Start-Ups

Love or money: The differences in founding a nonprofit and a for-profit startup

More and more founders are setting out to start nonprofits. Here are the key differences you'll encounter while founding a nonprofit or a for-profit startup.

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Image: iStockphoto/PIKSEL

Tech startups regularly grab headlines with billion dollar acquisition deals and massive IPOs. But, there's a crop of startups that have something other than a massive payday in mind.

Nonprofit startups are not novel. In fact, Y Combinatorwelcomed nonprofits into its program starting at the end of 2013. However, it seems that there are more now than there have ever been, and they are gaining traction by using technology and innovation to solve real-world problems and by adopting many of the core tenets of the startup methodology.

One of the first decisions you'll make when you start a company is what your goal will be, whether that is to make money or to use your organization to raise awareness about a certain issue, like social justice, and cause positive change.

But there are many other differences between founding a nonprofit startup and a traditional startup that you'll face along the way. Here are some of the main ones.

Differences in fundraising

A huge aspect of building a startup is raising money, but access to this capital is different for for-profit and nonprofit ventures.

Brett Cenkus built six for-profit startups and is now working on a nonprofit. From his experience, there is more capital available to for-profit startups from a wider variety of investors. Friends and family are often excited by the idea of striking rich, and the venture capital industry is continuing to see strong investments.

"For non-profit ventures, options are far more limited," Cenkus said. "There is a little grant money available, but beyond that you're left to pitching wealthy individuals who have to believe strongly in your cause. This is somewhat odd since charitable giving dwarfs the size of the US venture capital market."

So, nonprofits can't take a traditional "investment" in the same way that a for-profit startup can. On the flip side, for-profit businesses can't offer the tax benefit that nonprofit donations can, said Leslie Bocskor, an angel investor and chairman of a non-profit organization.

In addition to capital, there are other resources that won't be as available to you in a nonprofit. While there are some traditional startup accelerators that are taking in nonprofits, there are far fewer programs dedicated solely to the development and growth of nonprofits.

"Funding and/or an accelerator program allow a founder to create the infrastructure necessary to grow really quickly than they otherwise would," said Dani Pascarella, founder and CEO of Invibed.

Differences in growth

Growth is paramount in any business venture, but the way it is measured in for-profit companies can be different than how nonprofits measure growth. According to University of Michigan professor Kentaro Toyama, for-profit companies have to prove one thing — whether or not they can make money. Scalability is desirable for for-profits startups, but for nonprofits it's a little trickier.

"For-profits have a clear metric for measuring success," Toyama said. "Nonprofits have to be smart and creative to demonstrate impact."

Money coming in is still an issue for nonprofits, as you will likely need to seek capital through traditional fundraising. But to do that, you have to demonstrate the impact of your nonprofit and the vision behind it. For discerning donors, you'll need to demonstrate the cost-effectiveness of the impact as well.

Attracting talent is another aspect of growth that's different between the nonprofit and for-profit world. Right now, tech talent is in high demand and for-profit startups can likely offer better pay and equity. With a nonprofit, first and foremost, you'll need to find people that are passionate about the vision of the company.

Try reaching out to existing nonprofits in a different vertical. See if they know of anyone looking for work. Also, look for nonprofit-related conferences in your area and make sure your company is represented there. When you do make an offer, make sure you do your market research on similar positions and offer a fair, but realistic salary, because you will have more people to answer to for what you're paying employees.

"With a nonprofit, salaries of officers, directors, and key employees are public information," Pascarella said. "There is often pressure from donors to keep salaries low, as they want to be sure that the money they donate is going directly to the cause and not towards hefty salaries."

Differences in expectations

Possibly one of the biggest differences you will notice in founding a nonprofit and for-profit company is the public perception of your company and the expectations for your startup.

It starts with the vision. For-profit startups have a reputation as being iterative, meaning what they are working on now might not be representative of what the company looks like in a year or so. That's expected of a for-profit startup who may be chasing a better market opportunity, Cenkus said, but it doesn't work that way for nonprofits.

"I don't know how someone launching a non-profit would make a 180 degree pivot with any credibility," Cenkus said.

The culture of the company will also be subject to a different scrutiny in a nonprofit startup. According to Toyama, for-profit startups can be brash or over promise without too strong of a repercussion, but that can be damaging to a nonprofit.

"Brashness is not a virtue for non-profits, since it can cause harm or disappointment to impact beneficiaries who are often in vulnerable positions — as they say, first do no harm," Toyama said.

When you look at who the companies are beholden to, you will notice that for-profit startups typically have to answer to shareholders and customers, while nonprofits tend to be much more public-facing. Because of this, Bocskor said, nonprofits are held to a higher standard and must deal with four key issues in that regard.

    1. Transparency of accounting, because all filings are public record
    2. Disinterested board control
    3. Tightly regulated missions
    4. Strict adherence to the rules to maintain nonprofit tax free status

    The journey taken by a nonprofit founder might not be any more or less difficult than that of a for-profit founder, but you will have a very unique set of challenges before you. Hopefully this gives you a clearer picture of what life is like for a nonprofit founder.

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    About Conner Forrest

    Conner Forrest is News Editor for TechRepublic. He covers enterprise technology and is interested in the convergence of tech and culture.

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