The Profit vs. Nonprofit Tug of War: From investors to employees, why my social business did a 180
I’ve had the for-profit vs. nonprofit debate both internally and with various mentors, funders, friends, and teammates since the day BLISS was created. It seemed there was no clear answer. While BLISS was born out of an unmet social need, we were, at the same time, creating a product that would have to compete with for-profit labels, requiring us to pay very close attention to our market and customers.
In the absence of hybrid structures in Pakistan, where we are based, I chose to go the nonprofit route. At conferences and during pitches, I would often get asked to justify this choice; we could easily have been a viable for-profit. My answer had to do with perception and control. I wanted to ensure that our social mission remained our raison d’être and that everyone understood that – our communities, our funders, our customers, and our team. Additionally, I believed our model lent itself well to raising grant capital (more on that later).
Still, I often felt like I had multiple personality disorder. Achieving real impact required us to think compassionately and consider the needs of a population that was living on less than $2 a day. But the product required us to consider the needs of the high-income consumer market, as well as the whims of the fashion industry. I had to play the role of decision-maker on both fronts.
This January, after operating as a non-profit for a year and a half, I decided to flip BLISS to a for-profit.
Here is the short story of why: as a nonprofit, we were attracting the wrong people and the wrong money. This is something I had feared, but when it started coming true, it hurt our progress more than I could have imagined. I learned this the hard way, but having a purpose other than profit, such as creating social impact, is not sufficient reason to be a non-profit. Here’s the longer version:
Attracting Misfits: Products vs. Services
Entrepreneurs need a certain level of optimism and naiveté to succeed. Let’s just say I possess these qualities in slightly unhealthy doses. While conventional wisdom and common sense tells us that nonprofits and for-profits thrive on employees with very different skill-sets, I believed we could swim against the tide and create a new kind of nonprofit! We could legally be a nonprofit, yet attract the for-profit talent our model required.
In reality, that’s not quite how it worked out.
When you’re selling a product to a high-income bracket, there’s urgency to ship, to deliver to the market, to constantly push out newer products to delight and excite the customer, to make in-roads that lead to sales, to move faster and offer better quality than competing brands. Your customers have endless choices, especially in an industry like fashion, where the handbag industry just in the U.S. is a $10 billion plus market, and 80 billion garments are produced every year. That is a lot of handbags and a lot of clothes from which to choose. If the product does not have impeccable quality with reliable consistency, if the customer service isn’t fantastic, or if the designs aren’t on trend, neither retailers nor customers will stick around for too long just for the social impact. Delivering this quality consistently requires a team that is obsessed with details, outcomes, progress and getting stuff done, and driven by an urgency to deliver.
As a nonprofit, there’s usually a focus on services, not products. In a place like Pakistan, if you’re providing education, health care, or other services as a nonprofit, it is often to base-of-the-pyramid customers who do not have any options. You’re not facing fierce competition for a ‘spot’ in the community the way you do for a ‘spot’ on the racks of a desirable retail chain. This is not to deny the fact that the nonprofit world has some of the most compelling and effective leaders, and is building beautiful things with thoughtfulness and compassion. But the competition that fuels the pace and innovation in a product-focused for-profit is usually missing.
By advertising ourselves as a non-profit, we were attracting people who were great fits for traditional non-profits, but misfits for us. The result was frustration, a misalignment of priorities, and a sluggish pace. We were also inadvertently pushing away a lot of smart, resourceful, driven people who had their own notions of what a non-profit represented. Additionally, it often becomes easier to convince top tier professionals to join your early-stage/risky startup at a low pay scale if equity can be part of the incentive. As a non-profit, you can’t put that on the table.
Hiring talented people is a behemoth of a task to begin with – advertising yourself in a way that attracts the opposite talent pool of what you need is equivalent to setting yourself up for failure. Running a startup is a lot of work; it can often be tiring, frustrating, unrewarding, and lonely. You will lose sleep, your health may suffer, and you may not see friend or family for weeks or months. There is no reason to make life harder by choosing a legal structure that requires you to swim against the tide.
In the time that we switched from a non-profit to a for-profit, we went from hiring ex-USAID employees and development professionals, to hiring fashion school graduates and ex-cofounders/entrepreneurs. The difference in output could not be more visible.
Attracting The Best Kind of Money
Social enterprises are often trying to prove new concepts, fulfill unmet needs, or enter difficult markets. As Kevin Starr points out in this post, they need capital at better terms and with longer payback schedules because the problems they are solving are complex and the processes they need to set up may be riddled with inefficiencies.
For example, our production and quality control are much more difficult and inefficient than typical garment industry setups because we are simultaneously trying to create sustainable income, dignity, opportunity and growth for the women who make our products. Simply by virtue of selecting underprivileged and/or unskilled women, we have strayed away from the quickest and most cost-effective way to create our products – find cheap labor that is already skilled at the craft. I thought this lent itself well to grant capital that would allow us to experiment in our first couple years, without pressure to pay back money or deliver financial returns. I was hesitant to talk to traditional investors focused on the ROI.
But I had heavily underestimated the frustrations associated with raising non-profit money. Funding cycles of a year, even two years were common. For us, everything had changed in a year! At times, after months of conversations, paperwork submission and phone calls, the communication would just diffuse into non-existence. Once our contact person at a renowned Pakistani foundation resigned, with no one to pick up the correspondence, leaving us at a dead-end.
This is not to say raising capital with traditional investors is even remotely easy. It comes with its own set of challenges. Often the terms can be bullish and values can be misaligned. Ultimately finding the right investor(s) is one of the most difficult things an entrepreneur must do no matter what. But for me, one of the most compelling reasons to choose a non-profit structure – the presence of grant capital to get us through our teething years – had fallen flat on its face. The time spent talking to funders was taking away from hiring, product development and everything else in between.
We have now successfully raised our seed round of equity investment through a syndicate of Pakistani investors. It was not easy; we started out with radically different ideas about what a fair deal was, and spent hours negotiating the equity. But these investors have been entrepreneurs themselves – they have successfully built and sold businesses. They understand the urgency I feel for my startup. The entire deal – from the day I called up one of the investors, to the day we shook on the deal took less than 30 days, of which I was not even in the country for two weeks.
While we are still not the most compelling proposition for an investor looking primarily or solely for financial returns (as is true for most social enterprises), these investors care about the social impact just as much as the financial returns.
The unique combination of empathy and business acumen these investors bring adds the right amount of pressure to deliver. We must pay them back, start showing results, and meet our milestones, but it must all tie back to creating impact for our communities. Any capable entrepreneur should want that pressure, should want to be pushed to move as fast as they can. When you take money that must be paid back in one form or another, the clock really starts ticking. This pressure is not a typical characteristic of non-profit funding.
However, the real icing on the cake is the fact that these investors bring many years of valuable experience in the sectors we operate in (retail, operational expertise, marketing) as well as general startup knowhow (hiring, fundraising, strategy, leadership). Because they have a financial stake in the company, which is not possible with a non-profit, they are much more inclined to actively partake in our progress, and to offer their expertise and networks to push us to success. Within 10 days of shaking on the deal, one of the investors had connected me to the best leather tannery in the country. This is the best kind of money.
The Real Bottom-Line
Ultimately, the real bottom line is our impact – not only on our communities but also on our customers. We decided to choose a model that best helps achieve this impact.
Because our impact is baked into the business model – the more products we are able to produce and sell globally, the higher our impact – we picked a structure that enabled us to establish the most efficient design and production processes, and find the best marketing and distribution channels. For other companies and other models, this may not be the right answer.
In the end, that is the most important consideration in choosing a structure – to pick one that helps you fulfill your mission, your raison d’être. Everything else will follow.