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How to decide non profit vs. for profit

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A straightforward look at the tradeoffs between non profit and for profit ventures, and a stab at simplifying the question of how a start up entrepreneur can choose between the two.

A straightforward look at the tradeoffs between non profit and for profit ventures, and a stab at simplifying the question of how a start up entrepreneur can choose between the two.

Published in: Economy & Finance, Business

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  • 1. How to decide whether your start-up should be non-profit or for-profit in 4 easy steps. An oversimplification prepared by Ben Wirz, Director Business Consulting John S. & James L. Knight Foundation Contact: wirz@knightfoundation.org
  • 2. 1. Do you need your business to make money for you? A. If the point of the business is to make you money... … then, the business should be for-profit B. If the point of the business is to give away money or services... … then, the business should be non-profit C. If you want a business that generates income to change the world and make you some money… … then, you need to ask yourself a few more questions… (see next page)
  • 3. 2. Can your business be a viable for-profit business? A. NO , then focus on your charitable purpose and become a non-profit . B. YES , then ask yourself a few more questions (see next page)… In other words, is there a reasonable chance that the business will be able to repay all of the capital invested within 5-7 years?* NOT SURE? Focus on the revenue model: Who is your customer? How large is your target market? Can you be competitive within that market? Do you have a viable financial plan? What realistic scenario(s) would lead to capital reimbursement? *(1) 5-7 years is a general guideline, the timeline can be longer, particularly for asset intensive businesses (2) Reasonable chance of repayment does not mean risk-free, it just means that assumptions do not defy logic.
  • 4. 3. Where will the capital to build your business come from? For- Profit Investors Only (angels, venture capitalists, corporations, banks, etc), then your business should be for profit . Early stage for-profit investors will want equity returns which non-profits are legally incapable of providing. Philanthropic Investors Only (foundations, philanthropists, non-profits, universities, etc.), then your business should be non-profit . Philanthropic entities find it easier to fund non-profits for legal reasons, and many programs are set up to be available only to non-profit organizations. Could be either or both? Turn the page.
  • 5. 4. Do you need to be in control? If you’ve made it this far, you are starting a business that is potentially both profitable and mission-driven. How do you want to run that business? Non-profit startups are board-controlled transparent entities where management is replaceable, but, mission is safeguarded. If this structure appeals to you, then you have your answer. For-profit startups are typically management-controlled opaque entities. Mission priority depends on commitment of management. Importantly, most start-ups become investor-controlled after a few rounds of funding, which can affect mission priority. If this structure appeals to you, then you have your answer.
    • If neither structure appeals to you , there are hybrids including:
    • L3Cs and B-Corps
    • For-profit subsidiaries of non-profits
    • Non-profit subsidiaries of for-profits
    • BUT, the fundamental tradeoffs outlined here remain.
  • 6. Additional Resources:
    • For Love or Lucre ; Jim Fruchterman . Excellent detailed look at how to make this decision from an entrepreneur who knows both worlds.
    • Forming a Business and Getting on Line ; Citizen Media Law Project . Excellent, detailed view of what kinds of options are available, geared particularly towards entrepreneurs who want to put content online.
    • Startup Tools ; Steve Blank . Fairly comprehensive list of tools to use once you have made the decision to go forward from the Lean Startup guru. You should also probably try to read everything he has written about what it means to be a startup.