Why you should mind the gap
The difference between a nonprofit and for-profit business isn’t impact; it’s the gap between their source of revenue and the people they serve.
“I really wanna make an impact, so I’m thinking about starting a nonprofit.”
It’s a sentence I often hear expressed by people looking to solve a problem, make a change, or otherwise improve someone’s life. You know, deliver value to the world.
They’ve come to believe that businesses aren’t about making impact. Nonprofits do that because they aren’t in it for the money (it’s in the name and all).
Unfortunately, that’s a transactional view rooted in the old story about work. The old story says for-profits only care about making money and often leaves nonprofits trapped in a starvation cycle without enough money for the infrastructure they need to serve their people well.
Either way, we’re lessening our impact.
In the value economy, businesses exist to deliver value. The difference between what we currently call a nonprofit and a for-profit lies in the gap between their source of revenue and the people they serve.
If the gap is zero, you’re what we currently call a for-profit business. You serve your customers and your customers pay you for the value you deliver.
The key here is that a business with no gap can concentrate solely on delivering value to the people they serve because they’re the same people who provide the financial resources the business needs to run.
As the gap increases, you have to split your focus.
For example, if you have a bit of a gap, you may be a business that deals in memberships, where companies pay for individual team members to join.
You serve the individual first, but you must also deliver value to the company that paid their membership. That will require you to balance what you help the individual do or achieve and what you help the company do or achieve.
If you have a large gap, then you’re what we currently call a charity. You must deliver value to the people you serve, but you must also invest time securing money from a completely different group of people so you have the resources you need to do what you do.
The value your donors or other supporters seek likely has nothing to do with the value you deliver to the people you serve. In fact, sometimes giving donors what they want can distract you from delivering the value the people you serve need. That says nothing about grant requirements or the time it takes to identify, engage, and retain this completely different group of people.
Yes, there are tax and legal implications to different entity types, but the key difference between them isn’t whether or not they make impact — it’s the gap between their source of revenue and the people they serve.
Select the entity type that allows you to deliver meaningful value with the greatest amount of focus. By concentrating your focus, you’ll increase your impact.
Happy Monday,
Katie
Your Friendly Weekly Writer
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Interesting way to put things. I suppose the membership idea includes businesses that serve insured people or entities. Medical practices, certain trades that deal with accidents/disasters have a gap to mind as you put it. But an entity that exists to solve a compelling community problem could be either a for-profit or a not-for-profit. Investors/donors who believe in the mission will contribute because they want to be part of the solution. But usually, donors act out of heartfelt sympathy for the cause while investors act out of a strong belief in the potential ROI. Of course, donors are solicited constantly. Investors? Much less frequently as those served (or their proxies, e.g. insurance companies) pick up the slack. Still, non-profits could benefit from more sound management practices while for-profits could benefit from a more relational approach to the community they serve. Great topic. Great insight.