Charity vs Business: The Business Case

May 8, 2009

If you had $1,000,000 to make an impact on poverty, how would you spend it? Would you give a grant to a nonprofit or would you make an investment into a for-profit? This is the challenge that some grantmakers face (for those who consider the tools of PRIs and MRIs) – but is a question that few have attempted to answer definitively.

In the past several weeks, I’ve had the privilege of attending some phenomenal events in the social enterprise space. Two weekends ago I was at the Global Social Venture Competition’s Symposium on Social Entrepreneurship and last week I was at a Northern California Grantmakers briefing titled “Stepping into New Territory: Rethinking Social Enterprise.” Both events were informative, but for different reasons. The GSVC Symposium had exceptionally informative sessions for practitioners (I attended the panels on Financing Social Ventures, Critical Legal Issues for Social Enterprises & Social Enterprises, and Social Enterprises in Emerging Markets: Trends, Challenges, and Surprising New Markets – notes to come) while the NCG event provided insight into the black box world that is philanthropy (shout out to Judi and Lucy for organizing and facilitating the event, respectively).

What these events make clear is that there is a growing realization by both philanthropic funders and practitioners that charity no longer has a monopoly in creating social impact (which was not the case a few years ago). The false dichotomy that nonprofits create only social value and for-profits only create financial value has been shattered. Each generates both social and financial return – the million dollar question is: which one generates more social impact per $.

Unfortunately, I think it’s impossible to accurately quantify and measure the social impact of any organization, whether they are nonprofit or for-profit, and skeptical whether we will be able to find useful metrics that enable us to make comparisons (I think there’s a reason why we haven’t seen any convincing analysis for one organization, let alone an entire industry – one reason I’m partially skeptical of ideas like global social investment exchanges for nonprofits). Thus, without the ability to perform sound quantitative analysis and comparisons, any attempt at comparison will likely be unsatisfying to some degree.

Nonetheless, there has been recent anecdotal evidence in mainstream publications like Time, Business Week, Forbes, and the New York Times and bloggers who cover the social enterprise space like Anne Field of Not Only For Profit, Amie Vaccaro of ecofrenzy, and Nathaniel Whittemore of, that take a cursory look at the comparative advantage of for-profit companies compared to their nonprofit counterparts. My personal experience as a long-time observer of the social enterprise space and as a mentor to social enterprises (mainly through the BASES Social Entrepreneurs’ Challenge and my experience as a Teaching Assistant at Stanford’s Social Entrepreneurship Collaboratory) also confirms this trend of for-profits being more effective than nonprofits.

So I’m going to go out on a limb here and say that I think investments in for-profits will generally have more impact per $ than nonprofits* – and offer four key bullet points that articulate why I think this is the case:

1. Charity is (Always) Limited

Here’s a passage from Philanthrocapitalism, which describes a disagreement between Muhammad Yunus and Pierre Omidyar on a business versus aid approach to microfinance:

At issue was Omidyar’s belief that microfinance could lift millions more people out of poverty, far quicker, by running it for profit rather than as a nonprofit like the Grameen Bank founded by Yunus in Bangladesh in 1974. The two men had clashed at the home of legendary venture capitalist and philanthropist John Doerr, who was hosting the meeting as a fundraiser for microfinance. Omidyar had declined to add his own money to the $31 million that the other philanthropists had used to encourage banks in poor countries to lend more, and at lower interest rates, to local microfinance institutions. Instead, Omidyar left the meeting convinced that, if it was pursued as a for-profit business, microfinance could reach a massive scale. He calculated that meeting the needs of all the potential poor borrowers would require about $60 billion – way beyond the capacity of the traditional charitable and government donors. “There is not enough nonprofit and aid capital in the world to get microfinance to the scale it could achieve. Relying on nonprofit capital, not self-sustaining business models, is a big mistake,” he says.

Omidyar makes an important observation: there’s not enough charity and aid money in the world to meet the needs of the poor. I came to a similar realization when I was in China consulting for a social enterprise that wanted to provide P2P scholarships to students in rural regions of China; if you want to help 300 million people in Western China, charity’s not the answer. One of the key differences I use to distinguish between charity/nonprofits and business/for-profits is that charity is designed to transfer value while business is designed to create and capture value. And if we’re trying to provide value to the poor, it seems much easier to create it using the power of business then to transfer it using the power of charity.

2. Charity is (Often) Inefficient

However, philanthropy’s problem isn’t limited to its size, but also its marginal efficacy; philanthropy is inefficient per $ spent because of bureaucratic and allocative inefficiency. One of the reasons there’s all this talk about global social investment exchanges and markets for philanthropy is this failure of philanthropy to allocate its resources efficiently. As William Easterley writes in The White Man’s Burden:

A price that clears the market is like a heating thermostat. When the house gets too cold, the thermostat automatically turns on the heat. If the house gets too warm, the thermostat turns off the heat… The market works in the same way-if there is excess demand, the price goes up; if there is excess supply, the price goes down…

The difficulty of foreign aid agencies is that a bureaucrat is controlling the thermostat to the distant blanket of some poor person, who has little ability to communicate whether she is too hot or too cold. The bureaucratic Planners get little or no feedback from the poor. So the poor foreign aid recipients get some things they never wanted, and don’t get things they urgently need. (168-169)

Like Easterly, I strongly believe that aid is by design an inherently inefficient way of helping the poor because of its lack of accountability to the people who are the primary beneficiaries of aid (what I like to call the Nonprofit Efficiency Impossibility Theorem). Paul Polak, in his excellent book Out of Poverty: What Works When Traditional Approaches Fail, shares the same criticism and argues in favor of market-based solutions to poverty:

In the first twenty years of my work with IDE, development leaders were outraged by my notion that you can and should sell things to poor people at a fair market price instead of giving things to them for nothing. “Business” was a dirty word to development organizations.

“It’s exactly the multinational corporations that use the business approach you advocate who have caused the problem of poverty in the first place,” they would say. “Poor people simply can’t afford to buy the things they need, and they need these things very badly. The only way to make a real difference is to donate these things to them.”

And the development organizations continued to donate mountains of food, free village hand pumps that broke down within a year and were never fixed, and thousands of free tractors that continue to rust under the African sun.

While I see the merits of aid organizations like FORGE (which provides “aid” to refugees in Africa) and Room to Read (which provides educational resources to children in developing countries), where cost recovery really isn’t possible, I’m wary of aid as THE PRIMARY solution to global poverty because of aid’s general lack of accountability.

3. Charity (and Aid) is Often Insulting and Harmful

Andrew Mwenda’s TED talk on how the media should really stop portraying Africa as a continent of hopelessness that needs foreign aid. Enough said. (If you haven’t watched this talk, you really really should).

4. Business (if Successful) Scales

Although I disagree with Yunus’ call for subsidized capital from social investors, a question I’ll explore in much more detail in a later post, I agree with a lot of what Yunus says in his new book Creating a World Without Poverty: Social Business and the Future of Capitalism. In particular, Yunus points out the difference in ability between a business and nonprofit in achieving scale (in fact, one of the first articles on the social entrepreneurship movement back in 2003 by a reporter from ABC News highlights the issue of scale as being ‘the sticking point’ facing the sector). Here’s what Yunus has to say about (social) business, being able to scale more effectively:

Charity too has a significant built-in weakness: It relies on a steady stream of donations by generous individuals, organizations, or government agencies. When these funds fall short, the good works stop. And as almost any director of a nonprofit organization will tell you, there is never enough money to take care of all the needs. Even when the economy is strong and people have full purses, there is a limit to the portion of their income they will donate to charity. And in hard times, when the needs of the unfortunate are greatest, giving slows down. Charity is a form of trickle-down economics; if the trickle stops, so does help for the needy.

A social business is different. Operated in accordance with management principles just like a traditional PMB, a social business aims for full cost recovery, or more, even as it concentrates of creating products or services that provide a social benefit. It pursues this goal by charging a price or fee for the products or services it creates…

The achievement of full cost recovery is a moment worth celebrating. Once a social-objective-driven project overcomes the gravitational force of financial dependence, it is ready for space flight. Such a project is self-sustaining and enjoys the potential for almost unlimited growth and expansion. And as the social business grows, so do the benefits it provides to society.

While the White House’s new Social Innovation Fund might address some of the inequities facing nonprofits in achieving scale, I still think it will be difficult for domestic nonprofits to scale when the federal government is the only viable answer and that international nonprofits will still struggle mightily with the issue. Social businesses on the other hand can sidestep the need for charitable funding entirely.


I believe businesses are generally more efficient than nonprofits, especially when it comes to creating wealth for low-income communities, and that impact investing will be the new giving – mission investing circles anyone? – if philanthropy stops letting function follow form (see Lucy’s excellent post on institutional isomorphism). That’s why I believe a lot of young social entrepreneurs, like Sam Goldman and Peter Frykman, are starting to realize that business solutions and not charity solutions can be more ideal when it comes to maximizing impact (and philanthropy’s impact would be multiplied if it leveraged its capital to fund social impact businesses with true potential).


*While I frame the question of for-profits versus nonprofits by equating nonprofits with charity, I understand that not all nonprofits are engaged in charitable activities; some are engaged in earned income activities as well, making them more similar to the for-profits under question. In a future post, I will expand on my earlier post Reexamining the Case for Social Enterprise, and explain why I and many people I have talked to (especially those in philanthropy and law), are skeptical of not-very-profitable social enterprises and the new L3c form.

24 Responses to “Charity vs Business: The Business Case”

  1. First of all, great job, you obviously put a lot of work into this post. You make a number of interesting points, but there are two significant bones that I would like to pick with you. First, I realize that the idea of “doing well by doing good” is very fashionable on the West Coast in particular, and if one can show that there is more social impact to be had per $ invested, as you claim, it follows that the socially responsible thing to do is to ignore charity in favor of opportunities for financial return. You should recognize and acknowledge upfront that this is a very, very seductive conclusion, a classic have-your-cake-and-eat-it-too scenario, the attractiveness of which provides very strong incentives to those who subscribe to it to want to believe it’s true (and rationalize away anything that gets in the way). I don’t doubt that it’s possible to have broad, transformative social impact using for-profit business models. But just as you call out the fact that charity alone can’t possibly solve the world’s ills, you should be honest about the fact that private enterprise won’t do it either. Take microfinance as an example: probably the most prominent example of a for-profit microfinance institution is Compartamos, which reaches a huge constituency but until recently had interest rates of over 100%. It’s an open question whether financial instruments that don’t work toward building up the assets of the poor, rather than just making capital available to them, can really make much of a difference. And what about the non-economically-active poor? There is nothing that private enterprise can do for them, as far as I can tell. Even subsidized microfinance doesn’t reach them for the most part.

    In one of my classes last year our professor drew a simple 2×2 grid with public benefit on one axis and private benefit on the other. Private enterprise, including social enterprise, occupies the part of the grid where private and public benefit intersect. And that’s great when it’s possible. But there are plenty of things that provide public benefit with no private benefit. And that is the purview of the nonprofit/NGO sector. No matter how much you invest in the the private/public intersection, and there certainly should be plenty of investment there, that square with the public-only benefit is going to get neglected without charitable funds. And so unless you feel like that’s a morally just outcome, you can’t advocate ignoring it. There has to be a combination of the two approaches.

    The other issue I would take up is with your statement, “charity is designed to transfer value while business is designed to create and capture value.” This is a common misperception that I feel is worth combating. Value is created through voluntary economic transactions made in an open marketplace that would not have occurred without the parties existing or being aware of each other. There is nothing about that definition that excludes donations made to charity. Essentially, donors are buying services from the nonprofits. The fact that they don’t benefit directly from those services is COMPLETELY IRRELEVANT from an economic standpoint. What is not irrelevant is the money that goes to those charities, that then gets distributed in the form of salaries and benefits to their employees, payments to vendors, and consumer surplus delivered to the constituents of the nonprofit (which can then be distributed back to society in the form of new businesses, increased profits from firms that sell products to those consumers, etc.). Nonprofits DO NOT suck economic value away from society — they are every bit as value-generating as businesses. The ONLY difference is that the value is primarily captured by constituents rather than investors.

    This is hard stuff and I recognize that there’s significant room to disagree. But count me among the defenders of the nonprofit form and skeptical of social enterprise as savior of the world.

  2. Tony Wang Says:


    Let me be the first to say that I agree with almost all of your points. I don’t think that private enterprise is the panacea of how we can solve all social problems – public goods that suffer from free rider problems cannot always be provided by private enterprise – hence why we need government (and civil society when government fails, if you believe in three failures theory). So if I wasn’t perfectly clear about that, let me be clear about that now.

    However, in the allocation of philanthropic capital, I think there is a current overallocation of capital to the nonprofit sector and not enough to the social enterprise sector, based on an impact/$ assessment. We need to fund the nonprofits that only generate public benefit, but only to the equilibrium point where the impact/$ is equal with the impact/$ of allocating capital to other endeavors, like social enterprise.

    I think 2×2 matrices are nice, but I think like most 2×2 matrices, your professor is oversimplifying. If we created a bar graph instead where the x-axis was a spectrum of nonprofit to for-profit and the y-axis was value (which can be approximated by a sum of public and private benefit), for certain social issues, I think for-profits generate more value than nonprofits, but nonprofits receive most of the capital (like initiatives that help the poor, or capital that goes to Africa). For others, I think nonprofits generate more value than for-profits (like early childhood education). I make the business case only because the view is underrepresented in philanthropy circles, but ultimately I also recognize that what philanthropy needs to do more of is to comparatively evaluate the option of supporting businesses and nonprofits and make the appropriate strategic decision (which I acknowledge will not always be business).

    As to the question of whether charity is about transferring value, I think you’re right that my statement isn’t entirely accurate. Both nonprofits and business are intended to create value. However, a significant part of charity is about transferring value (if I give a homeless person food, I am transferring my wealth to him without necessarily increasing total value in society). It’s true that I could provide a homeless person free education, which increases his productivity, which might increase total value in society – but the point here would be that business, and not necessarily nonprofits, would be better suited as the efficient vehicle for the delivery of these kinds of services.

    I was planning on writing a follow-up to this post called “Charity vs Business: The Charity Case” but I’m thinking you might be better suited to write the post (I’d be dispassionate at best). What do you think? I’m also looking for a co-author on a SSIR article that looks at the strategic value of different organizational forms if you’re interested..

  3. Anne Field Says:

    Thanks for this thoughtful analysis. I also feel that, all things being equal, a for-profit structure is more effective than a nonprofit. But, there are many times that a particular mission simply doesn’t lend itself to a money-making business.

    On L3cs. I like that form, although I understand that, by its nature, the structure is limited and doesn’t lend itself to scale. But there is a place for that, too. One issue with L3cs is that the recession is dulling their luster. Foundations that may want to fund these companies don’t have the money to do so.

    I wrote something about this on my blog, Not Only for Profit. (It appears on the True/Slant network). If you want to read more:

  4. Tony Wang Says:

    Thanks Anne for commenting! It may be several weeks before I get to the L3C topic, but I’ve been following the topic closely in the blogosphere (your blog included) and will try and present my best case against L3Cs then. Looking forward to the discussion.

  5. Tony,

    Great response. I don’t really have anything to add. Gotta run now, but DM me your email address and we can talk further about the ideas you mentioned at the end of your comment.


  6. DF Says:

    I work in the social venture space and thus am quite sympathetic to the sentiment in the arguments you lay out here. Unfortunately, your logic is inconsistent and you display (like many new entrants to the space) a glaring lack of sophistication when thinking about development. In the argument above you make sweeping generalizations about both the private and non governmental sectors that boil down to market=good, government or nonprofit=bad. This mode of thought is outdated and lacks nuance.

    Additionally, you seem to conflate the concepts of charity and philanthropy. I would recommend Payton and Moody’s book called Understanding Philanthropy published by IU Press in 2008.

    Social enterprise has a clear role to play in driving development forward. However, we don’t need to justify it by attacking traditional modes of development. After all, if markets were well equipped (or inclined) to meet the needs of the poor, we’d be facing far less daunting challenges.

  7. Tony Wang Says:

    Hi DF,

    Thanks for commenting, but I have to be honest that I’m a little surprised by your comment. You mention that my “logic is inconsistent… and a glaring lack of sophistication when thinking about development.” Would you care to explain in more detail how exactly either of these are true? Without concrete examples, it seems we will simply have to disagree as to whether I make illogical, unsophisticated arguments without furthering the conversation in any meaningful way. :)

    As to sweeping generalizations, I didn’t think that my post was advocating the absolute view that “market=good, government or nonprofit=bad” though I have to admit that I may have been at fault as Ian pointed out similar concerns, which I attempted to clarify later. As someone who works closely at the intersection of philanthropy, nonprofits, and business, I understand that markets, governments, and nonprofits all have their role to play. However, my point here in this post was to lay out the case for supporting business (which is underrepresented) – and to also argue how business solutions are sometimes more effective than nonprofit solutions. It’s true that nonprofit or government solutions are sometimes more effective than business, and I invite you as I have invited Ian to post the opposite case (Charity vs Business: The Charity Case).

    To the point about conflating charity and philanthropy, I don’t think this is true and would like to defend myself here. My experience in philanthropy is extensive (starting with my undergraduate research experience to my current job as a consultant in philanthropy) and I don’t believe I made the mistake of falsely equating philanthropy with charity. For another excellent book that makes clear the distinction of philanthropy and charity, I’d suggest you read Peter Frumkin’s book Strategic Giving: The Art and Science of Philanthropy published in 2006 by the University of Chicago Press.

    Since there may be some confusion around the issues of charity vs. philanthropy in this post, let me be clear: I am mainly criticizing nonprofit solutions in this post as the ideal solution for creating value and criticizing philanthropy’s role in supporting largely nonprofit institutions without giving due consideration to business solutions. This is why I believe that the very thing we need to do is to attack traditional modes of development – because philanthropy often faces the question of how to allocate its limited resources and will often allocate its resources inefficiently when supporting traditional modes of development. In my opinion, philanthropy allocates its capital inefficiently and could be more efficient if it allocated more of its capital towards business solutions, in particular mission investing and social venture capital. I don’t think the reason business solutions haven’t met the needs of the poor is because markets are ill-equipped to meet the needs of the poor, but that we as a society have not designed businesses to meet the needs of the poor. There is a huge potential that many from traditional spheres of development fail to acknowledge – which, if my viewpoint is correct, suggests that an adherence to traditional ideology makes the poor worse off.

  8. Tony Pipa Says:

    A few quick reactions to point out blind spots in each of your points:
    (1) It was an $800,000 loan guarantee from Ford that enabled Yunus to get Grameen underway when for-profit banks wouldn’t get behind the initial idea. Microfinance as a concept was developed and proven within a nonprofit construct. “Charity” was thus the enabler of the conversation you recount – perhaps microfinance, and the conversation itself, wouldn’t even exist without it. If you have $1MM to invest, I think something along the lines of Ford’s investment – which supported an innovation that has now attracted enormous resources, for-profit and non-profit – would be a good one.

    (2) (a) Easterly’s criticisms focus primarily on government-to-government or multilateral aid (it’s getting tiresome to see this type of aid conflated with philanthropy and NGOs). (b) Greater efficiency does not always translate into greater impact, especially when it comes to poverty. (c) The best NGOs and nonprofits concern themselves with being accountable to their beneficiaries, and most innovations in this regard come from the nonprofit sector. Yes, many organizations underperform in this, but many don’t.
    (3) This one took my breath away. A charge like this needs to be based on more than one or two selected criticisms (the one cited, again, focuses primarily on government-to-government aid). And your implication is that the for-profit sector isn’t “insultful.” Here’s my experience when I walk into a low-income neighborhood: a proliferation of check cashing businesses and lack of full-service banks; a proliferation of fast food restaurants and lack of supermarkets and healthy food choices; a decrepit state of housing with high-profile advertising for predatory lending vehicles (admittedly those are becoming less and less, but for all the wrong reasons).

    Yes, there are nonprofits/charities that take paternalistic approaches that are demeaning, but the sector is also characterized by leadership on things like participatory development, supporting leaders indigenous to disenfranchised communities, etc. It’s within the nonprofit sector that marginalized constituencies often find their voice, develop their leadership, and have their dignity affirmed. What about all that community organizing we’ve been celebrating now that Obama’s become president?
    (4) “Scale” seems to be used in a very narrow sense here. Nonprofit leaders who create momentum for large-scale social movements; nonprofit efforts that advocate for public policy shifts that affect entire citizenries; diffusion of innovative ways of working; these are also about “scale.” I worry that we think about “replication” as the only, or at least primary, means for scale, and I think the recent posts on Nathaniel’s blog are exceptionally important in challenging this notion.

    If philanthropy sees its role as seeking out and supporting social innovations and collective power like this – microfinance, participatory development, community organizing – you haven’t convinced me, and indeed I’m not sure how much the distinctions you are trying to make further the dialogue. It’s interesting that you don’t see business getting due consideration, because it would appear to me that much business thinking is finding influence in the sector without due consideration being given to the whether those principles might be undermining the distinctive characteristics of nonprofits that are an engine of their societal value.

  9. Tony Wang Says:

    Thanks Tony for your thoughtful reply. A few thoughts to move forward the debate:

    (1) I see charity (in the form of subsidies and grants) and philanthropic support of market solutions like microfinance as overlapping but distinct concepts. In this case, philanthropy can support the field of microfinance through charitable (grants and PRIs to nonprofits and social enterprises) and non-charitable means (traditional equity and loan instruments). Although you argue that charity was the enabler, I don’t think it was the charitable characteristic of the PRI that was important, but the access to philanthropic capital more generally (which can be charitable or non-charitable). In fact, I believe that the “charity” part of the Ford PRI might have contributed to inefficiencies. By accepting below market rates of return, some believe that Ford allowed the Grameen Bank to be less efficient than it could have been. This argument has come up with respect to community development finance institutions (CDFIs) in the US and their underinvestment in technology infrastructure (and is why I would like to explore the topic of PRIs, L3Cs, and enterprises that generate below market-rates of return in more depth). See Collaborators or Competitors?” Federal Reserve Bank of San Francisco: March 2009 (16.

    Can “charity” in the form of grants and subsidized capital contribute towards the social good? Absolutely, as the Ford PRI to the Grameen Bank illustrates. But what this claim neglects to consider is a more optimal allocation of resources not through “charity” but traditional forms of capital.

    (2)(a) It’s true that Easterly’s primary focus is on government-to-government or multilateral aid, but I believe his arguments are also applicable to the nonprofit sector more generally (as the passage from Paul Polak also illustrates) – so while it may be tiresome that people are conflating philanthropy with government aid, there’s legitimacy to the comparison. In fact, this article explains how a recent issue of the medical journal The Lancet has many experts criticizing the Gates Foundation and how they allocate resources towards global health issues, which parallels both Easterly and Polak’s criticisms of aid.

    (b) When I use the term efficiency, I am talking about efficiency with respect to social impact. So when I compare the efficiency of business to charity, I’m not comparing the efficiency of some arbitrary metric like profit or general productiveness, but have in mind more meaningful metrics like the Out of Poverty Index. Thus, I’m arguing that business has the potential to be more efficient in generating social impact.

    (c) Even if I were to agree with you that most innovations come from the nonprofit sector, which I find a laughable argument at best, your historical argument is not a counterargument that provides a substantive reason to believe that funding nonprofits is inherently the most efficient way of developing those innovations.

    (3) The arguments I have made are not simply made on the evidence presented in this post, but a much wider body of literature and experiences – the passages here are meant to highlight succinctly what I think are the key issues.

    But I have to admit, I didn’t give much credit to nonprofit institutions in this post mainly because that wasn’t the purpose of my post – but I readily recognize that nonprofits have been the source of many important practices like “participatory development, supporting leaders indigenous to disenfranchised communities, etc.” I believe that nonprofits should exist and they play an important role in our society (like I mentioned to Ian and David, there’s another post just waiting to be written by someone to illustrate the other side, i.e. Charity vs Business: The Charity Case) – but I do think that the nonprofit organization’s role has expanded beyond what they’re meant for and that too often, when people want to start an organization to help others, they default to the nonprofit form.

    I think the examples of for-profit businesses that are hurting the community (a contentious statement by itself) actually illustrate my point on why a business solution may be better than a nonprofit solution. The best way to combat the “proliferation of check cashing businesses and lack of full-service banks; a proliferation of fast food restaurants and lack of supermarkets and healthy food choices; a decrepit state of housing with high-profile advertising for predatory lending vehicles” is through more efficient businesses that can compete with these businesses without being reliant on subsidized capital. A business solution to these issues will not be limited in the way nonprofits are, will not be inefficient and intentionally develop solutions that customers don’t want, will not be insulting and harmful but instead can be empowering since it operates in a free market and gives people a choice, and can ultimately scale if proven successful.

    (4) When I say scale, I’m talking about the impact that scales, not just the organization – on this, I agree with both you and Nathaniel.

    In summary, what I’m trying to argue is that the vehicle for change is often nonprofit when it should be business, since business can be more efficient in creating social impact. This isn’t to say that business is always more efficient than nonprofits and that all nonprofits are less efficient than business, but many of my peers who are agnostic about institutional form but value impact, are realizing that business is often the superior strategy for effecting change. In one of my immediate future posts, I’ll illustrate the respective roles of charity and business and their comparative advantages over each other in the context of actual issues, like education and poverty.

  10. […] consulting firm for philanthropy in the Bay Area, makes a thought-provoking, yet ultimately flawed argument about the social impact of nonprofits (which he calls charities) versus social businesses. Tony and […]

  11. […] Charity vs Business: The Business Case « Philosopher 2.0 Nell Edgington and Tony Wang debate whether nonprofit or for-profit business models lead to more social impact. Tony's post is linked here. (tags: philanthropy) […]

  12. Tony Pipa Says:

    Tony, many thanks for your thoughts and sorry to be slow in responding, been on the road. A few reactions to your reply:
    (1) Bit confused here. It would seem that the “charitable characteristic” of Ford’s loan guarantee was exactly the enabler here. It provided the space for Ford to take a risk that for-profit banks/other would-be backers wouldn’t. Steve Lawry does a nice job in his SSIR article differentiating among the distinguishing characteristics of different funding sources, and the sort of risk Ford took is emblematic of philanthropy. You imply that microfinance as an innovation would have happened without nonprofit support and the nonprofit context in which it was incubated. I don’t think it was at all inevitable.
    (2) Steve’s article also does a great job pointing out key differences in gov’t-to-gov’t aid and philanthropic support. There are fundamental differences in the accountability regimes. Easterly himself often praises the work of field-based NGOs that take their lead from local leaders, using them to bolster his criticism of gov’t-to-gov’t aid, which he sees as top-down.
    (3) Confused again. You’re asserting that nonprofits intentionally develop solutions that low-income people don’t want, but businesses don’t? This is a backhanded way of saying that folks in low-income neighborhoods don’t want a local supermarket with healthy food, or access to full-service financial institutions that charge nominal interest rates, since that’s not what businesses are providing. And I find the assertion that nonprofits intentionally create programs that people don’t want just…strange.

    Many nonprofits are started by people to address what they experience as an unserved need in their community. It’s the mission-driven component and indigenous leadership of the local Hispanic Center in Durham that drove them to partner with Self-Help and develop a Latino Community Credit Union when unbanked immigrants were violently targeted for their cash, which exploded in size overnight and opened other branches years ahead of schedule. (It might seem like a “business,” except it’s … not. And years later, there still aren’t any “for-profit solutions” in the neighborhood.)

    I find that in your attempt to draw these distinctions, you’ve set nonprofits up as a “straw man” in a way that emphasizes extremes and doesn’t accurately reflect the sector. Your description dismisses, to the point of extinction, many distinctive characteristics of nonprofits that give them particular value. Nonprofits aren’t just an “institutional form;” they put mission rather than profit at the center of their reason for being. I agree that different solutions can be applied to different problems. But until you give serious exploration to the implications of the mission-driven aspect of nonprofits, I find your thesis that business wins out unconvincing.

  13. Tony Wang Says:

    Tony, thanks again for your thoughts. I really do appreciate that you’re taking the time to respond to my arguments and hope that we’re making progress on these issues.

    A quick response to some of your points:

    1) Yes, I do think microfinance could have been supported independently of philanthropic dollars if investors were smarter. Investors disagree on valuations of risk all the time, but that doesn’t mean those who invest necessarily have to do so out of any sense of charity. If I believe that I can make money in microfinance while traditional banks and other institutions disagree, does that make me philanthropic?

    In the case of microfinance, while Ford did make its investment on the basis of social impact, a prescient venture capitalist I believe could have made the same investment. Lowry, in his SSIR article, doesn’t argue that Yunus was looking for subsidized capital, which a PRI often allows. Rather, he simply argues that banks didn’t believe in the financial viability of the project, suggesting that Ford, by being a prudent but different investor, could have had an impact by providing traditional capital. I don’t think it was necessary for Ford to have structured the capital to achieve risk-adjusted below market rates of return in order for them to have made a difference. Indeed, a venture capital firm who saw the opportunity before Ford could have made the same investment without structuring its investment as being charitable.

    2) I agree that NGOs are probably more accountable than government organizations. Whether NGOs are more accountable (and efficient in the delivery of goods and services) than private enterprise I believe depends – and often times, I can see private enterprise being both more accountable and efficient (not always, but often, especially depending on the sector).

    3) Ascribing intention to any institution is a difficult proposition and one that I did not mean to make. However, my point here was to simply say that by virtue of being a business, a business tries to avoid developing products that lack enough customers, while nonprofits often will develop programs that people will not pay for. In some sense, a nonprofit is fulfilling its charitable mission when providing services that people are unable to pay for, but because they don’t recover their costs from their customers, nonprofits run the risk of developing programs that may be unnecessary.

    I actually think that low-income neighborhoods do want local supermarkets, financial institutions, etc. and often times the solution has been a nonprofit one like you mentioned. However, your comparison of these nonprofits to for-profits that put “profit at the center of their reason for being” I think sets up for-profits as a “straw man” as well. The choice isn’t between a mission driven nonprofit and a profit driven for-profit any more than it is between an inefficient nonprofit and an efficient for-profit.

    Rather, the real $1,000,000 question is: if you have the choice of funding a mission-driven nonprofit and a mission-driven for-profit, which one would you fund? And if we look at the unique characteristics dependent on the nonprofit form and the for-profit form (their governance structures, their funding structures, the rules & regulations that apply to each), we may be able to better understand whether the local supermarket or the community finance institution should be structured as a nonprofit or for-profit when considering how to maximize social impact.

    My early intuition is that nonprofits are more effective vehicles at providing charitable goods (goods that involve wealth transfer) and public goods that the state fails to provide, while for-profits are more effective at providing private goods. But this is a topic that needs much more research and one that I hope to learn more about through dialectics like this.

  14. […] 1, 2009 In response to my post on Charity vs. Business: The Business Case, I just wanted to thank everyone who commented in the blogosphere and everyone who propelled the […]

  15. Simon Evill Says:

    Fascinating article, thank you.

    It is clear to me that there are no definitive statements or conclusions to your question of whether a Charity or Business creates the greatest social impact. Many Charities are indispensable in my opinion and reflect core human values.

    However, i would say that many charities exist purely because businesses are often so destructive in their social, ethical and environmental practices. Charities have formed to combat the malevolent and pervasive aspects of commerce.

    If therefore, businesses are a root cause of societal and environmental ills, they are paradoxically, the best placed to tackle them.
    “The problem IS the solution.”

    Any business that trades for a social, ethical or environmental benefit is a quantum leap forward in commerce and should be encouraged by consumers and investors.

    If you’re talking about pound for pound, then social businesses and enterprises punch well above their weight!

  16. Tony Wang Says:

    Thanks Simon, glad you liked the article. I think you’re right there are no definitive conclusions or generalizations we can draw about charity or business – and even if we believe that changing business represents the best opportunity for change, it’s unclear whether nonprofit or for-profit solutions work best. One example of two different approaches are and Virgance – you can check out a video of a panel discussion they were both a part of here:

    Money, Mobs, and Media

  17. Arin Says:


    While your ideas regarding profit v. non-profit viability and ROI are interesting, I think that they are also dangerous, especially when looking at the aims of most 501(c)(3) organizations and their roles within the community. As an artist who works with an arts non-profit, I see all too well how, when for-profit structures are employed, when the arts (an entity traditionally supported in part through what you deem “charity”) are monetized, that quality and integrity suffer. As a trickle down, what’s happening in blogs and articles such as yours is a direct reflection of this circumstance in action – that being, that when pay is on the line, the author is limited. As an organizer of an arts event, I also so how the privatization of the endeavor would qualify our output. But it’s not only in the arts alone.

    To run a shelter like a business, to try and make a creative writing program in a prison profitable, to engage in the work that isn’t “sexy” or “salable” becomes increasingly difficult once we stop looking first at how we might better things, and seek instead the bottom line.

  18. Tony Wang Says:

    Arin, thanks for commenting – you raise very good points, many of which I agree with. Some activities are inherently charitable and not monetizable – your examples of homeless shelters and creative writing in prisons definitely ring true in my mind.

    However, I find that there’s an interesting differentiation between activities and outcomes. When you talk about a homeless shelter, a nonprofit organization makes the most sense (anyone feel like starting a for-profit homeless shelter?). However, if you’re talking about providing someone with a place to sleep at night, a nonprofit solution may not always be the best solution. Maybe a for-profit job-training program would do more to provide someone with a place to sleep at night then a homeless shelter would. Not always – but it’s possible. And sometimes the pursuit of profit improves the quality and integrity of the good or service being provided than having your funding provided by donors. Sometimes being beholden to charity and donations does more to impede progress than the pursuit of profit. Again, not always – but it certainly does hold true in some cases. I guess what I really meant to say in this post is that for the outcomes we really care about, whether it’s creating great art or helping people have more rewarding lives, we should think really hard about whether a nonprofit or for-profit solution would be the optimal solution, independent of existing organizational constraints.

    As for quality and integrity, whether you’re an artist or a writer, I think your options are limited whether you work at a nonprofit or at a for-profit. In either case, your options are limited by your funding options – as a nonprofit, you’re limited by what your donors and funders are willing to pay for; as a for-profit, you’re limited to what your consumers are willing to pay for. In both cases, your pay as an artist is on the line – it just depends on who you’d rather be dependent on. Some artists who don’t find themselves being true to their values in the commercial sector find that they can be more true to themselves in the nonprofit sector, which I can totally understand – but it wouldn’t be too hard to imagine someone who finds that the commercial sector is more conducive to them being true to themselves. As a writer and as a consultant, I actually feel that by having a higher-paying job, I have more freedom to write about what I care about; if I were paid less (which would typically happen when you transition from the for-profit sector to the nonprofit sector), I would be more worried about being limited. Though in the particular industry I work in, which is unusual since for-profit consulting firms look exactly and pretty much pay exactly like nonprofit consulting firms, with some nonprofit consulting firms actually paying higher salaries, it matters less whether the organization is nonprofit or for-profit and more about what kind of work the organization does and how the organization funds its works.

  19. Focus on whatever is needed to change underlying systems in society. The question of Charity or Business (or Public Policy) is just tactical — in each case, which one or what combination will re-align how society operates, in small or big ways, so that the change is permanent.

    In some cases, Business achieves that. For example, provide better sanitation in poor areas in Kenya via micro-enterprises which vest local entrepreneurs with incentives to keep the systems clean and operating. Is proving to work better than most charity-based models.

    In some cases, charity is better. For example, grant to help communities in Indonesia do their own river-water quality testing, creates a whole class of educated, politically-vested people who then drive broader changes in water management in business and government. The charity work got the community vested to begin with, which then resulted in the systemic changes.

  20. Tony Wang Says:

    David, I completely agree – being tactical is the golden rule. What we need now is a guide for those tactics. And the tactics are influenced by underlying policy – so that policy should be set in such a way that the combination of all three sectors can maximize impact. Thanks for that insight.

  21. Maryam Yahya Says:


    It is time for a culture change on the very way we look at poverty. I established a small NGO in West Africa which ran for 5 years on funding through door organisations. My NGO was doing some very valuable community-led advocacy for changes in policy and practice in relation to girls education, local goverment practice and access to primary healthcare. Our project suffered the frequent ‘start and stop’ traffic jams non-profits are familiar with and changes in focus. This is accompanied with the fact that while the resident donor agencies lived a very high standard of living, we could barely afford to support our staff and our projects effectively. So much money wasted because projects were not completed due to a lack of continuous funding of projects that were making huge impact and very often due to a change in fashion dictated by donors. They always dictated their own priorities and this changed very often.

    I currently work with an international charity -Save the Children where I run a 4 year old project and guess what? There has been a change in Fashion! This valuable project is ending because Save the Children has decided to change it’s strategic focus. Well that’s fine, sometimes organisations do need to re-evaluate what they are doing especially in the current economic climate but where does that leave us?

    The reason why I came to this site is because I intend to start a social enterprise of my own and I am looking for ideas of how to incorporate a business arm to my organisation so that our work is sustained in the face of fluctuations in the realm of Giving.

    I believe that donors have an important and special role to play in many respects but at the same time, relying mainly on donors means giving away your decision making powers as a non-profit and very often your very survival. Before you know it, you have left behind what you set out to achieve because you are more focused on survival strategies. If you lost your job, would you leave things to chance and rely on willing givers or would you look for a job – any ethical job that would ensure you could take something home to your family at the end of the day.

    Learning from my own challenging experiences and the experiences of other non-profit owners I know, I will never run a charity SOLELY on donor funding EVER AGAIN. My organisation WILL HAVE A BUSINESS ARM so that we can have choices and leverage. So that we can sustain our projects. YES WE WILL ACCEPT & APPLY FOR FUNDING FROM DONORS but this will be to enhance what we are already doing ourselves and on OUR TERMS. You see what we want is the power to deal with poverty DELIBERATELY and not BY CHANCE. Thats why we got involved. Thats why most of us have devoted our lives to this.

    THE PENNY FINALLY DROPPED! I continue my search for ideas on how to accomplish this and I know I will succeed because all this requires is a change in mindset and culture!

  22. Tony Wang Says:

    Maryam, your story is truly powerful and one that resonates strongly with Yunus, as he wrote in Creating a World Without Poverty. I’ve never worked on the nonprofit side and can only imagine the frustration of seeking grant funding constantly – best of luck to you in starting your social enterprise.

  23. Robert Tong Says:

    I wished I found this site so much sooner! Having been both in the private sector (Accountant) and public sector (funder), I completely agree with Tony Wang and love Maryam’s comments! Guys, those operating within the social sector truly desire our respect but we must ensure that remove our emotion. Having been a Treasury for many np’s, I realized one very important thing…there is no such thing as a non-profit. It is the ultimate disgrace to simply rely on external donors (government or otherwise) to do “the right thing” and keep giving money to ones cause. Sorry, but its all smoke and mirrors, suggesting that a non-profit is “better” than a private company simply because its a non-profit. Any private corporation can be mirrored to a non-profit (minimum board, no dividends, etc) but being sustainable is the ultimate key to success!

    I would love to discuss this more…

  24. […] some other references on the business vs charity debate: Charity vs Business: The Business Case Business as Philanthropy: Gates, Buffett, and Transformative […]

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