I’ve had the for-profit vs. nonprofit debate both internally and with various mentors, funders, friends, and teammates since the day BLISS was born. It seemed there was no clear answer—while BLISS was born out of an unmet social need, we were, at the same time, creating a product that would have to compete with for-profit labels, necessitating that we pay very close attention to our market and customers.
In the absence of any hybrid structures in Pakistan, where we are based out of, I chose to go the nonprofit route. At conferences and during pitches, I would often get asked to justify this choice; we could easily have been a viable for-profit. My answer was to do with perception and control. I wanted to ensure that our social mission remained our raison d’être and that everyone understood that – our communities, our funders, our customers and our team. Additionally, I believed our model lent itself well to raising grant capital (more on that later).
Often days, I felt like I had multiple personality disorder—achieving real impact required us to think compassionately and consider the needs of a population that was living on less than $2 a day, but the product required us to consider the needs of the high-income consumer market, as well as the whims of the fashion industry. And I had to play the role of decision-maker on both fronts.
After operating as a non-profit for a year and a half, BLISS flipped to a for-profit this January.
Here is the short story of why: as a nonprofit, we were attracting the wrong people and the wrong money. This is something I had feared and been forewarned about, but when it started coming true, it hurt our progress more than I could have imagined. I learned this the hard way, but having a purpose other than profit, or creating social impact is not sufficient reason to be a non-profit.
Here is the longer version:
Attracting Misfits: Products vs. Services
Conventional wisdom and common sense tells us that nonprofits and for-profits thrive on employees with very different skill-sets. I knew that starting off, but I believed we could legally be a nonprofit, yet attract the for-profit talent our model required. Entrepreneurs need a certain level of optimism and naiveté to succeed. Let’s just say I possess these qualities in slightly unhealthy quantities. I believed we could swim against the tide; we could create a new kind of nonprofit!
Here’s why this didn’t work for us.
When you’re selling a product to a high-income bracket, there’s urgency to ship, to deliver to the customer, to constantly push out new products, to make in-roads that lead to sales, to move faster and deliver better quality than competing brands. Your customers have endless choices, especially in an industry like fashion, where the handbag industry just in the US is a $10B+ market, and 80 billion garments are produced every year. That is a lot of handbags and a lot of clothes to pick from. If the product does not have impeccable quality with reliable consistency, if the customer service isn’t fantastic, or if the designs aren’t on trend, neither retailers nor customers will stick around for too long just for the social impact. Delivering this quality consistently requires a team that is obsessed with details, progress and getting stuff done, and driven by urgency and results.
As a nonprofit, there’s usually a focus on services, not products. In a place like Pakistan, if you’re providing education, health care or other services as a nonprofit, it is often to bottom-of-the-pyramid customers that do not have any options. You’re not facing fierce competition for a ‘spot’ in the community the way you do for a ‘spot’ on the racks of a desirable retail chain; the pace at which you move will rarely kill you. This is not to deny the fact that the nonprofit world has some of the most compelling and effective leaders, building beautiful things, with thoughtfulness and compassion. But the competition that fuels the pace and innovation in a product-focused for-profit is massively reduced, or plain missing. The focus is on solving tough problems faced by some of the poorest communities of the world. It is hard work, but it requires a different kind of team.
By advertising ourselves as a non-profit, we were attracting people that were great fits for traditional non-profits but misfits for us. The result was frustration, a misalignment of priorities, and a sluggish pace. We were also inadvertently pushing away a lot of smart, resourceful, driven people who had their own notions of what a typical non-profit represented. Additionally, it often becomes easier to convince top tier professionals to join your early-stage/risky startup at a low pay scale if equity can be part of the incentive. As a non-profit, you can’t put that on the table.
Hiring talented people is a behemoth of a task to begin with – advertising yourself in a way that attracts the opposite talent pool of what you actually need is equivalent to setting yourself up for failure. Running a startup is a lot of work; it can often be tiring, frustrating, unrewarding and lonely. You will lose sleep, your health may suffer, and you may not see friend or family for weeks or months. There is no reason to make life harder by choosing a legal structure that requires you to swim against the tide.
Attracting The Wrong Investors
Social enterprises are often trying to prove new concepts, fulfill unmet needs, or enter difficult markets. As Kevin Starr rightly points out in this post they need capital at better terms and with longer payback because the problems they are solving are complex and the processes they need to set up may be riddled with inefficiencies.
For example, our production and quality control is much more difficult and inefficient just because we are simultaneously trying to create sustainable income, dignity, opportunity and growth for the women we work with. Simply by virtue of selecting underprivileged and/or unskilled women, we have strayed away from the most cost-effective and fastest way to create our products – find cheap labor that is already skilled at the craft. I thought this lent itself well to grant capital that would allow us to experiment in our first one to two years, without pressure to pay back money or deliver financial returns. I was hesitant to talk to traditional investors that were focused on the ROI.
But I had heavily underestimated the frustrations associated with raising non-profit money. Funding cycles of a year, even two years were common. For us, everything had changed in a year! At times, after months of conversations, paperwork submission and phone calls, the communication would just diffuse into non-existence. Once our contact person at the foundation resigned, with no one to pick up the correspondence, leaving us at a dead-end.
This is not to say raising capital with traditional investors is even remotely easy. It comes with its own set of challenges. Often the terms can be bullish and values can be misaligned. Ultimately finding the right investor(s) is one of the most difficult things an entrepreneur must do no matter what. But for me, one of the most compelling reasons to choose a non-profit structure – the presence of grant capital to get us through our teething years – had fallen flat on its face. The time spent talking to funders was taking away from hiring, product development and everything else in between.
While we are still not the most compelling proposition for an investor looking primarily for financial returns (as is true for most social enterprises), there are certainly investors in Pakistan (and of course in the US) that care about the social impact just as much, if not more, than the financial returns. And the unique combination of empathy and business acumen these ‘impact’ investors bring actually adds the right amount of pressure to deliver. We must pay them back, we must start showing results, we must meet our milestones, but it must all tie back to creating impact for our communities. And I realized I wanted that pressure. I wanted to be pushed to move as fast as I could. When you take money that you must pay back, the clock really starts ticking. In addition, many of these investors bring valuable experience in the sectors we operate in (retail, fashion, artisan craft). That’s the best kind of money.
The Pro-bono Trap
As a non-profit, you get offered a lot of pro-bono help. After a while, you expect it of others, and you also start asking for pro-bono help. This can be terrible for your business if you’re looking to move fast.
If you are not paying someone for their time, you will not feel justified in holding them accountable. The deadlines will slip, the work may be incomplete or shoddy. Their paid clients will always get preference. This is common sense, but the repercussions of getting pro-bono help may not hit you till you get pro-bono help. If your website took 3 months to go live because you got it done for $0, or your product design cycles are taking three times as long as they should, are you really saving money in the end? Lost time is lost money for a startup.
So I decided – for any mission-critical tasks or roles, no more pro-bono help! When you budget something in, you will find the money to pay for it. Being a for-profit means people also don’t offer you pro-bono help, and you stop asking for it.
The Real Bottom-Line
Ultimately the real bottom line is our impact – not only on our communities but also on our customers. In the end, we chose a model that best helps us achieve this impact. For us, because the impact is baked into our model – the more products we are able to produce and sell, the higher our impact – it made sense to pick a structure that allowed us to establish the most efficient design and production processes, and find the best marketing and distribution channels.
In the end, that is the most important part of choosing a structure – to pick one that helps you fulfill your mission, your raison d’être. Everything else will follow.