Several years ago, a friend of mine came up with a very innovative way to motivate low-income kids to work hard on improving their vocabulary. Sounds like a great non-profit, right?
But here’s the surprise: he very intentionally formed his company as a for-profit. There are no deep pocketed donors, no fundraising drives. Rather the company is supported by government funding that goes to provide low-income kids with supplemental tutoring. Furthermore in many areas, his company gets paid for actual improvement of reading scores—results—rather than just delivery of service.
Taking a step back, if the societal goal is “raising highly literate kids”, beautiful things happen when a market is set up to pay for outcomes. That’s when entrepreneurs bring their creativity, talent, and energy to effectively meeting that need. And structuring as a for-profit gives him many advantages in serving this market.
Let’s consider the potential advantages of being a for-profit here, rather than a not-for-profit:
- A for-profit can pay its staff competitive market rates, rather than the lower “nonprofit salaries” that are considered “appropriate.”
- A for-profit can afford to hire a highly talented CEO with experience scaling services nationally, rather than someone less experienced.
- A for-profit can avoid the criticism and scrutiny of the non-profit “overhead police” who don’t understand the connection between expenses and impact.
- A for-profit is accountable to the market—in this case the kids and their reading scores—rather than simply needing to please donors to keep getting funding.
- A for-profit doesn’t have to spend time on fundraising, and has much more control over future income.
I have to admit that when I first heard about my friend’s company, I just couldn’t understand why he turned away from the benefits of being a non-profit. But the more I learn about the field, and read books like Dan Pallotta’s Uncharitable, the more I see that there are real trade-offs to be had in structuring a social benefit organization.
One last thing: it’s worth noting that my friend is extremely committed to the cause of education. He’s not in it for the money. For many years he has put all of his earnings back into the growing company, so that he can reach more kids. For years, in spite of running a company that employs hundreds, he hasn’t owned a car. Clearly his motive is impact, not personal profit—which makes his choice of a for-profit structure all the more fascinating. Cases like this lead me to wonder if the assumptions behind “non-profit” are in fact a hindrance.