Case Study

What would you do with this business?

Matthew Staver for The New York Times Saul Garlick, ThinkImpact.

Last week, we published a case study about a social entrepreneur, Saul Garlick, discussing what kind of legal structure would be best for his enterprise, ThinkImpact, which encourages entrepreneurship in third-world communities. He fundamentally had three options: continue as a nonprofit, go commercial, or find some sort of hybrid route.

We asked three experts which option would be best. Pamela Hartigan, director of the Skoll Center for Social Entrepreneurship at Oxford, who is constantly advising aspiring social entrepreneurs, suggested that Mr. Garlick hop off the “treadmill of donor dependency.” Jonathan Lewis, a lecturer at the University of California, Berkeley, and a social entrepreneur himself, also suggested going commercial. Lastly, Shivani Siroya, an entrepreneur who runs InVenture, a hybrid organization, noted that it was possible to raise revenue even as a nonprofit and thus suggested that ThinkImpact should not dismiss a nonprofit model too quickly.

Many commenters agreed with Ms. Siroya, suggesting that Mr. Garlick use revenue streams as a nonprofit to raise money rather than going purely commercial. Others, however, noted that the nonprofit field is evolving and a profit-making enterprise can be driven by social impact and not the bottom line. Several readers pointed to new legal structures like a benefit corporation or L3C, which incorporate social impact into the core mission of a company.

We contacted Mr. Garlick for a follow-up conversation, which has been condensed and edited, to see which option he chose.

Which of the three viewpoints could you relate with most?

Jonathan Lewis’s. I think he appreciates the reality around donor fickleness and also, rightly, notes that the nonprofit/for-profit debate is overestimated and really just about structure. I believe both structures can work, but they come with different requirements for how people prioritize their time. I found the other comments interesting but ultimately not really solving the problem. The nonprofit was generating earned income, but we were not optimizing our efforts to create value through that type of transaction. I think people make the mistake of distinguishing for-good vs. for-money. The notion that nonprofits are the right — or even, better — vehicle for doing good in the world is no longer true. That may have been the case at one time, but today, ethical, well-run businesses with products that make life better are remarkable at improving lives at scale.

So, you decided to go the for-profit route. Why?

Ultimately, the decision came down to shareholders versus donors and vision. While I realized that shareholders can be demanding, I was able to identify impact investors who believed in the mission of the company and were willing to be patient. I also wanted to dedicate more time to the value we were creating, and as a for-profit with debt or equity financing, I could dedicate my team’s and my time to building great products and services.

What would you say to nonprofits and nongovernmental organizations, or NGOs, that have been in existence and continue to operate on donations and grants?

I am a huge fan of nonprofits. I serve on several boards and feel inspired by the work they do to improve lives every day. But I also know of countless failed NGOs that are unsustainable and are shrinking or dying due to a broken model. This is particularly true in the international nonprofit world. There are expenses: think of flying around the world for programs, while there are also pressures not to spend money on flights to ensure low overhead expenditures to look good for donors! It is a system that deserves review. I also am far more skeptical of the true value these organizations have in the communities where they work. Some are remarkable but far too many are disconnected and dishonest. This is perpetuated by a broken feedback loop. If your beneficiary is not a customer, they may never tell you that what you are providing is unhelpful.

Are investors and shareholders not as demanding as donors and grantees?

It is extremely different. I find donors to feel owed some emotional reward that is intangible and constantly burdensome because as a nonprofit director you never know if they are really satisfied. Plus, each donor has a different need, from special projects to more colorful pictures. Investors, especially ones who believe in your vision, are pretty cut and dried about their expectations — deliver something great and do it in a way that is growing and eventually makes money.

Do you think that people are more generous with their time and energy as a for-profit or nonprofit?  Does it make a difference?

People are pretty generous in both cases. Nonprofits are definitely better positioned to get unpaid volunteers, and rightly so. One common perception is that for-profits are rich, so they have plenty of money to pay people. While that is certainly not the case, it impacts the expectations of the individuals involved.

Article source: http://boss.blogs.nytimes.com/2013/07/15/a-social-entrepreneur-transforms-a-nonprofit-into-a-profit-making-enterprise/?partner=rss&emc=rss