Extractive summaries of and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 298 | May 26 – June 1, 2023.
Should Your Start-up Be For-Profit or Nonprofit?
By Cait Brumme and Brian Trelstad | Harvard Business Review | May–June 2023 Issue
When a socially minded entrepreneur starts an enterprise today, it’s often unclear whether it will ultimately be for-profit or nonprofit. Four factors should inform the choice between being for-profit or nonprofit:
- Is the Market Ready? As part of their early strategy work, entrepreneurs must assess their market’s size and rate of growth and the level of existing competition. But that task is more complicated for social entrepreneurs, who are more likely to operate in underdeveloped, complex, or emerging markets, where it’s costly to create demand. Founders must answer questions such as: How much customer education is required for adoption? Does the market have a mature ecosystem—such as a reliable supply chain—to help deliver the product or service to end users? What barriers to entry, such as regulation, may be prohibitive? The central question here is: Can market conditions support a for-profit approach?
- Are Customers Willing to Pay? Entrepreneurs must develop and test hypotheses about their target customers, the value proposition, and the customers’ ability and willingness to pay. With social ventures, that process often prompts debates about intended impact as entrepreneurs grapple with tensions between customer access and affordability on one hand and profitability on the other. If the end users are unable to pay a price above costs, and a third-party payer, like the government, is unlikely to become the customer at attractive margins, the organization should remain a nonprofit.
- Where Is the Available Capital? Instead of hoping for a blank check from an infinitely patient (and capitalized) investor, social entrepreneurs need to do the same hard-nosed analyses that for-profit founders do, estimating how much money the venture will need and how much cash flow it can generate after reaching breakeven. They may even project when the venture might be sold, for what amount, and to whom. But founders need to imagine what success may yield and how that will influence investors or donors.
What Will Attract Talent and Other Resources? The final consideration is the enterprise’s ability to build the right team and obtain other nonfinancial resources, including intellectual property. Social entrepreneurs must assess the type of talent they need and whether the organization’s mission is compelling enough to attract passionate and hardworking people at below-market salaries. Nonprofits can also have a countervailing advantage over for-profits in their access to scarce or proprietary resources. These “privileged” resources include pro bono legal support, intellectual property licenses, commercial partnerships, favorable treatment from regulators, access to positive publicity, and invitations to prominent conferences.
3 key takeaways from the article
- When a socially minded entrepreneur starts an enterprise today, it’s often unclear whether it will ultimately be for-profit or nonprofit.
- Four factors should inform the choice between being for-profit or nonprofit: market readiness, customers’ willingness to pay, capital availability, and access to talent and other resources.
- It is up to entrepreneurs to make the crucial decision about whether to organize as a nonprofit or a for-profit and which kind of capital to raise. We think that a disciplined approach to making those choices as early as possible will serve founders well. But even with a framework, the decision may sometimes be murky.
Topics: Entrepreneurship, Social Entrepreneurship, Startups