NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, July 31, 2014

Should a new social good organization choose a for-profit model or a nonprofit one? This is a question we face each year at my organization, Echoing Green, when we evaluate thousands of business plans from social entrepreneurs seeking start-up capital and support. This year, nearly 50% of those plans proposed using a for-profit model. And when we asked these entrepreneurs why, some of their reasons were just plain bad.

They are not alone. New entrepreneurs are increasingly starting for-profit firms whose primary purpose is social impact. Supporting this trend is a tremendous increase in capital available for “impact investing.” According to a recent JPMorgan/GIIN report, impact investors invested nearly $11 billion across 4,900 deals in 2013, up 250% from 2011.

At Echoing Green, the social impact of our portfolio is our highest priority, so we’re agnostic on which form the organization takes. With the new possibilities for for-profit models (including B Corps,L3Cs, etc.), social entrepreneurs now have more options. This can be a good choice for the right organization but too many entrepreneurs seem to be making the decision for the wrong reasons.

Here are some of the worst reasons we hear for starting a for-profit to do good:

Bad Reason #1: Only for-profits use “business discipline.” It’s easy to scan headlines and see undisciplined for-profit companies (take GM, American Apparel). If “business discipline” means a thoughtful, hard-nosed, numbers-driven, approach to delivering results, businesses such as Teach For America (with a $250M annual operating budget), the multi-billion-dollar-lending BRAC, or even institutions like Harvard University or the Cleveland Clinic are great examples of disciplined nonprofits. Clearly, for-profits don’t have a monopoly on discipline.

Bad Reason #2: Only for-profits can sell a product or service. This is a misunderstanding of corporate law in most countries. Whether your organization is a for-profit or nonprofit doesn’t typically affect your ability to sell products. There are some nuances in China and India, but in most parts of the world, and certainly in the U.S., nonprofits may sell products (Girl Scout cookies!) and for-profits can accept donations. In the 2013 class of Echoing Green Fellows, five of the 12 nonprofits earn revenue, and five of the seven for-profit companies have received donations.