To Be (a non profit) or Not to Be (a Non Profit)…That is the Question.

20 Jun

It’s a question that every social enterprise has to answer- do we want to be a business or do we want to be a non profit, or hey- do we want to be both? It’s a question that we struggled long and hard over and we have come to a decision: We are only going to be an Indian for profit (at least for the next year) with the option of creating an additional non profit arm later down the road.

Our thought process: We had decided early on that we wanted to at LEAST be a for profit in India.

Reasoning:  In our collective experience, we felt that it was easier to get work done in India as a for profit.  We also felt that people in India had more respect for businesses (as opposed to non profits)- probably because there were so many non profits already present, doing work in India.  Image wise, we felt business was the way to go to get things done.

Why incorporate in India as opposed to the US company with an Indian subsidiary?  Good question.  It’s tough because American investors are definitely wary about investing in Indian companies (and we do not have any typical investments to date- besides grants aka free money), but we are interested in working/partnering with Indian governments.  And if we are an American company, we felt that it would jeopardize our ability to work with Indian government entities, and even to some extent the Indian public.  We would always be the foreigners coming in and doing things.  Not optimal.

That wasn’t hard- Where’s the dilemma?:  Well, we were seriously considering being a hybrid non-profit/for profit company to get the best of both the worlds.

And here is why:

Grant funding: We figured we may have an easier time raising money from our non profit side (if we had one). $ is always good.

Partnerships: We thought that maybe if we were an American Non profit, it would be easier to form partnerships with government, and other Non governmental agencies and/or Universities.

Focus: We thought that maybe if each of us focused on a separate part of NextDrop (non profit= improving transparency and impact, for profit= execution and scalability/profitability) we would get best of both the worlds.  We thought it may be difficult for one entity to try and FOCUS on both (with the same funds).

Why did we decide NOT to do a hybrid?

Funding: We realized that…NextDrop had been winning a lot of cool things, not because it was a non profit (because it wasn’t), but because…it was a good idea.  And people wanted to help see if it would work.  And that hasn’t changed.  We figured that if we break up NextDrop, it may not have the same appeal.  Lets face it, people funding non profits don’t really want to be funding tons and tons of impact evaluations/R& D stuff (at least according to Draper Richards- they want to fund innovation).  Which makes sense.  So we are banking on the fact that we can still attract investment/grants (for the dual purpose of social impact and small financial returns).  And FYI, grant making organizations CAN give to for profit organizations (it’s just more difficult, but we are proof that it can happen).  Sometimes it’s in the form of free money, but many times it’s in the form of a PRI (Program Related Investment).  This means they actually do get equity in your company and it is a convertible note (as far as I can tell- pleases feel free to correct me if I’m wrong!)

Focus: Ari made a good point.  If we had two separate organizations, one focusing on impact and transparency, and the other focusing on execution and scale, what happens down the road if the two separate from each other?  What happens to NextDrop then?  Does it become a pure moneymaking machine?  Given that this is a really new field topic (hybrid models in general), and the only examples we see are non profits that are pretty much subsidiaries of the for profit (i.e. they don’t exactly do a WHOLE lot to influence the actual for profit entity), we thought that maybe it was in our best interests to keep the two together- at least for the first year.  We also weren’t terribly sure what interesting things the non profit could do (because we didn’t want to set one up that didn’t do much except write grants and do impact evaluations- important as they are, making that a stand alone non profit doesn’t make sense).

Partnerships:  We realized that it really doesn’t matter weather you do a for profit or a non profit (well, most of the time).  Emily had a good point- if something is important to your organization (i.e. partnering with Universities, government agencies etc…) it doesn’t matter what the legal structure of your organization is.  Even in cases like the World Bank etc…they contract out to private entities on the ground all the time to get things like surveys done.  Since most of the people we would want to partner with have a history of partnering with BOTH non profits AND for profits, it won’t really jeopardize our ability to work together with amazing institutions.

And that is how we (finally) came to our decision.  We have put in some legal paperwork, so we will hopefully be a legal entity in India within the next few months.

 

Exciting times!

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6 Responses to “To Be (a non profit) or Not to Be (a Non Profit)…That is the Question.”

  1. Prayag Narula June 21, 2011 at 1:15 am #

    Congratulations. I’ve long held the belief that NextDrop should be a non-profit just because it ‘fits’ the non-profit model. I have my rational reasons too:

    1. Revenue: I doubt if NextDrop can produce millions of dollars in revenue. I would love to be proved wrong but coming from India, my hunch is that it will be very hard to monetize your model. Even if you have some customers what is stopping them from forwarding information over texts to other friends and family for free. You won’t believe how much value people put in money in India. Advertising as a model is based on not just scale but the spending power of the people and I doubt you can produce enough leads for the advertisers to justify their advertising spending. May be govt. advertising is a good channel but you are too reliant on govt. partnerships on other aspects too. Putting all eggs in one basket is probably not the best idea.

    2. Grants: It is; as you’ve said; easier to raise grant money as a non-profit. And you are good at grant writing, why not leverage that by adding an extra incentive.

    3. Social Image: In India people trust non-profits (NGOs as they are called) more than a business.

    I would love to be proven wrong because it means there is a viable model in selling information to the bottom of the pyramid in India.

  2. anu June 21, 2011 at 4:02 am #

    These are all excellent points and I really appreciate you raising those issues. You are right about the revenue- we will not be producing tens of millions in revenue. At scale, best case in year five of our business plan we are only projecting about 3 million in total revenue which, for a business, is not a lot. However, I do believe that there are certain investors that are ok with very small margins but higher social impact. I could be wrong- but I guess only time will tell. Also, the customer payment is something i really want to pilot. You could be absolutely right. We did take that into consideration and only assume one in five people would be potential paying customers but who knows what people will do. We definitely need to try it.

    2. There is no telling who is “right”. I think we can get grants as either type of institution but again, I could be wrong.

    3. I guess we still think getting work done in India is better as a business- governments respect you more and maybe people will be wary but…I think we can work around that. Again it is something we have to try out and we could be totally wrong.

    At the end of the day you could absolutely be right- that we should be a non profit. I think we also realized that it is easier to go from a for profit to a non profit than vice versa. But I am drawn to the idea that if you don’t have a good enough product, people will not buy it. Well then…maybe we shouldn’t be making this product in the first place then right? I guess my theory is that if the number one selling product in the Dharavi slum store is Garner Fructis, then I think that if people aren’t willing to pay for my service, I should get a better service because clearly its not about the money.

  3. Susan McDonald June 21, 2011 at 4:06 pm #

    If you have any Canadian audiences:

    Foundations that give grants can only give grants to

    a) Other foundations
    b) Charities
    NOT Non-Profits. The term Non-Profit in Canada is different than in the USA.

  4. Anu June 22, 2011 at 8:47 pm #

    Wow that’s great – thanks Susan!

Trackbacks/Pingbacks

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  2. hungama - Knight grantee NextDrop builds community by linking two scarce resources: water and information - June 23, 2011

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