Idea in Brief

The New Landscape

There is no longer a clear line between nonprofit and for-profit enterprises. Nonprofits now offer products that compete with those of the best for-profits, and for-profit ventures, often backed by impact investors, can deliver as much social value as traditional charities.

The Dilemma

Many founders of social enterprises are so hungry for capital that they base decisions about which legal structure to adopt on whether the first major check comes from an investor or a grant-making organization.

The Better Way

To guide their choice, founders can ask: Is the market ready for a for-profit solution? Are customers willing to pay? Where is the available capital? What will attract the talent we require? Once they pick a legal structure, they should stick with it; ventures that try to change midcourse often flounder.

There once was a time when “start-up” clearly referred to a new venture that sold a product, looked for investors, and aimed to turn a profit. A nonprofit was a completely different kind of enterprise—one that was funded through the largesse of donors, gave away its offerings, and had relatively few similarities to a traditional business. In recent decades those lines have blurred. Many nonprofits now provide products or services that compete with those of the best for-profit companies. Meanwhile, for-profit start-ups, often backed by “impact investors” who care about more than financial returns, can do as much good as traditional charities. As a result, when a socially minded entrepreneur starts an enterprise today, it’s often unclear whether it will ultimately be for-profit or nonprofit.
A version of this article appeared in the May–June 2023 issue of Harvard Business Review.
Read more on Nonprofit organizations or related topics Social enterprise, Start-ups and Entrepreneurial legal issues