How to decide if your
startup should be nonprofit
or for-profit in 4 easy steps
An oversimplification prepared by Ben Wirz...
1

Do you need the business
to make money for you?

A. If the point
of the business
is to make you
money...

...then, the
...
2

Can your business
be a viable for-profit business?

In other words, is there a reasonable chance that the business
will...
3

Where will the capital to build
your business come from?

for-profit
investors

philanthropic
investors

(angels, ventu...
4

Do you need to be in control?

If you’ve made it this far, you are starting a business that is potentially
both profita...
additional resources
1. For Love or Lucre; Jim Fruchterman.
Excellent detailed look at how to make this decision from an e...
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Knight Foundation's Decision Tree: Profit or Non-profit?

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Knight Foundation's Decision Tree: Profit or Non-profit?

  1. 1. How to decide if your startup should be nonprofit or for-profit in 4 easy steps An oversimplification prepared by Ben Wirz, director of business consulting John S. & James L. Knight Foundation Contact: wirz@knightfoundation.org
  2. 2. 1 Do you need the 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 nonprofit C. If you want a business that generates income to change the world and make you money... ...then, you need to ask yourself a few more questions... (see next page) knightfoundation.org • On Twitter: @knightfdn
  3. 3. 2 Can your business be a viable for-profit business? 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?* NO yes ??? Then focus on your charitable purpose and become a nonprofit. Then ask yourself a few more questions (see next page) 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 scenarios 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 the assumptions do not defy logic. knightfoundation.org • On Twitter: @knightfdn
  4. 4. 3 Where will the capital to build your business come from? for-profit investors philanthropic investors (angels, venture capitalists, corporations, banks, etc.) (foundations, philanthropists, nonprofits, universities, etc.) Then your business should be for-profit. Early-stage for-profit investors will want equity returns which nonprofits are legally incapable of providing. Then your business should be nonprofit. Philanthropic entities find it easier to fund nonprofits for legal reasons, and many programs are set up to be available only to nonprofit organizations. could be either one? Turn the page. Getting Local: How Nonprofit News Ventures Seek Sustainability • knightfoundation.org • On Twitter: #infoneeds knightfoundation.org • On Twitter: @knightfdn
  5. 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 the business? Nonprofit startups are boardcontrolled and transparent where management is replaceable, but, mission is safeguarded. If this 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 startups become investor-controlled after a few rounds of funding, which can effect 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 nonprofits • Nonprofit subsidiaries of for-profits BUT, the fundamental tradeoffs outlined here remain. Getting Local: How Nonprofit News Ventures Seek Sustainability • knightfoundation.org • On Twitter: #infoneeds knightfoundation.org • On Twitter: @knightfdn
  6. 6. additional resources 1. For Love or Lucre; Jim Fruchterman. Excellent detailed look at how to make this decision from an entrepreneur who knows both worlds. 2. Forming a Business and Getting Online; Citizen Media Law Project. Excellent, detailed view of what kinds of options are available, geared particularly towards entrepreneurs who want to put content online. 3. Startup Tools; Steve Blank. Fairly comprehensive list of tools to use once you have made the decision to go forward from the Lean Start guru. You should also probably try to read everything he has written on what it means to be a startup. Getting Local: How Nonprofit News Ventures Seek Sustainability • knightfoundation.org • On Twitter: #infoneeds knightfoundation.org • On Twitter: @knightfdn

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