Thursday, June 4, 2009

Not just for profit businesses

Most people are familiar with the traditional, profit focused business model. A business is created, providing some service or product, with the explicit and primary goal of making money for the owners of the business. Most organizations we are familiar with on a day to day basis... Starbucks, McDonalds, Dell, Walmart, etc all are built around this model. These companies tend to only be interested in social good as a side project, if at all. Often time such social good projects start due to a campaign against them as soulless, causing them to create a group in charge of social outreach, community improvement, and (not coincidentally) image improvement.

On the other end of the spectrum are non-profit organizations, or NGOs. These groups tend to be focused around providing a service to a particular group in need, with the primary goal of improving that group's way of life. Non-profits tend to either charge nothing or very little for their services, and pay for those services by way of donations. In the United States, these donations are tax deductible, though along with that tax deductible status comes a number of restrictions on the organization, including the requirement that they *must* receive at least 50% of their income from donations or grants, and not from the sale of services.

Both of these models solve particular problems extremely well, but others not as well. If our goal is the betterment of the world (which I think most people at least think would be nice), it is valuable to think about the problems in both of these models.

The for-profit model

It is sometimes argued that a set of purely profit based motives is the best way to improve the world. Everyone trying to improve their own lot will work as hard as they possibly can, making the most forward progress. Underserved groups will not persist, as new businesses will form to provide them services and make a profit.

The problem with this, in my mind, is that the claimed mutual benefits depend upon a more or less equal distribution of power and information. Sure, if you and I are competing, each trying to profit, and neither of us has a huge advantage, we will both do our best work and achieve as much as possible, and due to our equality in power, we will both reap the gains. However, if instead you have great power over me, it behooves you to exploit me to the greatest extent possible, and do the least work possible yourself. An asymmetry of information works the same way, except instead of exploiting via power you can exploit via trickery and control of information.

We need some sort of counterbalance to the asymmetries of power and information between large for-profit corporations and the rest of the world. Government is one way of achieving this, participating as a rule-maker, playing field neutralizer, and providing aid and a hand up for those who are in need and have no direct way to help them selves. Unfortunately, as is moderately obvious in the United States, and extremely obvious in Guatemala, governments can easily become co-opted by powerful corporations and fail in their counterbalancing role.

The Nonprofit Model

Enter nonprofits. Non profits can provide a great counterbalance to both for-profit companies and government. They can provide key services to those who are in need, and not being served by either companies or government. They can provide advocacy for those being abused by the current power structure. And they provide a necessary power center that is not motivated by money in the same way that both for-profit companies and governments often are.

There are, unfortunately, serious problems with nonprofits as well. Most of these, I believe, stem from the fact that their needs for survival (funds) are completely disconnected from the services they provide. This results in a couple of big issues.

The first is that of a nonprofit that begins to be extremely successful in the service it is providing. More and more demand for the service creates a requirement for more and more funds to provide that service. If it were a for-profit business, the income from the services would help pay for the expansion. Unfortunately, however, for a nonprofit their ability to secure funds is largely disconnected from their success selling a service, and they now need to ramp up a fundraising operation that may or may not be able to cope with the increase in demand.

The second major problem is that there are few pressures upon NGOs to provide the highest quality of service, or improve their service. If they were a business, poor service would result in no income, thus forcing them to improve or perish. However, so long as an NGO is succeeding in fundraising, they can be slow, bureaucratic, and ineffective in providing their service with no real reason to change. As some of my friends at work have noticed, while some newer and younger nonprofits are extremely agile, the larger and older ones have incredible amounts of bureaucracy.

The third way: Not just for profit

A third approach that has been becoming more and more popular recently is that of a not just for profit business. These businesses are structured as for-profit businesses, but have as a part of their core tenants a social or environmental mission.

The startup I work for is a good example. While we are structured as a for-profit company, and in fact are venture funded, our explicit goal is to empower individuals to improve the world. Our product is focused around encouraging millions of people to get involved in activism for social and political causes around the world. And throughout our decision making process about things to pursue, the question of how it will help our users change the world for the better is continually asked.

As core as our social mission is, we would not likely have succeeded as a nonprofit. Being structured as a for-profit company allowed us to tap the venture capital markets, to be able to grow our offering within a couple of years to one that more than 50 million people use. The possibilities of profits have allowed us to attract the highest quality technical team, with engineers who range in dedication to the social mission, but all of whom are thrilled to be a part of a top caliber team changing the world.

Another great example of a not just for profit company is Better World Books, an online bookstore that partners with literacy programs worldwide. Better World Books collects used books to sell, as well as selling some new books as well, and works with a carbon offset program to make certain that their shipping is as environmentally friendly as possible. They not only donate a percentage of the revenue from every book sale to literacy programs worldwide, but also works with its nonprofit partner programs to find homes for unwanted books, keeping them out of landfills and doing some good.

The last time I looked at Better World Books was a year ago, and it was much smaller and only selling used titles. They now appear to be selling a far greater selection, and the next time I'm book shopping I'll look there before Amazon. They also were recently voted the 'most promising social entrepreneur' by Business Week, and look to be growing rapidly.

Opportunities abound

This form of business structure is only just now starting to become better known , but opportunities abound. Having a social mission is not only good for how you feel about yourself, and the world, but it can be good for your business as well. Being able to talk about the good you are doing can help you compete for top employees, as well as distinguishing your business from others to your customers.

Whether you're a budding entrepreneur, looking for a job, or just looking to buy some books, you too can get involved in this budding movement. Instead of starting a company purely to make money, spend some time thinking about how you can align your business with making the world a better place. Or while you're shopping, be on the lookout for companies that are doing a little more than padding their own pockets. You'll feel better, you'll often times getter better service, and you'll help keep people working at making the world around them a better place.

Have another not-just-for-profit business you're excited about? Let me know!. This is an area I'm extremely interested in, and plan to be doing more research on. Please let me know in the comments of any ideas you have or examples you especially like!


  1. The problem with the not-just-for-profit business model is that it isn't supported by our American corporate legal structure.

    Corporatations have one responsibility under our system: maximize shareholder value. Any corporation which isn't doing it's utmost to maximize shareholder value is subject to lawsuits.

    Any for-profit corporation that is doing any social good is doing so as a soulless ploy to maximumize shareholder value. Starbucks sells Fair Trade coffee (or whatever social good they do) because they (and the shareholders) feel that the goodwill generated will either allow them to sell more coffee or sell coffee at a higher price. As soon as that is no longer true, they will stop doing their social good.

    Change can only come with legal reform that forces companies to value something else in addtion to profit.

  2. Scott -- you make a valid point about the legal system and some for profit public companies. But there are many companies like ours where the social mission is built into the business model. Investors and shareholders in companies like ours choose to invest BECAUSE of the mission. Not just the profit.

    Check out B Corps website: to read more about it. Change is not only coming. It is already here.

  3. Hi Scott and Dana,

    Thanks for reading and commenting! Certainly the current legal system does not make it a default to have other interests beyond maximizing shareholder profit, but it certainly seems possible to write your agreements with investors and shareholders so as to include other concerns. Those documents become essentially contracts that are somewhat different than standard, but as far as I know are still legal contracts.

    I'm far from a legal expert though, so I could be wrong here, especially in the case of public companies. I'm about to go traveling throughout other parts of Guatemala for a week, but when I get back I'll do some more research and post what I find.

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  5. I found your blog when I googled "Not Just for Profit." This is a very interesting discussion.

    I founded First Juice to be a "multiple bottom line" company, and there are people who want to see companies like yours and mine succeed.

    I'd like to live in a world where "doing good" is "good business." I know that this is a relatively new concept in American business, yet some of us do subscribe to the old proverb that "A journey of 1,000 miles begins with one step."

    We need to turn this journey into a Forrest Gump style run across America!

    I can tell you that people (in our case parents of young children) will pay more for sincere and genuinely good products-- even during a recession. This is something I can prove.

    David Glasser
    First Juice