I agree at a high level, but details matter. Specifically, I’m unsure about the “can” in this recommendation, and I’m a little unsure of the audience for this advice.
Nonprofits are generally formed for topics/services where for-profit services aren’t sufficiently (in the minds of the organizers and donors) doing it. That implies that in the factual world, it isn’t done (enough) for profit. What counterfactuals are in scope for the “can be” done comparison?
For the nonprofits I know well, there’s also an important difference in mission. I like your flywheel circles as an illustration—for-profit organizations align the benefits they provide with the money (on both sides of the wheel): customers are the same entities as beneficiaries. Non-profits provide a non-monetary alignment channel—donors are a different kind of beneficiary than the direct target beneficiary.
The very important “can be for-profit” in your advice SEEMS to expand to “if the beneficiaries can effectively use price signals to influence the organization’s behavior”. Which matches the real-world pretty well: for-profit when the beneficiaries are concentrated and wealthy enough to consume your service, not-for-profit when the beneficiaries are unable/unwilling to pay.
edit: oh, there’s also a class of organizations that are non-profit for regulatory or tax reasons, but operationally have fairly normal revenue streams and relatively little dependency on donations. I count those as for-profit for purposes of this discussion.
another edit: why not both? There are LOTS of segments in which for-profit and non-profit organizations both operate, often with a high degree of overlap of overlap.
As an example, some years ago I had some friends who wanted to create curriculum material, I think aimed at homeschoolers. They were thinking of setting it up as a nonprofit. I counseled them to make it for-profit, because it would force them to find a market and have more impact. They did and told me recently that this made a big difference for them.
But an even bigger lesson here is that we should look for structural barriers to for-profits. This could mean legal changes (e.g., in patent protection); creative new business models that challenge the structure of entire industries; etc.
because it would force them to find a market and have more impact.
If you think nonprofits don’t have to find a market (two markets, actually—donors and beneficiaries, which may or may not overlap) and to measure their impact, I suspect you’ve never worked closely with a serious nonprofit.
When starting out, it’s definitely a good idea to be as independent as possible, and that’s usually a privately-owned management structure (for-profit, sure, but that designation is a red herring. Startups are profit-irrelevant for the first few releases, and premature outside funding would be as bad a mistake as premature decision to go nonprofit.
After the startup phase, where the founder is a significant part of the labor, the question gets trickier. It depends a lot on your target beneficiary and how much their market power diverges from your mission.
Other than tax implications, what structural barriers do you have in mind which are pushing organizations into non-profit rather than for-profit structures?
I have started nonprofits, and worked closely with others.
I have also seen nonprofits that produce a lot of material that no one reads and that has no impact, but that keep getting donations from donors who aren’t paying much attention to impact, or who rationalize away the lack of it.
Examples of structural barriers:
Lack of patent protection, e.g., ability to obtain and enforce patent on repurposed drugs (example I mentioned and linked to in the article)
Regulation: e.g., many health insurance products you might want to create are illegal
Free public alternatives: e.g., it’s hard to profit in K–12 education because of public schools, making private school a premium/luxury product for the rich; something like tax credits for private school could alleviate this
Lack of patent protection does not stop a nonprofit from sponsoring research to run a clinical trial for a repurposed drug
Regulation on insurance offerings doesn’t stop a nonprofit from paying for people’s health care as a charity
Free public schools don’t stop a charity from offering an alternative free school
In each case, if a nonprofit wants to offer a product/service, they can do so, but the corresponding opportunities to offer the same product/service on a for-profit basis are prevented by the structural barriers.
Agree that specifics are important here. Some specifically interesting examples to me where non-profit and for-profit models overlap:
A university is set up as a non-profit org, receiving charitable donations from alums and other institutions or individuals. The university’s main non-profit activities are education and research. The university also wholly owns a for-profit org (basically, a hedge fund) which is used to manage the university’s endowment. edit: actually, an endowment fund also counts as regulatory non-profit if its sole purpose is to fund a non-profit’s activity
Mozilla Foundation and Mozilla Corporation. Mozilla Foundation is a non-profit org that also wholly owns the for-profit org Mozilla Corp. Mozilla Foundation’s main non-profit activities seem to be internet advocacy and funding other related projects. My impression is that Mozilla Corp. derives most of its income from search engine placement in Firefox, and then Mozilla Foundation is subsequently funded by Mozilla Corp.’s profits. I haven’t looked in detail though, so I may be off.
Note that in the above two examples, I’ve been using the terms “for-profit” and “non-profit” in a primarily regulatory sense, i.e. for-profit = corporation, LP, etc. vs. non-profit = 501(c)(3). In those examples, the terms also seem to map onto their “intentional” sense, but it’s unclear what form a general rule might take to disentangle “for-profit” vs “non-profit” in their regulatory vs “intentional” senses.
Technically nonprofit doesn’t mean you can’t make a profit. It just means you can’t distribute that profit, the way a for-profit pays dividends. You have to use any profit for operations.
I was mostly analyzing nonprofits that don’t charge for services. In the case of a nonprofit that charges, and does not rely on external donations, then the “product loop” is much more intact. In that case it’s only the investor loop, the “return loop” that is still problematic.
That’s really important, and I suspect a big source of confusion about your thesis. If you said “if you can find a price signal, incorporate it into your strategy”, even for non-profits, I suspect you’d get a lot less disagreement.
I agree at a high level, but details matter. Specifically, I’m unsure about the “can” in this recommendation, and I’m a little unsure of the audience for this advice.
Nonprofits are generally formed for topics/services where for-profit services aren’t sufficiently (in the minds of the organizers and donors) doing it. That implies that in the factual world, it isn’t done (enough) for profit. What counterfactuals are in scope for the “can be” done comparison?
For the nonprofits I know well, there’s also an important difference in mission. I like your flywheel circles as an illustration—for-profit organizations align the benefits they provide with the money (on both sides of the wheel): customers are the same entities as beneficiaries. Non-profits provide a non-monetary alignment channel—donors are a different kind of beneficiary than the direct target beneficiary.
The very important “can be for-profit” in your advice SEEMS to expand to “if the beneficiaries can effectively use price signals to influence the organization’s behavior”. Which matches the real-world pretty well: for-profit when the beneficiaries are concentrated and wealthy enough to consume your service, not-for-profit when the beneficiaries are unable/unwilling to pay.
edit: oh, there’s also a class of organizations that are non-profit for regulatory or tax reasons, but operationally have fairly normal revenue streams and relatively little dependency on donations. I count those as for-profit for purposes of this discussion.
another edit: why not both? There are LOTS of segments in which for-profit and non-profit organizations both operate, often with a high degree of overlap of overlap.
As an example, some years ago I had some friends who wanted to create curriculum material, I think aimed at homeschoolers. They were thinking of setting it up as a nonprofit. I counseled them to make it for-profit, because it would force them to find a market and have more impact. They did and told me recently that this made a big difference for them.
But an even bigger lesson here is that we should look for structural barriers to for-profits. This could mean legal changes (e.g., in patent protection); creative new business models that challenge the structure of entire industries; etc.
If you think nonprofits don’t have to find a market (two markets, actually—donors and beneficiaries, which may or may not overlap) and to measure their impact, I suspect you’ve never worked closely with a serious nonprofit.
When starting out, it’s definitely a good idea to be as independent as possible, and that’s usually a privately-owned management structure (for-profit, sure, but that designation is a red herring. Startups are profit-irrelevant for the first few releases, and premature outside funding would be as bad a mistake as premature decision to go nonprofit.
After the startup phase, where the founder is a significant part of the labor, the question gets trickier. It depends a lot on your target beneficiary and how much their market power diverges from your mission.
Other than tax implications, what structural barriers do you have in mind which are pushing organizations into non-profit rather than for-profit structures?
I have started nonprofits, and worked closely with others.
I have also seen nonprofits that produce a lot of material that no one reads and that has no impact, but that keep getting donations from donors who aren’t paying much attention to impact, or who rationalize away the lack of it.
Examples of structural barriers:
Lack of patent protection, e.g., ability to obtain and enforce patent on repurposed drugs (example I mentioned and linked to in the article)
Regulation: e.g., many health insurance products you might want to create are illegal
Free public alternatives: e.g., it’s hard to profit in K–12 education because of public schools, making private school a premium/luxury product for the rich; something like tax credits for private school could alleviate this
I’m confused. Which of those structural barriers apply to non-profits differently than for-profit organizations?
All of these examples apply differently:
Lack of patent protection does not stop a nonprofit from sponsoring research to run a clinical trial for a repurposed drug
Regulation on insurance offerings doesn’t stop a nonprofit from paying for people’s health care as a charity
Free public schools don’t stop a charity from offering an alternative free school
In each case, if a nonprofit wants to offer a product/service, they can do so, but the corresponding opportunities to offer the same product/service on a for-profit basis are prevented by the structural barriers.
Agree that specifics are important here. Some specifically interesting examples to me where non-profit and for-profit models overlap:
A university is set up as a non-profit org, receiving charitable donations from alums and other institutions or individuals. The university’s main non-profit activities are education and research.
The university also wholly owns a for-profit org (basically, a hedge fund) which is used to manage the university’s endowment.edit: actually, an endowment fund also counts as regulatory non-profit if its sole purpose is to fund a non-profit’s activityMozilla Foundation and Mozilla Corporation. Mozilla Foundation is a non-profit org that also wholly owns the for-profit org Mozilla Corp. Mozilla Foundation’s main non-profit activities seem to be internet advocacy and funding other related projects. My impression is that Mozilla Corp. derives most of its income from search engine placement in Firefox, and then Mozilla Foundation is subsequently funded by Mozilla Corp.’s profits. I haven’t looked in detail though, so I may be off.
Note that in the above two examples, I’ve been using the terms “for-profit” and “non-profit” in a primarily regulatory sense, i.e. for-profit = corporation, LP, etc. vs. non-profit = 501(c)(3). In those examples, the terms also seem to map onto their “intentional” sense, but it’s unclear what form a general rule might take to disentangle “for-profit” vs “non-profit” in their regulatory vs “intentional” senses.
Technically nonprofit doesn’t mean you can’t make a profit. It just means you can’t distribute that profit, the way a for-profit pays dividends. You have to use any profit for operations.
I was mostly analyzing nonprofits that don’t charge for services. In the case of a nonprofit that charges, and does not rely on external donations, then the “product loop” is much more intact. In that case it’s only the investor loop, the “return loop” that is still problematic.
That’s really important, and I suspect a big source of confusion about your thesis. If you said “if you can find a price signal, incorporate it into your strategy”, even for non-profits, I suspect you’d get a lot less disagreement.
Thanks, that’s a clarifying distinction.