NPO vs FPO – Selecting an Organizational Form
November 15, 2008
It’s been a wild week this past week – I attended the First Global Roundtable on Advanced Management Education Reform (GRAMER) as an observer, came back and spent my birthday with Meiyang in San Francisco, started full-time here at Blueprint, and attended a private reception for the Tech Museum’s Tech Awards for Innovation. Life has been busy (and I’m loving it!).
As much as I’m an advocate for for-profit businesses instead of nonprofits, because of their incentives for efficiency and innovation (what some might even call a necessity to be efficient in a competitive market), I’m starting to get a better picture of the decisionmaking that goes on in choosing an organizational form. This morning, I had a conversation with Elliott Brown, an Ashoka Fellow, who started a nonprofit called Springboard Forward (Elliott and I met through a mutual friend who helped me found Solutions Magazine back in the day). Springboard is a unique organization – its focus is on helping low-income individuals advance their career. The theory is, if you give promising individuals opportunities to advance their career, you can reduce business costs and improve the lives of individuals at the same time, a win-win situation that provides a business case for helping people.
But one thing that always struck me as unique about Springboard Forward is its incorporation as a nonprofit, especially since it started out as a for-profit. According to Elliott, the company he started right before Springboard Forward was a for-profit staffing agency. But the problem with the for-profit is that it never broke even because it had to invest a lot of capital into training and mentoring the individuals before they could staff them.
In theory, there should be a way to recoup investments into individuals. Forcing an organization to recoup their investment ensures that the organization is efficient in its investment. After all, you wouldn’t want to invest $1M into someone only to have them produce $50K of additional income and value over their lifetime – but if you invest $50K into someone who then makes an additional $200K over their lifetime, it makes sense that that someone could repay the investment. Elliott and I talked about my idea of “personal equity” – what apparently some call investing in “human capital” – and some of the cool work his girlfriend, formerly of Ashoka and now working for an Ashoka Fellow, is working on in developing human capital in the US (he’s the second person that’s mentioned this work and how it’s been really effective in Colombia).
But for Elliott and Springboard Forward, the for-profit model didn’t make much sense. His explanation makes sense – at the time, it was impossible to run the organization as a business and foundations liked his work but wanted the organization to be a nonprofit so that they could make grants, since from their perspective the organization in theory yielded higher social return than other grantmaking opportunities. Given the multitude of exogenous constraints (unable to secure a profit, lack of investors willing to make below market rates of return or accept higher amounts of risk, and the relative newness of social entrepreneurship – Springboard Forward was founded in 2002), I believe Elliott’s decision to incorporate as a nonprofit at the time was correct.
Nonetheless, I have to wonder whether the ideal organizational form (if you can control certain exogenous factors) is as a nonprofit. Yes, funding is easier as a nonprofit. Yes, it’s easier to strike partnerships when you’re a nonprofit. Yes, things cost less when you’re a nonprofit. And yes, people are willing to work for less when you’re a nonprofit (something their career coaches do). But there is the big problem of scale when you’re a nonprofit. You can grow organically from site to site through earned income and/or by finding additional partners and funders, but very few nonprofits have found success that way (Teach for America being one of the rare recent examples). Springboard Forward is expanding and is hoping to open a new site in Seattle that is completely self-sustainable through corporate partnerships (corporations pay them for their career advancement/job training services), but it is still unclear whether Springboard can be completely independent of foundation funding.
In the ideal world, Springboard would be able to recoup its investment while making market rates of return, but even though it might increase total economic value (for both the business and the individual – it’s unclear whether that’s actually true until it completes its study) its current structure doesn’t allow for much incentive to innovate or scale (no equity, and I didn’t ask about performance bonuses).
I think it’s time that I do a little more hardcore analysis with nonprofit and for-profit theory, especially looking at the economic rationale for the nonprofit tax deduction, perhaps starting with Blueprint (we’re a for-profit competing against nonprofits, which poses all sorts of challenges for us) and Springboard Forward (which is a for-profit that was forced to be a nonprofit due to lack of profitability). I’m not exactly sure what that will look like at this point, but visuals to come for sure..
November 17, 2008 at 8:34 pm
Springboard’s decision sounds more like a situational one to me. The limitations and interdependencies of nonprofit structuring are still there, and I’m not convinced that their decision has any bearing on whether nonprofits are actually the “right” organizational form.
You’ve nailed the core problem–organizations that sow great economic value aren’t always positioned to harvest their returns. The argument then boils down to whether or not it’s right to channel capital to these organizations, or send it to organizations whose value creation follows a simpler, tit-for-tat quantitative model, instead.
The libertarian in me would argue that precision comes first, and presuppose that, at least from the perspective of capital itself, organizations whose value metrics are fuzzy are fundamentally inefficient. He’d also be working in good faith that there exists some elegant solution that *does* allow for the organization to directly capture the value it creates.
The first question I would ask is whether that faith is misplaced. If it is not, then Springboard’s decision was a concession.
The second question I’d ask is if there’s any way of getting nonprofit capitalization mechanisms to work as efficiently as for-profit mechanisms do. There’s such a stark contrast in their liquidity and their means of communicating their value to prospective investors. Would a Buttonwood Agreement for nonprofits simplify fundraising? Would the nonprofit universe tolerate intermediaries ala mutual funds that could be entrusted by the general public to analyze and invest their money in worthwhile organizations? (The only proxy I can think of that’s filling that role now is churches.)
I’m admittedly an outsider. Your thoughts?
November 24, 2008 at 3:13 am
There is a difference between Springboard asking themselves whether they should incorporate as a NPO versus a FPO and a foundation wondering whether they should support a NPO model versus a FPO model; Springboard has to deal with the funding constraints that already exist in the market (exogenous) while foundations can actually shape what organizations can exist in the market (while some foundations only solicit proposals, others actually shape the field they want to build).
I thin your question of whether to channel capital organizations to organizations that sow great economic value but aren’t always positioned to harvest their returns versus organizations whose value creation follows a simpler model depends on your objectives as the person who owns capital. Whichever decision furthers your objectives more, then that decision is the obvious answer.
I’m not sure if your argument about precision is libertarian in nature, but rather, one that simply assumes those who are unable to have value metrics are ones that are fundamentally inefficient. I personally don’t think I agree with that statement – SROI is very difficult to measure and there comes a point when you evaluate two organizations, where one has a higher SROI metric than the other, but the one with the lower SROI metric actually has a much bigger impact because of other factors that aren’t easily quantifiable (yes, you could quantify them which would change the equation, but it seems silly to always have to quantify things to make decisions).
To your second question, foundations and donor advised funds are playing the role that you imagine, but they’re fundamentally inefficient since the original donor often doesn’t have a specific metric in mind, so the intermediaries haven’t had incentives to provide quality information in that area – though we’re seeing shifts now in the market where the information that’s being provided is becoming higher quality and more competitive. The firm that I work for is working on a product in that area and I know other firms are too.
Sorry, no profound summarizing remark here – but I thought the questions you raised were interesting and wanted to brain dump my answers back.
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