For-profits vs. Nonprofits

One of the biggest difficulties around the philanthrocapitalism debate is what the word even means. There is a branch of philanthrocapitalists who believe that for-profit business models can cure all the world’s ills. That every social problems has a profitable solution.

I think those people are deeply wrong.

There’s another branch of philanthrocapitalists who believe that philanthropy and the nonprofit sector can benefit greatly by using a financial markets approach to understanding nonprofits and to funding their operations.

This is the camp I fall in.

There is a set of simple equations that are important to understanding the difference between for-profits and nonprofits.

For-profits take labor and capital as inputs into an organization and produce financial profits as an output.

Nonprofits take labor and capital as inputs into an organization and produce social impact as an output.

To me, this implies that there is a good deal of overlap between understanding how nonprofits and for-profits utilize inputs. But there is relatively little overlap in understanding their outputs. This is why there is so much theoretically debate around measuring impact. There’s no good reference point in the for-profit world. Nonprofits exist for a fundamentally different purpose than for-profits. When philanthrocapitalist types demand that nonprofits become financial sustainable, I think they’re missing the point. The real point is to achieve impact. Achieving financial sustainability is just a fancy way of saying that nonprofits need to find a systematic way to secure the inputs they need to operate. But first nonprofits need to determine if they have a system in place to efficiently turn inputs into outputs (impact). If they do (and I believe many do not), then securing sustainability is key.

But sometimes nonprofits will find ways to become sustainable in a way that impairs their ability to achieve impact. Maybe a nonprofit that provides housing for low income families realizes that they could increase rents and become financially sustainable. But in all likelihood, doing so would reduce impact. It would reduce the degree to which the nonprofit was helping the cause of providing housing to low income families.

The interesting thing is that for-profits actually face the same problem. Let’s say a for-profit isn’t taking in enough revenue to pay their bills. They need more revenue so they slash the price of their product by 50%. This may very well have the impact of increasing demand so much that they sell tons more product and revenue goes up. Except profits go down. The for-profit is losing money on every sale and while they’ve increased the “inputs” available to the firm, they’ve reduced their “output” (plenty of for-profit firms have made this mistake, seeking to maximize revenue instead of maximizing profits).

Nonprofits are firms that transform capital and labor into social impact. While there are interesting opportunities for for-profits to create social impact as well as profits, the majority of issues that nonprofits seek to work on will not provide profit opportunities to the firms that are maximizing social impact. There may be ways that a firm can produce both a profit and social impact, but in most cases the firm will realize that by foregoing profits they can increase social impact.

What I think is most critical is that we begin to understand that the work of producing social impact is just as worthy as the work of producing profit.


  1. Sean:
    Bravo! Wonderful reasoning – thank you!

    I might take your last line one further, though. Instead of the assumption that “…the work of producing social impact is just as worthy as the work of producing profit” – What if social impact, in the long run, is really MORE worthy?

    We all know folks who have plenty of money and none of the rest of what makes life worth living (the social impact stuff!), who live miserably unhappy lives. Where “profit” is the end result for a business, in our personal lives (and the lives of our communities), it is merely the means to more significant community results.

    It happens I posted about the balance between financial sustainability and more “sustainable” organizational sustainability last week at my own blog, so that thinking is fresh in my mind. And it comes back to precisely what you shared above – sustainability is not about the means, but the ends.

    Thank you as always for wonderful food for thought!

    (Sustainability post is here, for those interested:

  2. Thanks Hildy, I know you haven’t always been a fan of my ideas, so it is nice to hear you agree on this one. I think everyone on the philanthropy side thinks capitalists just care about profit and every on the capitalist side thinks the philanthropy side doesn’t understand how to financially manage themselves. I think the idea of blending the two knowledge sets is very useful, but most people see the word philanthrocapitalism and think that it means making philanthropy profitable or making capitalism all warm and fuzzy. In fact is should dictate a “third way” approach.

  3. George Overholser says:

    Thanks for your always-clear posts, Sean.

    I’d like to debate you a bit on the simple premises behind this one, though.

    You wrote:

    “For-profits take labor and capital as inputs into an organization and produce financial profits as an output.

    Nonprofits take labor and capital as inputs into an organization and produce social impact as an output.”

    I cannot agree that the contrast is anywhere near that stark. As I have heard Clara Miller say: “Many nonprofits are being called social enterprises. But that doesn’t mean that for-profits are ANTI-social, does it?”

    It is true that the pursuit of profits is why many entrepreneurs choose to build a for-profit firm. But once the firm is built, customers (aka members of “society”) are the ones that determine the firm’s fate.

    True, a small portion of the customers’ money is made available as a reward to the entrepreneurs who took the risk to build the firm, but predominately the money goes towards producing goods and services that the customers couldn’t otherwise get and that they deem to be of social value (to themselves!). Overwhelmingly, in our capitalist society, this is how social value is generated.

    So I don’t buy the idea that nonprofits exist to produce social impact whereas for-profits do not.

    The problem, perhaps, is that there are types of social impact where the for-profit model simply breaks down. Nonprofits are an alternative type of firm that help to fill in for these market failures.

    For example, there is “market demand” out there for firms that do a particularly good job at turning money into tutoring sessions for other people’s kids — not for our own kids (Kaplan already does that in a for-profit mode) — but for other people’s kids.

    Why does the for-profit system so often fail to serve this market? One big reason is that the “market demand” in question involves goods and services that are not experienced directly by the people who pay for them. Thus the firm needs to be not only a compelling producer of goods/services, but also an “agent” that is trusted to act according to the customer’s (funder’s) wishes, in a situation where the customer does not experience the outcomes first hand.

    For-profit firms are tough to trust as agents. So tough to trust, that if built they would fail. Knowing this, entrepreneurs don’t even try to build them. Despite the (altruistic) demand, the market fails to respond.

    This is one place where nonprofits shine. Just like a for-profit, they are “in the business” of turning money into goods/services that have social value. But unlike a for-profit, they can be viable in a trusted agent role. Were there not a nonprofit designation to signal this trust-worthiness, the firm would not have been built and the market for altruism would not have been served.


    Among for-profits, the money used to build firms is inextricably tied to the equity system, which, in turn, is inextricably limited to firms where profit-making is a motive.

    Presently, there is no such thing as nonprofit equity. So what is the money we use to build nonprofit firms? To me, that is a central question to be explored among so-called philanthropcapitalists. (And we’re making great progress!)

    Thanks for allowing me to grapple with you as we all struggle together to make sense of this very complex and important topic.

  4. These are all good points George. I agree with your argument. I do believe that for-profits produce social good and I believe that nonprofits produce “financial good” (ie. nonprofit revenue represents something like 10% of GDP and provide many, many jobs). But for-profits are set up primarily to produce profits and nonprofits are set up primarily to produce social impact.

    The point of my post was not so much to differentiate between the two, but to point out the similarity in that both types are organizations that use labor and capital as inputs. This is why philanthropy and capitalism dovetail together (they share 50% of their basic equation in common).

    Yet they also differ in their outputs and this is where the philanthrocapitalist crowd who thinks there is a for-profit solution to everything gets things wrong.

  5. The Debate will continue but there seems to a recognition by many businesses now that social responsibility must be part of their corporate identity.

    This cartoon link is a college senior point of view on the difference between the two goals.

  6. Jason Dick says:

    Great thoughts. I think that we are in an exciting time for both philanthropy and business. I am not sure quite where I land on the philanthrocapitalism idea yet but I am excited that the industry has grown large enough for it to even be a question.

  7. Thank you so much for your post on the ongoing debate of capitalists joining, or as some people believe, taking over the non-profit world. At the start of 2008, the United States claimed to have 1,000 billionaires and worldwide there are a total of 2,500 of them. I agree with your parts of the argument and you did make me rethink the debate in general when you described there were two different types of philanthrocapitalists. I would have to say personally I fall into the second category you described yourself in. It is hard to really take a side when both non-profits and profit organizations responsible for social change, regardless of the amount of money spent to create this change. But money does talk in some cases. The amount of charitable giving in the United States has more than doubled from $13 billion in 1996 to nearly $32 billion in 2006. So, at some point I do think that it is inevitable for these worlds, the for- profits and the non-profits, to collide.
    In the book Philanthrocapitalism by Green and Bishop, I believe the authors are trying to explain by using philanthrocapitalism as an example is a way for the corporations of the future to become a trusted and active member of the world society regardless of whether it is for a product or service they produce or perform. I can’t help but think that the act of labeling the concept has caused half the argument given that this topic seems to be changing day to day. I personally think this debate opens up a space for ideas and reinforces that there are other ways to begin to solve the world’s problems. I do think that it is counter productive to speak badly of those whose who have donated their time and effort. I do see major benefits in the emergence of philanthrocapitalism but I am not sure if the definition of capitalism prompts a negative opinion of this idea. I feel that the word philanthrocapitalism begins to mean much more than adding business objectives to the world of nonprofits. I think the question isn’t what can philanthropy learns from business but rather, what can philanthropy learn from itself, from business, from government?