Making The Choice To Be A Nonprofit

The general opinion on nonprofits is that they are short on money and long on ideals, that people who work in nonprofits are underpaid and are often those who’d probably not get a job in the competitive corporate sector (more generalizations here).

Today’s nonprofits are challenging that opinion. More of them are being started by highly qualified passionate entrepreneurs, and many young college grads who could have gravitated to opportunities with big bucks (for example, Wall Street) are choosing to have social impact (check this top five list), and many nonprofits are able to pay reasonable salaries to their paid staff.

• What if all companies that produce something for the “common good” are nonprofits?
• What if Facebook were a nonprofit, like Wikipedia? If it were a nonprofit, selling users’ private data or allowing bad actors to influence elections probably would not be issues as the company might choose to be ethical if not compelled to grow shareholder value at all costs.
• What if Google were a nonprofit? Maybe it would continue to provide a great search engine, mail etc., and even get solid revenue, without having to resort to deeply invasive user behavior analysis or showing sponsored results from questionable sources — “don’t be evil” might be easier to practice.
• What if the pharmaceutical industry got research grants from government and foundations and was able to charge for its drugs to be sustainable, but kept them in the affordable, not obscene, price range and had no incentive to unethically pocket millions while fostering the opioid crisis?

Okay, these are just pipe dreams. None of this is likely to happen. But it seems logical that a service or product that is for the good of the public should not be subject to the demands of ever-increasing shareholder value.

More people are beginning to think about the disturbing social impact of unchecked capitalism and ever-widening inequalites, even those who have become billionaires themselves — Marc Benioff of Salesforce recently made this statement on the need for a “new capitalism”.

While alternative forms of capitalism are being debated (or dismissed, depending on the participant), there is a case to be made for nonprofits, which have become a necessary resource for millions in recent decades. Nonprofits were not so prevalent when the US had relatively better economic equality from mid-1940s to the 1970s, but from the 1980s to now there has been rapidly rising inequality and at the same time nonprofits have grown substantially. Nonprofits went from contributing 0.9% of GDP (gross domestic product) in 1945 to 2.9% in 1980 to 5.4% in 2018 (read more in this report).

As a concerned citizen, I of course care about how corporations may be repurposed to contribute to, not diminish, common good. I also find it heartening to see more social enterprises, many using technology, being created to address the burgeoning inequities (though I wish we didn’t have the need).

Additionally, as an entrepreneur, I hope that founders of companies, especially those that use technology to drive social impact, have the opportunity to seriously consider other business models and not default to the for-profit one just because that’s what is expected (“hey, we use tech, we can mint money!”).

This is informed by own experience. I had started an education company with the goal to use technology to create and deliver services to students, particularly the underserved who have limited access to one-on-one quality learning experiences with teachers/mentors. Getting started as a for-profit was not a problem. Having impact and getting great testimonials was not a problem either. But getting funding for scaling as a social enterprise was difficult. After trying various options, I successfully converted to a nonprofit and these are the reasons why and the lessons learned.

Technology

When I started the company, I did seriously consider making it a nonprofit but my advisors urged me to take the for-profit route because we were building our own software (nothing out there had the specific features that differentiated us).

We used open source which we modified as needed and added some cool code to create a platform that could support our goals, but that was not enough to create valuable intellectual property for most investors. If our software had been difficult to replicate because it had deep, unique, specificity and/or the hot trends of the moment (machine learning! AI!) our IP would have had appreciable value. Yes, we were an edtech company but though the tech was foundational to our offerings, it was primarily an enabler for our mission.

If the tech is not deep enough in the tech-enabled social venture, the nonprofit route may be a better choice.

Funding

It is possible to grow a for-profit without taking outside funding by bootstrapping and building revenue. But if speedy scaling is desired, more resources are required, usually venture capital. Conversely, venture capital funding is most likely if it is apparent that the startup has a high probability of scaling successfully and quickly.

The education market in the US, especially if serving students in public schools, is often a long slow slog due to the complexities of school and school district administrations and the differences from state to state. Education ventures are better off with patient capital, which is not easy to come by.

If for any reason (target market, financial model, team, IP) venture capitalists are not interested in investing, the nonprofit route may be a better choice.

Mission

There’s some naiveté in unquestioningly buying into the “do good, do well”, “make money, make meaning” mantras. It all depends on how much really — “how much money” and “how much good” because pursuit of one might lower the outcome of the other.

For example, in education the good is in helping the underserved — the students from low-income families who often go to schools with limited resources and poor outcomes and present a greater need. But the money is in serving those who can pay — for example, the US parents who are willing to pay to help their child do better at school have created a market size of $608.1 million just for online tutoring.

There is no value judgement here as one could still doing some “good” by helping students even if going only for the tutoring dollars. But, for my company the mission was about improving equity in education, and repurposing our goals to only offer paid-tutoring just did not seem right for us.

If changing the mission for the sake of more impressive revenues is undesirable, the nonprofit route may be a better choice.

Founders

The founders and the early-stage teams are the ones who’re going to do the heavy lifting to bring their companies to a point where scaling is a possibility. Their company’s direction is set by what drives them. If they have dreams of striking it big financially, they will not be interested in a nonprofit model. On the other hand, if social impact and the way it is delivered is important, they are more likely to gravitate towards the nonprofit approach.

But, nonprofits also need funding, though their funders are looking for a different kind of return on their investment. Nonprofit leaders also need to make pitches, show their capacity to grow sustainably and deliver the promised impact. They will often appeal to the emotions as well as to the logic and reason of funders, but they do not have to show how they will increase shareholder value. Getting funding for a nonprofit is an ongoing challenge and not at all an easy task, but it does take a different approach which might be a more comfortable fit for some entrepreneurs.

If social entrepreneurs are uncomfortable with their ability to single-mindedly go after rapid growth and profits, the nonprofit route may be a better choice.

Market

It is critical to identify the primary target market for the company right at inception, though it is feasible that could change as the company learns what works and what doesn’t when it goes to market.

For a social enterprise, the target market and how they will be reached/served is a big factor in deciding on the business model. Can the target market directly pay for the services? How much can it pay? Is it large enough that low-cost offerings can still generate high revenue that can grow consistently? Or is the target audience best served through an intermediary? If so, is the offering critical enough for the intermediary’s needs and will they pay a high enough price for it?

It is important to keep in mind that when serving low-income households prices have to be low (if not free) and at low prices, the scale has to be very large to make it attractive as a for-profit company. It is also worth noting that sometimes nonprofits are more welcome than for-profits in some target markets.

If serving the primary target market will deliver significant impact but cannot deliver substantial revenues, the nonprofit route may be a better choice.

The Choice

There is not just one way to form a social venture. Success and failure are possible for nonprofit as well as for-profit companies and there are many variables that affect the outcome: team, funding, offerings, market etc. Nonprofit companies can create for-profit subsidiaries where feasible. For-profit companies do not have to be venture-backed to be successful. And many entrepreneurs believe it is preferable to make a vast amount of money first and then consider “impact investing”.

It is possible to be dismissive of a company that chooses to be a nonprofit as being incapable of success in the for-profit sector or just choosing an easier path. But choosing to be a nonprofit could be the right thing to do — for example, we found that it was easier for us to work with many organizations, including large corporations, once we switched to a nonprofit model as it was better aligned with our mission. And, going the nonprofit route is not “choosing the easy path” — nonprofits take a lot of work, dedication and innovative ideas to bring in the money and deliver the impact.

Personally I find that the nonprofit model is a much better fit for what we set out to do, but I can imagine that some people would consider it a failure. Ultimately taking the for-profit or nonprofit route is a personal decision to be made by the the social entrepreneurs, but it is important that they make a thoughtful choice considering all the factors. The process will strengthen the sense of purpose and increase the chances of success (which after all, is the goal of both for-profit as well as nonprofit companies) and for a social enterprise, that includes making the world a better place too.