Nonprofit vs For Profit - How to Determine the Right Business Model

March 21, 2017 | Blog

Why Tech Nonprofit?

Almost every week we get the question, “Should I be a nonprofit vs for profit?” The nonprofit model is unique in that it allows an organization to focus 100% on its mission and impact. The tech nonprofit model, even more so. It enables a 100% focus on impact over profits, but also affords impact at a greater scale thanks to technology. As a nonprofit, you’ll raise money through philanthropic grants and even earned revenue. But you’ll never have to turn a profit for investors. This means you don’t have to tweak your product to align with investor demands, or to maximize clicks or engagement rates. You get to stay laser focused on your core mission, and building whatever best serves your beneficiaries.

Our long term vision is to build an ecosystem in which thousands (millions!?) of nonprofit organizations structure their impact model around a core tech product, rather than thinking of tech as IT. Stronger technology increases an organization’s ability to scale and impact more lives. But before you get to building tech, you must decide on your business model. That informs every step of the product journey. Here, we break down critical questions social entrepreneurs should consider when evaluating business models: nonprofit vs for profit.

nonprofit vs for profit

Who is the intended customer?

Today it’s cheaper than ever to launch a tech startup. Low-cost infrastructure tools like YouTube, AWS, and Twilio make it possible to bootstrap a tech product for $5,000, while the same product might have cost millions of dollars to develop ten years ago. The barrier to entry for initial tech development is at an all time low. Our alumna, Heejae Lim, actually bootstrapped the MVP of her product TalkingPoints by taking $5,000 from her student loans to build a parental engagement platform using Twilio and Google Translate.

While startup costs have lowered, founders should still think critically about their end user before even beginning product development. Tech startups should opt for a nonprofit business model if their product is serving a particular population’s unmet needs, or solving an issue that market solutions have failed. If the product is intended for a low-income customer or a community that couldn’t otherwise afford your offering, nonprofit status will enable you to reach your target user.

If the product or service is designed for higher income customers, or even the general public, 501(c)(3) status may not be the right business model. Remember, even if you want to do some good in the world, the moment you accept venture capital you leave your mission at risk of being swayed by investors. If your organization is focused on human rights, increasing access to healthcare, or improving global education, the nonprofit model will better suit your mission. Michelle Brown, Founder of CommonLit – the free literacy platform for students and teachers – advocates for the power of the nonprofit model. Because CommonLit is a nonprofit, the organization receives free licenses to high quality literature which are used on the platform. This enables CommonLit to always be free for students and teachers.  

Unlike direct-service nonprofits, such as soup kitchens or after-school programs, which require one-to-one interaction with the populations they serve, tech nonprofits achieve impact through original tech products. These products reach marginalized, hard-to-reach communities thanks to the ubiquity of the Internet and smartphones.

nonprofit vs for profit

Is mission your true north?

We’ve found most successful tech nonprofit entrepreneurs are solving problems they’ve personally experienced to some degree. Lived experience equips entrepreneurs to build solutions like nothing else. It also puts mission at the forefront of your business.

Many of our fellows are building and scaling the products they wanted for themselves. Sixto Cancel founded Think of Us, a digital personal advisory board for foster youth. It’s the tool he longed for when he was growing up in the foster system, and struggling to manage all the supportive adults in his life. Sixto is 100% committed to scaling the Think of Us app, which will improve life outcomes for foster youth, and eventually influence the system at large. Similarly, Rey Faustino founded One Degree, a Yelp for social services, after experiencing the difficulty and frustration of sourcing social services resources growing up in a low-income family. He spent his afternoons as a kid leafing through a thick binder of social services resources, and many years later saw that nothing had changed. Rey incorporated as a nonprofit because One Degree is committed to giving families access to the resources they need to achieve social and economic equality. 

Nonprofit status keeps social entrepreneurs mission-focused because impact is the ultimate success metric. Scaled tech nonprofits like the Wikimedia Foundation or would certainly be different organizations today if it weren’t for their nonprofit status. This instills trust among their communities and keeps them mission-aligned, whereas for-profit founders may be swayed by pivoting for funding opportunities or vanity numbers.

Last but not least, social entrepreneurs should consider trust when structuring their organization. Users, community partners, and funders know that fundamentally, nonprofits prioritize mission over margin, while for-profit companies (yes, even social enterprises) ultimately prioritize their bottom lines.
If this all sounds like you and your organization, we encourage you to apply for our 2017 accelerator program. Through the Fast Forward accelerator, you receive a $25,000 grant, 100+ mentors, introductions to funders and the tech nonprofit community, curated training, and ongoing support.

So when deciding nonprofit vs for profit, consider the importance of your mission and the customer you want to serve.