snort derisively at this notion. Charities often have to be ruthlessly competitive, fighting to operate on razor-thin margins and to raise every extra pound they can, to the extent that some have concerns that this might be stopping charities working together as they should. However, while charities do face immense competitive pressure, it is definitely a different kind of competition to for-profit companies.
For the most part, successful companies have a laser focus on their customers’ needs; if they meet them, they make a profit. On the other hand, charities must have split focuses — working to provide the best possible services, but also in the incredibly competitive fundraising market (individual donations being the largest part of the UK charity sector’s earnings). This inability to focus on their core offering may put charities at a disadvantage compared to profit making companies, something pointed out by the CEO of BiddingForGood.com, commenting that “there is a very nice enforcement mechanism that suggests for-profits are going to be more resilient because they’ve had to compete for customers every day.”
Trust and the organisation’s image
No matter the potential financial, tax or flexibility advantages of a for-profit company, it is still true that charitable status has a huge positive impact on an organisation’s image, and on people’s general trust of the organisation. Charities are the third most trusted group in UK society — after the NHS and the Armed Forces, and people in general do not trust profit-making businesses to reliably advance social causes.
This issue is further complicated with an internet/tech business. Study after study after study finds that people’s trust in internet companies is rapidly falling from an already low base. When you consider the myriad stories of data breaches, and more pertinently the sharing of personal data with advertising agencies to pump up profits, it is completely understandable why people would have lost trust in companies such as Facebook and Google.
This can be especially difficult for companies that try to mix profit-making with a social purpose (in a more real way than writing ‘Don’t be Evil’ on the wall). Change.org is the most popular petition site on the internet globally and has been involved in some incredibly beneficial campaigns to ‘make the world a better place’. However, since they are a profit-making organisation, they needed a business model to fund this campaigning, and the one they settled on was selling user data (especially email addresses) to other campaigning organisations. Understandably, as with all perceived data privacy breaches, there was significant user backlash, which definitely serves to further undermine public trust in ‘social’ businesses.
More broadly, there is a concern that any profit making business, in its desire for ever-increasing growth, will inevitably seek to find new ways of making money from their customers. Whether through the sale of user data, increasing prices or more intrusive advertising, it can seem that internet companies will stop at very little in their desire to make ever greater profits. A non-profit status or a charity statute in this situation seems like a very sensible way to publicly distance an organisation from the prevailing ‘exploitative’ environment.
However, I don’t think this is the only way. There are sites on the internet run by private companies that have managed to gain a reputation for putting user interests first, and make money not by surreptitiously selling off user data, but by openly selling a worthwhile product or asking people to pay what they like. This is difficult; it requires a clear commitment to always put users/customer first, and is a model that is easy to criticise on a slow news day, but it is possible.
One of the best examples of this is JustGiving. They are very open about the fees they charge, and have detailed explanation page of these fees, along with a clear justification for them. Nevertheless, they still get their fair share of criticism from the usual sources, but there are hundreds of charities that depend on JustGiving to improve their fundraising and to do some of the difficult admin tasks that they may not have time for. As they state on their blog they can then use this money they earn to properly pay their employees and to improve their service.
Another relatively new for-profit service is Patreon. The site, which allows people to fund their favourite creative artists, singers or bloggers, is run on a for-profit basis. And yet, the ‘creators’ on its platform have seen massively increased revenues and some have been able to make the shift from part time to full time as a result. As a result of being able to raise venture capital, this site has grown far faster, which in turn means they can hire more and better qualified people (to improve the site and its security) and can provide their creators with further increased revenues.
For us, Patreon and JustGiving are particularly interesting examples, because they are providing a service that is in some ways similar to ours; that is, an internet platform that enables other organisations to do their jobs better. In this situation, it seems that charities are not the ‘default’ governance structure, and that for-profit companies are a more usual model (compared for example to charities providing health & social care or medical research). So while it’s clearly difficult to acquire a trustworthy reputation from the off, by maintaining a user-first policy (and our integrity) we think we can successfully run a for-profit business that our users can respect and trust.
Still, we have to be aware that if we go down the for-profit route, we’ll always have questions we need to answer:
But what if we fail?
It’s all very well talking about how we’re still going to put users first when we’re mega successful, but, the sobering reality is that most startups fail. It would be remiss of us not to consider the differences between a charity and a for-profit company in this scenario.
Closing a business is incredibly easy, in fact the government recommendations are to pretty much do nothing — just to stop trading. On the other hand, closing a charity is notoriously difficult. Just a cursory glance at the gov.uk recommendations shows how much longer the process is, and in 2011, the NCVO admitted that there was very little advice on how to properly close down a charity and that it was an area in which they and the sector were seriously lacking. Potentially as a result, it is hard to name a fully closed charity, while closed businesses are ten a penny. If what we’re planning turns out to not work, or just to be not quite useful enough, we wouldn’t want a difficult closing down process to stop us from properly re-evaluating whether it is still a sensible use of both our and other people’s time and resources
And speaking of other people, if we were to be a charity, it would leave a far larger negative impact after our closure. Under the EIS and SEIS schemes mentioned earlier, our investors could actually get back almost all their money as income tax relief, whereas charity donors would have no such recourse. Furthermore, after a charity is shut down, we would have to continue to keep the books for another 3 years, and our trustees would continue to be personally liable for any decisions they made during the charity’s operation. As a risky new startup that will inevitably make some mistakes along the way, this seems like a hefty burden to place on their backs.
So what did we do at Time to Spare?
We’re set up as a normal Limited Company.
It’s been an interesting experience. People often take longer to trust us because we aren’t a charity. When we go to conferences, events or meet new people, people think we don’t belong there. Customers have asked us “Why aren’t you a charity? Is it so you can sell out and buy a yacht?”. Which is annoying, as I can’t even swim.
But, having thought this through before we started, we’re now even more convinced that it was the right move. Having seen the problems charities have with applying to and reporting for all their different funders, we’re glad we can operate outside that model.
At the same time, for all the organisations that have no choice but to run as charities, we’re trying to improve the grant funding process. If you want to hear more about that, let me know.