Do societal problems like hunger and homelessness only exist because no one’s found a way to make money solving it? Is it always better to take donation dollars you don’t have to pay back vs investments you do? Is it more advantageous today to be a for-profit or a non-profit when trying to do good? We sat down with Jamie Shea, Strategic Director at Mission Throttle to ask these and more after the jump.
Thanks for taking the time to answer our questions, Jamie, how did you like your recent visit to Grand Rapids?
No problem. The trip to GR was real exciting for me to see the people specifically focused on doing well by doing good at the same time. Folks at HUB Grand Rapids and all those who came to the Social Entrepreneurship event in January are great.
There seems to be a lot of “buzz” around for-profit companies with a purpose, are nonprofits excluded from this excitement? Is the activity in the NPO (non-profit) space plateauing or are we seeing growth or innovation in that area as well?
I think that there’s been more energy in what I like to call the hybrid space. What that is, is bringing the nonprofit values, the compassion for doing social good, and the skill associated with actually creating programs that serve others, and marrying them with the for-profit skills like finance, business management, and biz-development skills. So for me, what I’m seeing is the most exciting space is between the two (NPO and FPO spaces).
I think there’s been a challenge around people making a distinct bifurcation of NPO and FPO (for-profit). I look at it as tax statuses and not business strategies. We don’t think FPO or NPO, it’s a later part of the discussion. We think “What is it you’re trying to accomplish?” “What’s the final outcome you want to achieve?” “How do you get the resources?” Can you raise investment capital and provide a return given what you’re trying to achieve, or is that going to be difficult for you? If so, then you can focus more on donations and grants.
So tying NPO passion, values and skills to FPO biz-mgmt & biz-dev abilities. Have you seen nonprofits then become the “fallback” for social ventures that can’t make it? Have you seen a FPO convert to an NPO and what does that mean for equity folks who have invested in that FPO company?
That is a good question. I don’t know if I’ve ever seen that. To literally do that, you’d probably have to dissolve the FPO entity, and create a new NPO entity. Once you take their money, there’s a judiciary duty to act with the goals of investors, which is to maximize profits. That’s the goal.
Now with the hybrid model, there’s a different judiciary duty, that is to optimize profit and have some sort of social return. It’s getting together with the group of investors and deciding what you want to upfront. But if the expectation upfront is “I’m going to give you $100k and you’re going to give me some sort of financial return..” I don’t even think you can legally “morph” into a nonprofit and say, “Ok, now it’s now a donation”, you couldn’t legally do that. What you’d have to do is say, “You gave me $100k with expectation of getting a financial return”, and then if they were willing to, you’d say, “I’ll give you your money back, and then you can make a donation”.
A lot of it would depend on the operating agreement too.
Yeah, what’s really interesting is seeing a NPO and FPO within the same venture too. There’s a strategic decision to figure out what activities fit on the FPO side and what activities fit in the NPO side.
Really what a lot of the NPO world is, is cross-subsidization; making profitable programs and using the profits from that to pay for programs that are not as profitable, all under the same umbrella. On a macro scale, that’s how the economy works anyway. But now, some companies are starting to work like this from within as well, with a for-profit arm and a non-profit arm.
How have you seen portfolio companies answer the question, “Why are you not a nonprofit?”
For-profit or non-profit simply dictates where you can get your resources from. If you can create a model that allows you to create social good and can actually return money to investors, without having to go get grant or donation dollars, I would say there’s no reason to not be a for-profit.
And again, for-profit doesn’t mean I’m trying to maximize profit, it simply means that if there are profits in the business, I can distribute those profits to people who gave me capital upfront. Within a nonprofit, in fact, money gets hidden a lot of times anyway. So sometimes you’ll see nonprofit execs getting $500k salaries and profits not distributed (since NPOs can’t distribute profits to owners) vs FPOs where the execs are making very low salaries and if there’s a little bit of profits, it gets distributed.
So I think one of things we try to force out of the woodworks, is that simply because you’re a FPO doesn’t mean you’re only after financial return, and for NPOs, it doesn’t mean you’re only focused on social good and not on running the business well. We’re trying to remove those skepticisms. Both sides are doing good work. Not everyone on both sides is doing good work [laughs], but certainly individuals on both sides are.
So you’re saying that if you can create a model that does social good and can provide a return, there isn’t a reason not to be a FPO. And NPOs are for people who create models of social good that likely won’t be able to make a financial return on its own.
Exactly. Nonprofits are selling to folks that can’t pay for it. So that’s why we say, “This is an important social good, we want to make sure we have it”, and that’s why have the NPO tax status.
The challenge with nonprofits is every 2-3 years they have to go get additional money. They’re constantly dependent on other people to make it. Grants change over time, and sometimes the ones that fit you aren’t available. You find yourself changing your nonprofit around and around again to fit the criteria of whatever grant happens to be available. If NPOs can be more financially sustainable, they’re more in control of their future.
Have you seen advantages to being a NPO vs FPO in terms of selling to consumers or to businesses? I’ve asked this question to Rick DeVos and other entrepreneurs, I get some people who say it doesn’t offer an advantage because it can convey the expectation that you can just donate your service or product to them rather than sell it, or maybe like you said, your finance skills or mgmt skills aren’t as good as what they’d see in a FPO approaching them.
On the other side, some people say, “Yeah if they’re a nonprofit, then we certainly know they’re in it for the right reasons and we want to help them, plus it’s a write-off for us.”
I don’t have enough evidence to say one way or another. What you just said definitely covers a lot of the stereotypical reactions on both sides; that’s very much where the mindsets are. And that’s why Mission Throttle is trying to change that. Just because you’re a NPO doesn’t mean you’re not capable of running a business and having strong accountability. And then if you’re a FPO, it doesn’t mean that you’re not really in it for the social good.
You really don’t have to advertise which tax entity you are. You can choose to do that, but you should have the brand or product really speak for itself in terms of what social good it’s doing.
Tell us about what’s happening in the grant space and social investment space. Any particular “high energy” areas?
We still have about the same annual donations/grants, investments are about the same. There’s definitely an emerging energy around impact investing, but it’s still early and nascent and laws are still being worked out. If you believe you can attract market-rate investment, you should do it.
People are starting to consider these 3 options strategically; “How do I use grant dollars, market-rate investments, below market-rate investments to be able to create a social outcome?” Market-rate and below market-rate investments are equally as important I think, but fundamentally different. Business as-is creates social good; you have to be very careful in saying there’s something wrong with creating businesses. But there are certain social problems that businesses have traditionally not done a good job of solving. It doesn’t mean for-profit business and business skills can’t solve these problems, but that’s where below market-rate investments can come in.
It has been, “I either have to take market-rate investments” or “I have to go find grants” and there’s been nothing in between, until now.
Last question. There’s this idea that societal problems like hunger and homelessness still exist because no one has found a way to make money off of solving them. Are you a subscriber to this?
Well, that’s the million dollar question. One thing, people are getting more creative in thinking how do they make money. Some people in the social space, when you say “making money”, have this sort of aversion; I probably used it have it too. It’s okay. Making money is just saying, “Hey, can we sustainably solve this problem?” I think when you get a higher quantity of people focused with this idea, that’s something that will indeed help. And that’s what that below market-rate investment is for. If we get more people in this mindset, it will certainly help.
Thanks so much Jamie, I think this will be a great read for the community.
Mission Throttle is a registered L3C in the state of Michigan and exists to expand the capacity, capital, and convenience for those working to help those in need. Find out more at http://missionthrottle.com.