Sunday, January 13, 2008

For-profit or nonprofit: what's the issue?

I frequently get asked by folks I know in the for-profit tech sector (where I come from), why we don't focus on making money. The team at Benetech seems very strong, and it seems clear we could go off and find a way to make big money. I agree.

But, that's not Benetech. We chose a nonprofit form to do those things we were sure the for-profit world wouldn't do. Or, if they did, they would keep focusing on those "applications with commercial potential." We pretty much exist to adapt technology developed for those "applications with commercial potential" to applications with great social impact and limited commercial potential.

When you have two bottom lines, one of them is the deciding factor. When your organization faces a critical choice (and most organizations seem to need to make these choices), it will pick the bottom line that reflects its organizational charter. If serving shareholders is that bottom line, because you're a for-profit, I respect that. If you're a nonprofit, you'll choose to focus on social good. I like that better, because I once had to make the choice to jettison a social project when I was a founder of a venture backed for-profit company. It was the right decision for the company, but the wrong decision for society.

A wholly owned for-profit subsidiary of a nonprofit will follow the directives of its parent. We have such an entity, and the Mozilla Foundation/Corporation is a great example. But, those for-profits are exceptions, organized as a tool for nonprofits to protect their charitable status. When most people say they want to take the for-profit form, it's around raising capital and making money. Once you have shareholders, you have a pretty strong bias to pursue their interests. The folks I know who have tried to get investors to accept sub-market returns haven't raised much capital, although I continue to have hopes that they will. So, if you're a for-profit promising market investment returns, you're back in the situation of having to choose between serving society or delivering market returns.

We have a vibrant for-profit sector that works pretty well. We have a large non-profit sector that has many zones where it does not work well (measured by long-term addressing the social mission). Our work is bringing more businesslike approaches to the non-profit sector, rather than fixing the for-profit sector with more socially oriented approaches. To my mind, that's where the low-hanging fruit are in the technology fields. And, as a nonprofit, I can pursue society's interests with a clear conscience.

4 comments:

Mitchell said...

Jim

Great to see you writing about this. It's funny, I'm writing something about a very similar issue, only to see this appear. I'd like to get a good conversation started about the new hybrid organizations. I'm not sure blogs are the right place for ongoing conversations among more than a couple of people, but will start by blogging as well.

Mitchell

Brian said...

Thanks, Jim for fleshing out via your own experience and example the rationale for chosing a nonprofit structure for your organization. It nicely echoes an article I just read this evening by Cynthia Gair, "If the Shoe Fits: Nonprofit or For-Profit? The Choice Matters" available as a free download at www.redf.org. Incidentally, I found that reference as well as Benetech's web address and description in a humorous and inspiring account by Earl Copus: "Melwood: A Story of Empowerment: Transforming Lives of People with Disabilities Through Entrepreneurship." I strongly recommend it. Its available at www.melwood.org.

Brian

dallburn said...

What if the nonprofit invented something it needed for its mission, but the invention accidentally turned out to have wide commercial appeal? Venture capital firms are calling, as well as big commercial outfits wanting to license (or break) the patent? Do we spin it off and hope for royalties, or keep it inside paying UBIT and hope it doesn't jeopardize the parent's exemption?

All Things Fundraising said...

Jim, we need hundreds more people like you with your insight and your ability to take some of the for-profit values into the nonprofit sector without having to satisfy shareholders. I suspect that gives you a greater ability to satisfy all your stakeholders who understand the need nonprofits have for technology and technological understanding.
Thanks for doing what you do.

John