The New York Times just ran an interesting case study about a social enterprise, ThinkImpact, that highlights fundamental structural issues that entrepreneurs must address. When first starting out, and perhaps later when the organization has been operating for awhile, the question of whether to be a nonprofit or for-profit enterprise—or even a tandem enterprise incorporating both—will rear its head.
In the case of ThinkImpact, a Denver-based organization that provides education and training around social enterprise, the organization originally was founded as a nonprofit, but was encountering problems with fundraising. It was presented with three options:
- Remain a nonprofit. This would allow the organization to attract grants more easily and also would allow for an earned income stream, but wouldn’t allow for private investment.
- Convert to for-profit. This would open the organization to more financing options, including taking on debt and raising equity from friends, family and other private investors. It also would come with uncertainty in terms of whether universities would feel as comfortable working with a for-profit.
- Utilize a tandem structure. This would involve keeping the nonprofit and starting up a for-profit subsidiary. This would allow for the use of the advantages of both models, but would come with complexity (we’ve written about tandem operations before, and it involves careful structuring and ongoing compliance efforts).
Several experts were invited to weigh in, and ultimately, ThinkImpact has elected to convert to for-profit status. ThinkImpact’s founder, Saul Garlick, had this to say about the decision:
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.
Deciding on a structure is a key decision, because the different options come with different benefits and burdens. It is important to try to get into the best model from the get-go, but ultimately an organization may find that the model it selected initially is not working for it. ThinkImpact felt constrained by the nonprofit model, and locked into a cycle of constant fundraising that impacted its ability to focus on programs. Other organizations, however, may get more value from nonprofit status, particularly from having 501(c)(3) tax-exempt status; still others may find that a tandem structure is the best fit. What matters is the organization’s goals and needs, and this can certainly change over time.