NexThought Monday: Starting a Nonprofit? Consider a Public Benefit Corp Instead
It’s 9 p.m. the night before our biggest fundraiser of the year. I’m on the phone with my teammate who continually makes gasping sounds from burning herself with a hot glue gun. She’s assembling party favors to give to our guests. One of our donors fell through on the auction item they were supposed to donate and we’re scrambling to figure out where we’re going to get a replacement. Our entire budget depends on this event, so every last donation counts.
We come up with a plan, and I hang up feeling a little guilty knowing she’ll be up until 1 a.m. gluing. I sigh and wonder how it got to be this way. Our nonprofit organization was actually bringing in consistent revenue from our microfinance banking operations, and we were funding all our local staff in Africa through our own funds. But we desperately needed donation capital to fund any growth. It seemed ludicrous that chasing down silent auction items and staying up gluing party favors were good uses of our time.
This is the challenge that so many startup social good organizations face – even if you have a good business model, how do you get the funds to get started and scale?
After five years of running a nonprofit organization, I found myself completely burnt out on fundraising. While I did love the relationships I made with generous and impactful donors, the grandiose events required to close funding weren’t producing enough return on investment.
Though I had a successful exit with my nonprofit startup (read more here), I knew there had to be a better model. Soon after our exit I joined my now co-founder Rose Broome to build HandUp, a for-profit Public Benefit Corporation with a mission to support individuals experiencing homelessness. Through this process, I’ve discovered a few takeaways that apply to for-profits and nonprofits alike.
Define your market impact and model
I speak with a lot of social entrepreneurs who start filling out their 501(c)(3) nonprofit paperwork before they’ve even identified where they want to go and how they want to get there. Figuring out your model before deciding the right legal structure is key.
With HandUp, we knew up-front that we would be building software for nonprofits and also that we had ambitions for massive scale. Our market research told us that individual households alone donated $26 billion to alleviate domestic poverty, and the government spent over $200 billion on the types of programs we hoped to support. With a clear market and model for scale, we landed on the for-profit structure as the best model for us.
Next, consider what you’ll need to get going. It’s easy to get wrapped up in a big vision, but you have to prove you have something. What’s the easiest way to test your idea for the smallest amount of money possible? Before we hired anyone, Rose threw together a scrappy version of our website and our co-founder Zac, a close friend of Rose’s, agreed to build it. We launched a beta partnership with a local San Francisco organization and signed up the first homeless individuals ourselves. It was only after we saw donations coming in and started hearing from other nonprofits seeking the same technology, that we started asking for money and solidifying a team.
If you’ve ever been a part of a technology company, especially in the Bay Area, you probably know the hardest step is forming the team. Competition for engineering and design talent can make or break your venture. While our first employees were highly motivated by the potential for impact, we had to be able to compete on salary, benefits and equity as well. Operating under the for-profit model gave us that flexibility and helped us keep pace (or at least get close) with the tech giants of Silicon Valley.
The advantage of flexibility in funds
While many later-stage nonprofits are able to smooth out their revenue, getting funding for early-stage social innovation is tough. Government and foundations are incredibly risk-averse and grants tend to come with many strings attached. When you look at funding for traditional startups there is a much more established market. In the U.S. alone, $58.8 billion was deployed in venture capital funding for startups in 2015, compared to $15.2 billion in impact investing funds deployed globally that year, according to the Global Impact Investing Network.
Social impact and nonprofits are very dependent on donors to scale. If you do go the nonprofit route, make sure you look into working under a fiscal sponsor at the beginning. You can read more about this approach here. Basically a fiscal sponsor is a nonprofit that agrees to process all your donations, usually for a fee, and takes legal responsibility for ensuring that your funds go toward the right mission. It’s a great way to keep your overhead lean and avoid all the hassle of applying for 501(c)(3) status until you’re ready.
While I can rattle off many benefits of working under a for-profit structure, that doesn’t mean I haven’t faced obstacles as well. One of the primary challenges you face as a for-profit social enterprise is pressure from investors to clearly articulate and execute a revenue model. While it’s helpful to have the focus on sustainability, this pressure can cause you to stray from your social mission. For HandUp, we only make money if we are having an impact on poverty, so these incentives are aligned. This is the biggest lesson I’ve learned: Make sure your mission and revenue model are aligned.
After over two years of running HandUp, I’ve been able to compare the two models. If you have the right model for scale, with a clear market, and have tested your idea, I highly recommend taking the Public Benefit Corporation route. We have been able to raise early-stage capital to get ourselves off the ground, attract amazing talent through equity and growth potential, and (we hope) provide further proof that there is new hope for the for-profit model to be an agent for change.
These lessons apply whether you decide a non-profit or for-profit is right for you and your team. Just make sure you don’t find yourself with a hot glue gun at 1 a.m. asking if there isn’t a better way. There are many options for social businesses these days, so take the time to find the one that’s right for you.
Top/homepage image courtesy of HandUp.