3 Reasons to Consider Converting a Nonprofit to a For-profit
In 2010, I rallied a group of friends with me at Cornell to start an organization that would help narrow the achievement gap and eliminate the summer learning loss. The achievement gap is the disparity in educational attainment between rich kids and poor kids or black kids and white kids. At the time, we were going to do this by providing low-income kids and families with free enrichment programs over the summer. In order to do that, we figured that we'd have to find a way to get people who have money to donate some of it so that we could provide the programs for free since our target beneficiaries didn’t have money.
To raise money at a large scale, we recognized that we needed our legal structure to be a 501(c)3 nonprofit organization. After a couple of years of operating, we realized that if we had any chance at scaling our work to reach a critical number of children and families every summer, then we would have to get schools to contribute to support our programs. That was the beginning of our earned income strategy.
Nonprofits can have earned income models and remain nonprofits. In fact, many hospitals and universities have earned income strategies and strategically remain nonprofits because it makes the most sense for them.
Here were the three reasons that we decided to convert:
1. Social problem vs. pain point
Traditionally, nonprofits solve social problems like homelessness, poverty or achievement gaps, and for-profits solve pain points like finding a new apartment or learning a new skill to be successful at work. Not every for-profit company addresses a pain point, and there are some nonprofits that don't address a social problem, but they are not the majority. In fact, the future of business is becoming more blurred where for-profit companies must also address social problems to continue thriving.
In our case, we began to realize that our school partners were not paying for our services because they wanted to narrow the social problem of the achievement gap. Rather, they were paying for our services because they needed support running summer programs. The way the school year was designed set them up for failure in trying to operate any summer programs effectively. Thus, we were operating in the realm of the for-profit space. We also realized that we were in a space where we were competing with other for-profit companies, like Scholastic, Pearson and McGraw Hill. However, we were limited to using nonprofit tools. At that point, we realized if we wanted to compete with other for-profit companies then we would have to be on a leveled playing field where we could operate with the same rules.
2. Market opportunity
This is probably the biggest factor to drive your conversion and it was ours, too. Seven years ago, when we started out, there was no such thing as a summer school market. It is still debatable whether one exists today. However, after generating millions in revenue in this space, we’d like to believe that there is in fact a market. Moreover, the market has the potential to be worth over $10 billion nationally. When we realized this market existed, we decided that if we remained a nonprofit, then we wouldn’t be as compelled to provide and deliver a service that actually met the needs of the market because we’d always have philanthropy to rely on. By becoming a for-profit, we recognized that we’d have to be more responsive to our customers and provide something that was addressing a need for our partners. This was a lot more in-line with the ethos of our company, which we’d been operating as a business from the very beginning.
This may or may not matter to you. When I originally started building Practice Makes Perfect, ownership was the last thing on my mind. As it started to scale and gain traction, I brought people onto the board and took philanthropy from organizations who believed in what we were doing. My team was doing something really special. The reforms we were carrying out were led by my firsthand perspective. Today, the majority of education reform is still led by people who are only sympathetic to the problems our communities face. Seldom are the people trying to improve the school systems led by people who went through them. Our approach was different. I was empathetic to the challenges and the adversities that our kids faced. I was them. I went through our most struggling public schools and had insights that I believed could make a real difference.
Nonetheless, I would find myself backing down as I went toe-to-toe with our board as we were building the organization. Every board member on a 501(c)3 board has equal voting power. That means the founder or the executive director cannot make decisions unilaterally. That’s because most nonprofits are funded by individuals who receive a tax-deduction for their contributions. Because those tax-deductions are money that would’ve gone to the government, the government assumes ownership over the assets of any nonprofit. The board members, as such, are appointed fiduciaries who are supposed to act in the benefit of the government. What’s in the best interest of the government may not always be what’s in best interest of the mission.
There were times where I found myself wanting to take bigger risks and make larger leaps to serve more students only to be told I needed to be “more realistic” or “not take on that level of risk.” Growing by 30 percent or 40 percent was a great achievement, even when I knew we had the potential to reach 300 percent to 400 percent. Without ownership, I could take the risk and jeopardize my job and lose the hard work I put into building my organization. That’s when I realized that ownership was important for me because it would maintain the integrity of the work my team was carrying out.When we finally decided to make the conversion, we decided to become a benefit corporation.