By Ryan Allis, CEO of Hive
By Ryan Allis, CEO of Hive
When I was Co-President of the Social Enterprise Club at Harvard Business School in 2016, we often would talk about this core question of what was the best structure to make a positive impact in the world.
Personally, I'm a big supporter of non-profit organizations and have been a board member and donor to many. There are a number of instances in which markets and governments under serve communities and NGOs are needed. In some cases, however, people choose to operate as a non-profit when a for-profit business model or hybrid business model would actually allow greater sustainability and scalability.
From my perspective, the best way to create sustainable, scalable, and lasting change is usually through a business. By building a for-profit business you won't have to chase after donors, you'll attract better quality talent, you'll be able to pay yourself better, and you'll be able to have the resources to invest in making your product or service better.
Early thought leaders in the social enterprise space like Bill Drayton (Ashoka) and Greg Dees (Duke/Stanford/Harvard) once argued that being a "for-profit social entrepreneur" wasn't even possible. Today, they have changed their perspectives and realized that impact can be made across any sector of the economy.
One of the biggest challenges of non-profit organizations is that they often finds themselves cash-strapped, asking for donations, unable to pay staff well, and unable to attract the top talent.
As one example, take a look at this essay from Kjerstin Eriksen about her international refugee organization FORGE being cash strapped as a non-profit. Donors always wanted to fun "programming" but never the overhead that was necessary to make the programming happen. Donors always had these great ideas for what was best that were disconnected from the needs of the actual end customers. Dan Pallotta, author of Uncharitable, also writes extensively about the overhead problem within non-profit organizations.
Switching from an NGO to a For-Profit
In 2012, a friend of mine by the name of Saul Garlick turned his non-profit ThinkImpact into a for-profit. ThinkImpact focuses on providing educational experiences in developing countries, particularly for those interested in social enterprise and addressing the needs of populations of other parts of the world. Here's a New York Times article from July 2013 about his experience called "Should a Social Enterprise Go for Profits?"
The article states:
"By the age of 23, Saul had graduated from college, and the nonprofit had evolved with a new name, a new mission and a small team of employees. The organization, ThinkImpact, was coordinating trips for young adults to go to South Africa where they gained firsthand experience developing community projects and social businesses. But as the nonprofit grew, Mr. Garlick felt overwhelmed by financial burdens. Rather than focusing on the operations, he spent the bulk of his workweek connecting with potential donors and trying to raise money. Staying a nonprofit would mean Mr. Garlick would have to continue his constant fund-raising. On the other hand, converting to a commercial business would give Mr. Garlick the ability to... take on debt, raise equity and build a sustainable business model."
Here's a quote from Saul about the conversion to being a for-profit social enterprise that he sent in to me:
"Since the transition from non-profit, Earned Income has increased three-fold. Our impact in terms of reach and success stories has at least quadrupled. The decision to go for-profit helped my team and I to think bigger about the possibilities, leverage market forces in ways we didn't even consider before, and also, identify efficiencies that have helped us run a lean organization while achieving more than ever. Additionally, our strategic partnerships are more substantial and I am certain this was the right decision for tackling our theory of change."
Following the conversion from a non-profit to a for-profit, Saul saw revenues increase, was able to pay staff better, attracted more qualified team members, and was able to greatly expand his programming. While previously he had lost money on every service his company provided, as a for-profit he was able to scale to a larger size, serve more students, and continue to subsidize those who couldn't afford the full price.
Three great examples of highly successful for-profit social enterprises are Change.org, Bridge International, and CrowdFlower.
Change.org makes impact by enabling citizen voice as a global online petition platform. The company makes money by generating leads for non-profit organizations and political campaigns—helping these organizations reach more donors and make more impact themselves. If Change.org were set up as a non-profit it wouldn't be able to attract nearly the quality of talent it has and would be constantly searching for more donations. Change.org recently raised $15M in a round led by Omidyar Ventures. Change.org is led by CEO Ben Rattray.
Bridge International is another great example of a company that is making tremendous social impact as a for-profit business. It is based in Nairobi, Kenya and has over 53,000 students enrolled in its 130+ schools across Kenya. They are able to provide better quality and lower cost schooling for tens of thousands of students for just $5 per month. Investment funds like NEA, Khosla Ventures, and Omidyar Ventures have investment. Bridge is led by CEO Jay Kimmelman.
CrowdFlower is based in the Mission district of San Francisco. They've raised $13M to date to become a leader in crowdsourcing judgments (for example, analyzing scientific image data). They have more than 5 million contributors globally (many in Sub-Saharan Africa) who earn money for helping analyze data that humans are better at analyzing than computers.
More Companies Solving Big Problems
There are also many, many examples of responsible companies who are focused on solving problems and making the world better. Companies like Google, Tesla, Mosaic, Change.org, Biorecro, TerraPower, LendingClub, SpaceX, Bridge International, D.light, and Skybox are just a few who are solving major human challenges. There companies are making a lot of money doing it and attracting the best and brightest talent.
Why can it be better to build a for-profit than a non-profit? Here are six reasons.
Is it easy to build a company that makes a huge positive impact in the world? Nope.
But it's a lot easier to build a company that makes a huge positive impact in the world than a non-profit that makes a huge positive impact in the world.
Imagine if back in 1998 when Larry and Sergey were setting up Google that they would have set it up as a non-profit venture instead of a for-profit venture. Instead of creating 50,000 jobs, attracting the best talent in the world, and actually achieving their mission of organizing the world's information, Larry would still be walking around Palo Alto asking for $100,000 donations to scale up his server farm.
Imagine if back in 2003 when Mark was starting Facebook that he would have set up a non-profit focused on "making the world more open and connected." Instead of building an organization worth $60 billion that has been hugely impactful in enabling global citizen voices to be heard (in Colombia, in Egypt, in Libya) Mark would still be walking around Cambridge holding meetings with donors who were yelling at him for spending too much of his money on servers.
There are a number of highly impactful non-profits (Teach For America, EDx, Acumen Fund, Endeavor, and Khan Academy are a few of my favorites). I would argue that many of these organizations would be able to actually be more financially sustainable and have a more scalable impact if they instead converted into for-profit social enterprises like ThinkImpact, Change.org, and Bridge International.
Acumen Fund is an example of a successful non-profit organization. It is run by Jacqueline Novogratz, author of The Blue Sweater. After 10 years of being in business, it has invested $81 million in 72 businesses in emerging markets. However, even the smallest of professional venture capital funds have raised $250M or so and thus have 3x more assets to invest than Acumen. If Acumen Fund were a for-profit fund it could by now have a multi-billion dollar portfolio creating millions of jobs in emerging markets rather than thousands. If Acumen really wants to as it 2012 annual report says "build a world-class global institution that capable of fundamentally transforming how the world fights poverty" it would be well served to convert to a for-profit social enterprise, pay market salaries to its investment professionals, raise a real investment fund of $500M or more, and focus on the primary goal of creating as many jobs in frontier markets as it possibly can.
B Lab is a non-profit organization based in Philadelphia, PA that certifies socially and environmentally responsible companies. As of 2013, B Lab has over 790 for-profit companies that have been certified, including large firms like Patagonia, Warby Parker, Etsy, Method, and Seventh Generation.
By becoming a B Corporation, you make a commitment to the needs of employees, customers, the community, and the environment in addition to your commitment to shareholders. Time and again, I've found that building value for employees, customers, the community, and the environment actually aligns with the creation of longterm shareholder value. B Corporations also enjoy substantial discounts on products from companies like NetSuite, Salesforce, and Intuit.
For companies with less than $2 million in annual sales, the cost to become an B Corp is just $500 per year.
In an influential article in Harvard Business Review in April 2012 called Transformational Entrepreneurship: Where Technology Meets Societal Impact, writer and entrepreneur Max Marmer provided a framework for thinking through how to make the most positive impact.
On the X-axis he plotted long term societal impact on the Y-axis he plotted Economic Impact. In the quadrant with the greatest economic and social impact, was transformational entrepreneurship--reserved for for-profit, high-growth firms that focused on solving major human challenges. You can see the chart reproduced below.
Max states in the article:
An increasing number of entrepreneurs are awakening to the possibility of combining the scalable tools and methodology of Technology Entrepreneurship with the world-centric value system of Social Entrepreneurship. Together they create a new type of entrepreneurship that could become our primary source of socioeconomic value creation. What do we call this movement? I propose we call it "Transformational Entrepreneurship.
To successfully make the transition to the new socioeconomic era of the information age, we need to learn to focus the enormous power and efficiency of capitalism on the world's most important problems. To do so will require figuring out how to unite the scalable tools of Technology Entrepreneurship with the moral ethos of Social Entrepreneurship.
While Social Entrepreneurship is promising, its impact has been limited to date as its solutions are rarely devised with scalability and true economic sustainability in mind... Transformational Entrepreneurs earn their name by creating innovative solutions to the world's biggest problems that are scalable, sustainable and systematic.
If you want to make the biggest positive impact in the world as you can in your lifetime, build the next Google, Bridge International, Change.org, or D.light. Find a big problem like clean water, education, healthcare, energy, government 2.0, security, human communication and build a sustainable solution to that problem.
If you want to create a clean energy world, start a clean energy company. If you want to educate the world, start the world's best education company. If you want to end homelessness in your community, start a company that trains the local homeless population in job skills and places them in in-demand jobs. If you want to protect biodiversity, start an eco-tourism and photography company. If you want to end poverty, create a company that creates lots of jobs in the developing world.
The steps to building a company that solves a problem are simple in concept, yet take a few years to get right and to scale your solution.