Over the past fifteen years, I’ve had the opportunity to provide strategy for well over a hundred social change start-ups seeking to make the world a better place. The most common question they ask, “Should we be a for-profit or a nonprofit.” My answer, “Why not consider both?” Let’s review the advantages and disadvantages.

The nonprofit option

Human hands holding polygonal heart. Love, peace and donation concept. Charity event. Vector illustration for non-profit organisationHuman hands holding polygonal heart

The nonprofit option is the most popular choice with over $410 billion given to 1.5 million nonprofits last year alone. Nonprofit leaders report back to me four primary advantages to this legal structure:

  1. “My donors get a tax deduction.”
  2. “Foundations prefer giving to nonprofit entities.”
  3. “Nonprofits have a good brand in our culture.”
  4. “We don’t have to pay taxes!”

They also cite three major disadvantages:

  1. “I feel like I’m in constant fundraising mode—I’m chasing donors not solving problems.”
  2. “Instead of seeing our impact, donors scrutinize my salary and overhead costs.”
  3. “No matter how much sweat equity I put into my work, I have no financial gain to show for it.”

Impact investing for for-profit social ventures

The rise of impact investing into for-profit social ventures makes this is a powerful alternative to the nonprofit model. The Global Impact Investing Network reported that “225 investors, including pension funds, invested $35.5 billion across 11,136 impact investment deals in 2017. That is up 58% from $22.1 billion across 7,951 deals in 2016.” That $35 billion is getting pretty close to the $66.90 billion donated by charitable foundations in 2017.

Nonprofit leaders are also looking toward for profit earned income as part of their future as well. A recent Bridgespan Group survey of US nonprofits’ executives reported they “believe earned income would play an important role in bolstering their organizations’ revenue in the future.” According to Echoing Green, a nonprofit with a 25-year record of supporting early-stage social entrepreneurs, the proportion of their applicant pool proposing for-profit and hybrid organizations has grown to nearly 50 percent, compared to 15 percent in 2006.

For-profit social ventures name three primary advantages to choosing this model.

  1. “I no longer feel like I’m begging donors year in and year out.”
  2. “There’s untapped capital out there without sufficient social ventures to invest in.”
  3. “We put in our own sweat equity and as owners, I might get a great long term financial return for my work.”

Social ventures also described to me three disadvantages.

  1. “I don’t know how to find impact investors.”
  2. “We aren’t able to get funding from foundations or other traditional donors.”
  3. “It’s hard to measure and report out both impact measurement and return on investment to investors.”

Hybrid models that include both for-profit and nonprofit entities can maximize the advantages of each model, while minimizing the disadvantages. These hybrids come in many shapes and sizes.

Read the rest at Big Think