Nonprofit or For-Profit: That is the Question

For entrepreneurs, the start-up phase is an exciting but challenging time. For social entrepreneurs, a major decision that needs to be made during this start-up phase is whether to launch as a for-profit or nonprofit (or hybrid in between)?

Many factors go into this decision, including the potential for financial returns, the level of independence the management team desires, the availability, amount and type of up-front capital required, and many more.  Clark and Dees have profiled three different start-ups – a nonprofit, Bull City Forward, and two for-profits, Catchafire and Simpa Networks – and now they have summed up their thoughts on business models for start-ups.

Read below and join the conversation on the Social Edge now!

Start-Up Choices in Business Models, Summing Up
by Clark & Dees

Social entrepreneurs in the start-up phase face many challenges. As we’ve learned, getting your business model “right” often takes much iteration and experimentation before you have an efficient, sustainable, scalable model that delivers real impact.

Two interesting variables are how much time and independence you have to test different aspects of your business model. We’ve profiled three ventures on our blog so far. Bull City Forward is trying to develop a set of sustainable activities to support a community of local socially-oriented enterprises. For Catchafire, a matchmaking service for professionally-skilled volunteers and socially-focused organizations, the focus has been on refining its revenue model. Simpa, offering a mobile pay as you go system for to make solar energy in India “radically affordable,” needed to get significant investment capital in order to run a full test pilot. These three ventures are each about a year old and note that one is nonprofit and two are for-profit, and already, this legal choice makes a difference: they are each on very different paths of business model refinement.

Bull City Forward is trying different ways to both earn revenue and to garner grant support. Even though it is a nonprofit, it has a target beneficiary, local organizations, which can and have become a paying customer base.  Whether that base can pay full costs is still an open question. And the time that Bull City Forward is spending to answer that question can be extended at any time by a new grant. Since we posted our profile, BCF has been working to refine its landlord model, create a new umbrella legal structure for its expansion in Charlotte, survey its members to create tiered levels of services, and find ways to partner more effectively with more established local institutions, like universities. BCF has enjoyed a good deal of flexibility in working its way toward a viable business model.

For the for-profit social venture start-ups, like Catchafire and Simpa, the road is much less independent.  Catchafire wrote a business plan, engaged angel investors, and has made a commitment to earn those investors a return. Simpa did the same but with a mix of angel and institutional investors. In both cases, the investors have had, it turns out, strong opinions about business models, revenue models and pace of growth. In fact, Catchafire has recently changed its pricing model – as opposed to charging $199 per match, it is forming annual fee relationships with nonprofits for several volunteer projects over the year. Simpa’s investors actually insisted that Simpa work in two value chains, not just one. Simpa wanted to be a mobile loan intermediary but is in the solar equipment distribution businesses also as a result of feedback from investors. And for both, those investors now have ongoing influence through their board roles. Business models for Simpa and Catchafire will be refined together with those investors, in conversations about high-level governance of the companies’ assets and choices.

One of our working hypotheses then, is that starting up as a nonprofit, even when you have some earned income potential, gives you more room to refine your operating model. It may also give you more independence, and that can be a good thing, or a bad thing. And if an entrepreneurial venture needs the time to refine how its activities truly create impact, and its “investors” are more interested in social return than financial return, it’s a more appropriate form. If, on the other hand, you believe your operating model is stable, and you have a payment model that could throw off profits to match, and you want the strong advice and ongoing involvement from investors, the for-profit form might be better.  Pressure from investors looking for financial returns on a tighter timeframe might stimulate the creativity needed to move quickly to a sustainable model.

What do you think? Is the legal form of a start-up a significant decision? What critical issues do you or did you face as a start-up? What advice do you have for new social entrepreneurs trying to decide which path to follow at the outset?

Join Cathy in the conversation at the Social Edge now!