Nonprofit Raises $7.6 Million in Venture Capital

The for-profit GOOD buying the nonprofit Jumo has gotten a lot of press, including the New York Times. While the unusual (but perfectly legal) transaction has stirred up some debate about what it all means, I think the far more unusual and interesting story is the deal to transform the nonprofit CouchSurfing into a for-profit so it can take on $7.6 million in venture capital.

According to Forbes, the nonprofit CouchSurfing, which seeks to connect global travelers with locals through arranging a free place to stay, has changed from a nonprofit to a for-profit B Corporation and received venture capital from Benchmark Capital and Omidyar Network.

I have so many questions, I better just get them out:

• Helping people find a free couch to crash on is a nonprofit activity?
• The organization barely has any revenue, but Omidyar was more interested in providing for-profit venture capital than a nonprofit grant (Omidyar does both kind of funding)?
• Stories abound of a new tech bubble in privately held companies, but are venture capitalists seriously now willing to invest in “not for profits”? Aren’t there enough money losing “for-profits”?

Whew. OK, now that I got that skepticism out of the way, let’s look at the broader implications.

According to the co-founder of CouchSurfing, the deal is about maximizing the organization’s social mission:

“The non-profit structure is not ideal in enabling innovation to occur in terms of regulatory oversight and various auditing requirements,” says Daniel Hoffer, CouchSurfing’s co-founder turned President and CEO. “B Corporation status allows us to take investment money and be nimble and flexible while sticking with our social mission.”

Hoffer goes on to say that the first order of business will be “aggressive hiring” to better serve the organization’s three million members. Now if you take as a given that CouchSurfing is serving a social mission, then clearly suddenly have the resources to engage in aggressive hiring to serve their rather large membership is a very good thing.

I’m struck by this tidbit in the Forbes story:

“The news is timed one month after another couch surfing website, Tripping.com, announced it had secured over a million in seed funding from Quest Venture Partners and a group of undisclosed angel investors. Tripping.com only claims “thousands” of members and one has to wonder whether CouchSurfing developed a sudden inferiority complex upon hearing news that its smaller, new, for-profit rival was suddenly flush with cash.”

Inferiority complex? Or did CouchSurfing just make the completely rational decision that they’d be crazy to remain a nonprofit if the for-profit capital markets were better able to provide them the money they need to grow and thrive?

All it really means to be a nonprofit is that you agree to never distribute excess resources for the personal use of the people who contributed the capital to create the business. In exchange, those contributions are deemed tax deductible. For-profits are not restricted from having a social mission and the language is so loose to qualify as a nonprofit that almost any “mission” can qualify. For instance, the nonprofit National Cattlemen’s Beef Association lists their primary “mission” as “increasing consumer demand for beef”.

Now switching between tax statuses or letting a for-profit buy a nonprofit raises all sorts of important questions. But at the end of the day, all of the concerns get down to questioning about whether a tax deduction was granted for a charitable gift that resulted later in producing a profit for someone.

Never mind that the government provides tax incentives for all sorts of for-profit activity (and all money losing for-profit investments are tax deductible), I just don’t find the risk that someone, somewhere might get a tax deduction for something that ends up turning a profit as all that disturbing. If that’s the risk, I’ll take the potential return of certain nonprofits gaining access to significantly more resources so they can accelerate their social mission.

Just as their are rules about how for-profits and nonprofits must conduct themselves, it is a given that we need well thought out laws to govern how for-profits can buy nonprofits or nonprofits can become for-profits. Those laws already exist, but innovations like B Corporations that are meant to strengthen and improve these laws should continue to be expanded.

Look, I don’t know if CouchSurfing’s “social mission” should qualify as a tax exempt nonprofit. But I know that nonprofits are starved for growth capital. The true distinction between a socially driven business and a profit driven business isn’t about their tax code election. The distinction is about the collective decisions the organization makes over time and who those decisions are intended to serve – public or private benefit.

We’re going to see a lot more deals like these over time. I’m all for vibrant debate about whether the deals are good or bad for the public, but let’s be sure we debate the true merits of various approaches to furthering the public good instead of wringing our hands about the surface level tax code issues.