Balancing the Mission Checkbook

I’ve been mulling the question of what makes a nonprofit organization distinctly different from a for-profit business. Thinking about this is percolating because of an article in The New York Times about a week ago, A Capitalist Jolt for Charity, about the nonprofit In2Books, the related for-profit business ePals, Inc, and the enthusiasm of venture capital entrepreneurs to use their money and talents to do good. According to the article, by morphing the nonprofit into a for-profit with access to angel capital and business practices, the combined organization is better than it could have been as a single nonprofit. They are “making use of some of capitalism’s virtues.” Really? I’m all for any trend that gets smart people from business, and their capital, focused on doing good work, but I am put off by the implication that (a) “regular” nonprofits don’t employ growth strategies already, and (b) there is not a real difference between a for-profit business and a nonprofit, as long as the business owners are working towards a community good.

Some of the phrases used in the Times article include “encourage more nonprofits to become self-sustaining” and “make the market work for social goals.” The terms revenue, profit, earned income, investment, and entrepreneur are bandied about as if they have a clear, singular definition that is unique to this topic. This muddy and imprecise use of business terms applied to nonprofit organizations (as if we hadn’t thought about these before) contributes to the confusion.

First of all, I can think of numerous nonprofits (including Nonprofits Assistance Fund) that have demonstrated smart growth, good business and financial practices, and important community impact. Would we have done better work if we had been a for-profit instead? The bigger issue to me is the essence question – what makes a nonprofit different? Is it just tax status, or is there a more essential distinction? I would love to participate in a broad discussion about this, starting with two fundamentals.

1. Business model differences – nonprofits almost always require some form and amount of subsidy to make the income, expense, and asset model work. Subsidy can take the form of direct financial contributions or grants to pay for some or all expenses, but volunteers, donated inventory and services, sponsorships, and low cost or free physical and financial capital are also forms of subsidy. In the case of ePals, described in the Times article, Intel is including the ePals icon on the Classmate laptop computers. This is a type of subsidy, since a traditional business partner would surely have to pay for this access. I also think that the investors who are willing to purchase shares in a social business without expectation of a market rate return on investment are effectively providing another form of subsidy. All this leads me to suggest that the idea that business practices will help nonprofits become “self-sustaining” and “make the market work” is trickier than it looks on a spreadsheet.

2. Structural differences – nonprofits and for-profit businesses have very different sources of accountability. The shareholders of a business can certainly decide to have a social mission. But the board of directors of ePals, Inc, even with its social mission and good intentions, has the option of changing their mind at a later date and reorganizing to return maximum profit. A nonprofit organization is accountable to the mission and community forever. The workings of boards of directors and staff can certainly be messy, confusing, and inefficient, but the measure will always be a true double bottom line, as it always has been.

What do you think – does this hit a nerve for you, or do you think I’m way off base?