Show Me the Money: Scaling Social Tech Ventures
Non-profit technology ventures today function very differently from their for-profit counterparts, but have produced some incredible solutions to really challenging social issues. There are important structural challenges in building a nonprofit tech venture, many of which call into question the fundamental norms of today’s more conventional business landscape. What’s the return profile for investors? To what end are financial incentives structured? Who really is the “customer”? We want to explore how nonprofit tech ventures navigate these structural challenges, and in the process, understand the potential for nonprofits to address problems that for-profit ventures simply cannot target.
To better understand tech nonprofits’ unique place in the business landscape, we spoke with Kevin Barenblat and Jim Fruchterman. Barenblat is the co-founder and president of FastForward, a startup that funds entrepreneurs to develop technology that has positive social impact. Fruchterman founded Benetech, a company that builds software to increase social good. For example, Benetech has implemented Bookshare, an online library that incorporates audio, Braille, and other strategies to make eBooks accessible for people whose disabilities interfere with traditional reading. Barenblat and Fruchterman explained that nonprofits solve different types of problems than for-profit ventures—problems that can’t be solved by the conventional market—and that nonprofits’ unique financial structures can be leveraged to achieve social missions. However, nonprofits face institutional limitations when it comes to scaling up their ventures. We need to revisit and revise these constraints to nonprofits’ scalability to encourage more impactful and wider-reaching nonprofits.
The core difference between nonprofit and for-profit companies lies in the structure of their ownership. A for-profit company is owned by stakeholders, and its ultimate objective is to return value to those stakeholders. A nonprofit, on the other hand, is “owned” by the public. As a public good, its financial incentives are more murky and context-dependent. This translates into complications when it comes to entering markets, calculating return on investment, and gauging competition. In a for-profit company, the stakeholders focus on one metric: Is their equity growing in monetary value? They care chiefly about hard financial data and driving higher cash flows. Non-profits, on the other hand, have no analogous metric since they generally depend on smaller sums from individual benefactors. Although some donors focus on data-driven impact metrics, most donors gauge their impact on a far more emotional basis. Barenblat explained that “the reality is that the donor universe has a lot more variability—people donate to support friends, or because of social pressure or interest in areas that have purposeful meaning to them (like diseases in their family). Those individual donors are not evaluating particular areas. They’re funding things that are important to them.”
This difference in stakeholder decision-making translates into an important difference in how nonprofit and for-profit ventures think about their markets. The market for a for-profit venture is fairly clear: Customers pay for your product, so your goal is to find a market that can bring in a steady stream of customers. With nonprofits, however, there is no clear notion of a “customer,” since the market to which you deploy your product is not the same market that funds your business. To Barenblat, both your beneficiary and your donor could be seen as the “customer,” so you must find two product market fits, appealing to both groups at once. While both types of companies must ultimately serve end user groups, their options for efficiently allocating funds differ due to different stakeholders and “customers.”
“Where investors think ‘This is a bad tech company,’ I say, ‘Think of this as a charity that’s 10 times better than any other charity you’ve seen.’”– Jim Fruchterman, Founder at Benetech
How, then, do we understand which markets nonprofit ventures can effectively target? It’s immensely difficult to build a nonprofit venture, whereas we’ve seen for-profit social entrepreneurship conquer socially geared markets like micropayments (mPesa). This seems to suggest that socially geared for-profit ventures are a better avenue for achieving social goals. However, although for-profit social entrepreneurship can spur immense change, there are certain communities, such as the poorest and least privileged, that will never comprise a sufficient market to sustain for-profit ventures. According to Fruchterman, wariness toward nonprofit tech ventures arises because “a lot of people say that, if the market can’t do it, it’s not worth doing. It’s like saying, if you don’t have money, you’re not worth helping.” Fruchterman takes issue with the idea that all social problems must be solved by finding or creating a profitable market. “Where investors think ‘This is a bad tech company,’ I say, ‘Think of this as a charity that’s 10 times better than any other charity you’ve seen.’”
Technology has tremendous potential to drive social impact without a for-profit business model, given how efficiently tech can be built and scaled. Barenblat spoke similarly about how to feasibly help disadvantaged populations, saying that “the reason to pursue a nonprofit is that it’s a great idea but perhaps not a great business idea.” He implied that a nonprofit would be worth pursuing only when a for-profit model would collapse under the same conditions. For-profits aim to make as much money as possible and thus collapse without sufficient cash flow. In contrast, nonprofits seek to help as many people as possible, and their beneficiaries don’t generate cash flow. Nonprofits can be more flexible since cash flow is not as tight of a constraint. Because they don’t have investors pressuring them to find a profitable market, the target market for a nonprofit can be the specific group a founder is aiming to help. Where for-profit corporations must heavily consider market size and growth, nonprofits have more freedom.
Beyond having greater flexibility to define their markets, nonprofits also have more leeway when it comes to competition. According to Barenblat, in the for-profit realm, there is intense concern about secrecy when it comes to innovation. You are always trying to build defensible moats around your technology. In a nonprofit or university setting, however, your work is meant to be released into the public sphere and built upon, so competition is much more positive for nonprofits than for for-profit ventures. “Competing” nonprofits mean that more people are trying to help in the same area, and your goal can be furthered by others’ work. By fostering a collaborative mindset, nonprofit tech innovation brings attention and provides scalable, accessible, actionable change for markets that are otherwise difficult to reach.
However, there are some strong institutional limitations that nonprofits face when it comes to achieving greater scale. In his TED talk, “The Way We Think about Charity Is Dead Wrong,” activist and fundraiser Dan Pallotta explains how nonprofits are incentivized to avoid using their funding for marketing and advertising. Donors want to see that their money is being directly channeled toward positively impacting beneficiaries. They do not want their money to go toward advertising “overhead.” However, failing to spend money on advertising runs contrary to the core business principles defined and followed by for-profit ventures. Money invested in advertising could generate “dramatically greater sums of money to serve the needy.” To Pallotta, donors’ attitudes about advertising can significantly limit the scale that nonprofits are able to achieve, which is something that must change if we want to enable social entrepreneurship on a larger scale.
A for-profit venture can be an incredible instrument to solve a wide host of problems, both with and without ultimate social goals. However, not every technology enterprise aimed at solving social problems can find a market to support itself. Nonprofits are necessary to impart real, scalable change in markets where the beneficiaries don’t have the means and resources to fund the enterprise. Nonprofits are also becoming increasingly powerful, since recent technology has enabled them to deliver more impact than they possibly could have before: As an example, Fast Forward’s companies have impacted 51 million lives to date.
To fully harness this potential, we must help foster institutional changes to address limitations that have held back nonprofits’ growth and scalability. Donors, for example, want to see their dollars go to tangible and emotionally rewarding changes, rather than important but impersonal expenses like advertising. One step in the right direction is to shift donors’ emotional attitudes about cash flow, so that nonprofits can operate with the same scope and scalability that other for-profit ventures have achieved—and more importantly, address a wider range of social issues more effectively.