Nonprofit v. For Profit

I had the chance last night to moderate a Feast Debate (#FeastOnGood) on non-profit vs. for-profit models.  Ruti Wajnberg and Jorge Vega did a great job orchestrating the evening, and it was a pleasure to host a conversation between Jo Opot, Global VP of Business Development at TerraCycle (and former Executive Director of StartingBloc) and Kate MacKenzie, Director of Policy and Government Relations at City Harvest.

With 120+ people packed into the beautiful Salt Space on West 27th Street, we set out to debate which model – nonprofit or for-profit – is better for pursuing social change (and once we quickly agreed that the answer was “it depends,” to dig into the strengths and weaknesses of each model across the very practical dimensions of fundraising, culture, revenues, getting and keeping great people, etc.)

I started the conversation by polling the audience, and of course my first question was how many people had heard of Generosity Day (couldn’t resist).  At least one third of the attendees raised their hands.  Sample bias aside, the idea that a third of people engaged in social change heard about Generosity Day and changed the way they acted for a day (and, I bet, for a long time after) just blew me away.

Then we got down to business, and I asked a bunch of questions of the audience around the biases we all carry around about nonprofit and for-profit models: with which is it easier to attract great talent; to partner; to raise money; to get things done; to create a great culture?

As Jo and Kate spoke, and as the Q&A with the audience unfolded, I increasingly realized the power our stock answers to these questions hold over us: nonprofits, the conventional wisdom goes, struggle to get “less dependent on – and beholden to – donor funding;”  we can’t compete with the corporate sector for great talent; for profits are built to scale more rapidly; and on and on and on.

All generalities hold a kernel of truth: there’s no doubt that the 501(c)3 structure creates limitations and that there are certain things (like giving employees equity) that only for-profits can-do.  But most of the perverse actions we take (as nonprofits and for profits) are not taken because of structures that keep us from behaving differently.

Take Sean Stannard-Stockton’s great post from yesterday about government crowding out philanthropy, he relates a story George Overholser tells about the need for creating an equity structure for nonprofits:

George used to be a venture capitalist and work with a venture philanthropy organization. He relates a story about how in the morning he presided over a meeting where the venture philanthropy group made a large grant to a nonprofit. Everyone was very excited and it was high fives all around with the nonprofit executives leading the cheers. The excited executive director happily pointed out that the grant met their entire fundraising budget for the year and so now they could focus on their programs.

That afternoon, George presided over a meeting where the venture capital group made a large investment in a for-profit. Again it was high fives and excitement, except this time only the venture capitalists were cheering. Looking over at the for-profit executive team, George noticed they all seemed nervous. When he asked what was wrong, the CEO said, “well, now that we have the growth capital, the pressure is on to generate revenue!”

To the nonprofit executive director, it didn’t matter if the venture philanthropy donors called their grant an “investment”. The only accounting treatment for money coming into a nonprofit is revenue. But for the for-profit, the venture capital money really was an investment. It would be booked as equity, not as revenue, and from here on out their success in generating revenue would be measured against the amount of equity they had deployed to build their business.

Sure, this is perverse behavior, but even in this stark example, there’s nothing structural keeping the nonprofit leadership from deciding to treat the large grant they just got as long-term capital, and to continue to aim for their revenue goal for the year.  Yes this might be a harder story to explain to funders (“why do you have so much cash in the bank?”), yes it would be better to have a better way to account for this within 501(c)3 reporting requirements.  But just because all of that is not in place doesn’t mean we can’t act differently.

I was surprised how much I ended up defending what was possible as a non-profit, since that wasn’t my plan going in and I don’t necessarily think being a nonprofit is the answer for most social mission organizations.  But so often “we’re a nonprofit so we can’t…” (raise a lot of money quickly, hire great people, not be beholden to grantmakers who want to impose their agenda on us, be ruthlessly accountable in everything we do) is simply a cop-out for our own bad behavior, limited thinking, and poor execution.

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13 Responses to Nonprofit v. For Profit

  1. Love following you & you usually have great, thought provoking message, but after reading the above I am not sure you “get” non profits.

  2. Sasha says:

    Hi Denise, thank you so much for your comment. It made me realize that I cut of Sean’s post one paragraph too early (have added in that extra paragraph).

    The point I was trying to make isn’t that nonprofits shouldn’t celebrate when they get a big infusion of capital – they should, they do, and I do! Instead, I’m suggesting that until we get the accounting right, we still operate differently. In this case, if the nonprofit was looking for growth capital they could have set up their annual fundraising goal to include a portion of long-term growth capital and a portion of revenues for that year’s operating expenses.

  3. Susan says:

    I’m an attorney, and I’ve represented a lot of non-profit organizations. My partner represents non-profits almost exclusively.

    What we and most attorneys and CPA’s who work with non-profits say, amongst ourselves, is that the people running these organizations are almost always space cadets. Generalizing like crazy here, but they usually have no solid sense of how to run a business; they seem to think that they are not subject, as appropriate, to the tax laws (501(c)(3) organizations are exempt from some, but not all, taxes), they cut corners on legal compliance matters, including taxes but also including things like building codes, and generally they operate as though they are Special People who are not subject to the laws of finance and physics like the rest of us. (Because they are engaged in “doing good”? Who knows.) As a result many such organizations run into a lot of trouble.

    I’m not suggesting that there are no fools in the for-profit sector. One wishes! Our recent economic troubles demonstrate that thinking that you are special and not subject to the law of gravity is not unknown in the profit sector. But overall, the laws of physics and finance tend to catch up with the profit folks sooner and harder, weeding out the real nut jobs, and leaving as survivors those who have something of a clue.

  4. Sasha-

    Great conversation last night! The best point made all night was that we can’t be bound by preconceived notions of what we can and can’t do as nonprofit/for-profit. What is most important is to understand clearly HOW your organization is achieving your mission and choose the proper legal structure based on that.

    Fortunately, there are some other interesting options becoming available to mission driven organizations, such as Benefit Corporations, Flexible Purpose Corporations, and L3Cs that broaden the directors mandate from maximizing shareholder value to maximizing stakeholder value.

  5. Sasha says:

    Kyle thanks for your comment here and for your participation last night. I’m hoping that YOU’LL hold a similar session on all the options that you mention…would love to understand more about how these are playing out in practice, and to hear your thoughts about whether and how these new structures are allowing organizations to scale more quickly and serve their constituencies more effectively.

  6. Thanks Sasha! So surprised at the interest in these topics. I thought I was the only geek that cared about this stuff. If a deeper dive is put together, you’ll be the first to know.

  7. Geri Stengel says:

    I agree: Nonprofit leaders need to rethink funding and investing so they “get” that impact achieved matters and should be measured. But in order to do that, funders and donors must change their thinking as well. The striking note in Sean’s scenario was the joy the nonprofit leaders felt because they could focus on program instead of fundraising. What does that say about the short-term funding cycle and the resources it wastes? What about investment in capacity-building, infrastructure, long-term projects, and living wages for front-line staff? Nonprofit leaders can push but funders must respond to new ways of measuring success.

  8. Hi Sasha, I totally agree with your point of view (I’ve worked both in for-profit and non-profit).

    One way to overcame these problems is to act as a Social Business (http://en.wikipedia.org/wiki/Social_business), as definied by Prof. Yunus: a financially self-sutainable non-dividend non-loss compnay, whose goal is to solve a social problem and not profit maximization.

    It has the best of both worlds. I’m starting one of them in India, and I think it is a new idea very very interesting.

  9. Sasha.

    A lot of debate surrounding this issue these days.. perhaps because new “investors” believe there must be a “better way”?

    In my experience as a social entrepreneur, consultant, and professor to 180 MBA students who are REQUIRED to develop a business plan that addresses an issue of sustainability (economic, environmental, social, or community), it is of little consequence whether or not the organization is profit or non as long as (1) it has a social mission at the core of its “business” model (2) it is a mission that is truly valuable, and genuinely address the underlying gap in the “market” and (3) its value translates into financial “support”.

    I know this is pretty wide angle, but if at the end of the day the organization is able to identify and build itself around a social mission, is able to build and build itself around a value proposition, it will find the money. IT may come from a government agency, a product/ service line, or from having a strong base of donors who BELIEVE that by donating their 5USD, they will (through the organization) have a measurable impact that justifies parting with that 5 USD.

    following that, and addressing the wider issues of hiring the right people, etc… that is also secondary to the mission and value proposition of the organization. If an organization has the mission/ value proposition right, it will not only be able to attract the right talent, it will be able to justify to outsiders the need to pay them a salary that is in line with the value they produce for the organization. A value that ultimately benefit’s society… and if that doesn’t work, then I simply ask why one should expect an investment banker to make 15m USD a year destroying the housing market while my staff make X rebuilding the lives of those who were impacted.

    r
    http://www.collectiveresponsibility.org

  10. Madeeha Ansari says:

    After much agony, I chose a for-profit organization because it was flexible, dynamic and fun. After all, I thought, the development industry is generally becoming about business generation. To be perfectly honest, the spirit in which the money is raised does count and it definitely colours the way you think.

    Guess “it depends” is all anyone can really say.

  11. Sasha says:

    Rich, thank you for this comment (which somehow was waylayed in the spam folder). I agree with your points, but what I heard from the audience at the Feast Debate was that, regardless of the fact that in principle any avenue can work to create social change, when faced with the practical question of what to do, people are still struggling.

  12. Sasha.

    Thanks.

    I wonder how many of these organizations, the ones that struggle, are (1) run by leaders who are new to social organizations (profit or non) and (2) are struggling with an external look vs. a legal structure?

    R

  13. Pingback: Aid & development: A few good posts « Peace Dividend Trust Blog

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