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:
- “My donors get a tax deduction.”
- “Foundations prefer giving to nonprofit entities.”
- “Nonprofits have a good brand in our culture.”
- “We don’t have to pay taxes!”
They also cite three major disadvantages:
- “I feel like I’m in constant fundraising mode—I’m chasing donors not solving problems.”
- “Instead of seeing our impact, donors scrutinize my salary and overhead costs.”
- “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.
- “I no longer feel like I’m begging donors year in and year out.”
- “There’s untapped capital out there without sufficient social ventures to invest in.”
- “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.
- “I don’t know how to find impact investors.”
- “We aren’t able to get funding from foundations or other traditional donors.”
- “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.