For Profit or Not-for-Profit. Is that the Question?

Posted by Gabriel Mandujano on May 19, 2015

As a former non-profit Executive Director, one of the questions I get a lot is something like “Why did you decide to start Wash Cycle Laundry as a for-profit instead of a non-profit?”  After all, for my personal goals, laundry was a means to achieving a social and environmental mission, rather than the social and environmental missions being an afterthought when designing a laundry business.

I think a lot of the hand-wringing about for-profits versus non-profits is energy that could be more productively applied elsewhere.  To be sure, legal structure matters, and it’s worth it to be thoughtful and deliberate about the form in which you build your venture.  That said, I think that the Heron Foundation has it right when it frames this decision as one about “tax status” instead of “for-profit” versus “not-for-profit.”  For a social venture, your revenue model, who you seek out to be on your cap table, and your intentions as founders are going to be what defines your identity, especially over the early years.  Whether or not you’re a non-profit or for-profit is closer to deciding whether to be a C-Corp, S-Corp, or LLC than it is a reason for soul-searching existential angst.

One of the primary reasons why I make the claim that for-profit vs. not-for-profit matters less and less is because the lines of who will invest in for-profits and not-for-profits are blurring more and more.  Back in the day, foundations gave grants to non-profits (only) and equity investors, like angels or funds, purchased equity in for-profits (only).

These days, that’s not always true, and it’s becoming less so.  Certain foundations, like the Heron Foundation and others, are lending both below-market rate debt and exploring more risk-seeking, higher-reward mezzanine debt structures for both for-profits and non-profits, under the umbrella of “Program Related Investments” or “Mission Related Investments” — PRIs and MRIs for short.  There’s an increasingly large amount of loan funds under management by social interest lenders, from boutique shops like The Untours Foundation to national players like RSF Social Finance.  (Stay tuned for another post on how Foundations are able to maintain compliance with IRS regulations for charities and support for-profit entities at the same time.)

On the other side of the track, you have more and more non-profits seeking some type of financing from investors who have traditionally only funded for-profits.  Social Impact bonds have seen the likes of Goldman Sachs putting capital into programs to combat recidivism.  And more non-profits are becoming owners of for-profit organizations, like the Immaculate Cleaning commercial janitorial service owned by DePaul USA, or the Archimedes Project, a non-profit that launches for-profit water-related ventures in the developing world and participates in their revenue.  These for-profit subsidiaries and affiliates of non-profits mean that increasingly, investors who want to see the return of their capital can sit across the table from 501(c)3s.

In Wash Cycle’s case, my decision was pretty pragmatic.  When I was just starting out — did I think that any foundation was going to give any substantial grant to a brand new non-profit organization without audited financials or an operating track record?  As a former ED, I estimated those chances at approximately zero.  I’d need to put my own cash and own credit on the line first (in addition to all the sweat equity), and if I was going to take financial risk, I thought it appropriate that I have the opportunity to get that money back, and hopefully some more, for the risk.  Pretty cut and dried.

 

Gabriel Mandujano founded Wash Cycle Laundry in 2010 to create upwardly mobile jobs for vulnerable adults.

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