July 30, 2014;Harvard Business Review Blogs

In a thoughtful blog written for HBR by Rich Leimsider of Echoing Green, he takes on a number of misconceptions people have that may lead them to believe that a for-profit social enterprise is better than a nonprofit. We have summarized those here:

  • Bad Reason #1: Only for-profits use “business discipline.” It is patently absurd to think that for-profits have a monopoly on business disciplines. There is no magic formula passed along with a business designation.
  • Bad Reason #2: Only for-profits can sell a product or service. Of course nonprofits can sell products. They sell cookies, tickets, human blood, and a host of other products. Once in a while, you may run into a restraint of trade snafu when there is a limited market in which you are competing head-to-head with businesses and they claim you have, by virtue of tax status, an unfair advantage, but these disputes have been relatively limited in the U.S.
  • Bad Reason #3: Only for-profits properly compensate employees. Stuff and nonsense. There are many over and underpaid people in both sectors.
  • Bad Reason #4: Only for-profits have a sustainable revenue model. Leimsider writes, “There are usually two intertwined misconceptions here. First, there is the earned income fallacy (see Bad Reason #2). If an earned income model is most sustainable for a particular company, they can pursue it as a nonprofit. The second misconception, however, is that philanthropic revenue is somehow less reliable than earned income. The official statistics show that more than 50% of start-up for-profit businesses fail within the first five years. Earned revenue can be highly variable.” 
  • Bad Reason #5: Nonprofits are “old-fashioned” and only for-profits earn respect in their sectors. Sigh. This seems just plain silly to us, but we know such thinking exists.

Leimsider also had three good reason to establish a social enterprise as a for-profit.

  • Good Reason #1: When local laws require it. Which domestically probably means never.
  • Good Reason #2: If equity investment is the best way to get start-up capital. Leimsider reminds us that this is a decision that should be made thoughtfully and with all options fully explored. “The trick here is not to lose sight that this will close off some philanthropic doors, and that equity investors will want to influence the business to get their money back.”
  • Good Reason #3: To send a signal to key partners or others about the role of for-profit markets. 

—Ruth McCambridge