I participated in the MaRs entrepreneurial toolkit program last fall as part of a cohort of 24 like-minded business people. The group was made up of a mix of people from different types of companies; with heavier emphasis on companies that were focusing on ITC, Health and Social Impact. During the more business focused sections on marketing, sales and finance, one of the people involved in a not-for-profit company was struggling with the idea of focusing on making money. For her, it seemed at odds with the idea of having a primary focus on having a social impact.
This opened up a wider group discussion on what it means to be a sustainable company, regardless of the type of company you are building. And then more specifically, what does it mean to be a sustainable not-for-profit. One of the instructors provided an interesting look at the question.
A sustainable company is a company that can stay in business because it can predicable and consistently bring in more money than it is spending.
In the case of a for-profit company, this surplus in revenue over costs is either invested back into the company for further growth, or is realized as a profit and paid out to shareholders as a dividend.
In the case of a not-for-profit company, there are no shareholders by definition and any surplus will never be paid out as a dividend. If there is surplus money over costs, then it is always re-invested back into the company so that it can extend the good works that it does.
The bottom line is that being a not-for-profit does not mean that you run at a deficit.
Funny enough, of the three types of companies that were in the mix, it was the companies concerned with Health innovations that often can’t avoid taking time to reach a sustainable business model. Many Health innovations are actually inventions that take time to build or there can be a need to spend time on pre-market trials. These companies often need to exist on external investment for several years before they see any real business profit. It was this group that struggled more with how to apply lean startup recommendations for finding product-market fit. You don’t do customer discovery interviews when building a new heart pump!
I find this interesting, having lived through the technology sector’s up and down road towards evolving an understanding of what sustainability means. In the early days of tech, it almost seemed like we were for-loss companies. Startups used the idea of a drive for innovation as an excuse to attract and spend VC money on building product, often experiencing years of unprofitability until either they magically found their market, were bought by some other larger company or went out of business.
Another aHa moment from this line of reasoning is the idea that even in a for-profit company, a decision can be made to feed this money back into the company to build more growth. Often, in order to become sustainable a company has to create a trajectory of growth; because in order to be consistently profitable you have to be growing. To not be focused on growth, is to invite the occasional inevitable ebb. A number of the larger innovative tech companies don’t pay out stock dividends; yet their revenues increase and their stock prices climb.
So why is this concept important to Not-for-profits?
Firstly a not-for-profit needs to find a business model that is sustainable like any other company. They need to bring in more money than their costs. Either by finding a consistent source of funding and donations; or if they are providing a discounted product or service close to cost.
And most importantly, for a not-for-profits, striving to make a surplus means that it has more money to invest back into and expand on its mission. This is a drive, not for profit, but for sustainable growth as well as to protect their mission by remaining a going concern.