Startup Genome began as a side project two years ago. To save money and move quickly while we proved that there was demand for Startup Genome, we ran everything through an old LLC using a simple DBA.
During those two years, we had an ongoing conversation about converting to a nonprofit if the project took off. What were the advantages of being a nonprofit? Would organizations be open to sharing their data with us if we remained a for-profit? Could we attract the same degree of talent as a nonprofit? Do we want to give up the possibility of selling this thing someday?
Ultimately, I believe that the decision to be a nonprofit is more about marketing and the way that you discuss your work with the public and your supporters.
But a lot more thought goes into it than that. We decided to go the nonprofit route. For those of you faced with the for-profit versus nonprofit decision, here’s our thought process:
Unlocking a new source of funding
The most obvious benefit to being a nonprofit is that it allows you to collect charitable donations (which are tax deductible for the donor) and it makes it much easier to qualify for grants.
If the only reason you’re considering converting to a nonprofit is to qualify for grant money, consider this: the Kauffman Foundation has awarded funding to Angel List and TechStars – both of which are for-profits. Not all grantors require you to be a nonprofit to receive grants. To land significant grants, you’ll probably need that 501c3 status, but you might be able to pursue smaller grant opportunities and remain a for-profit if your company’s mission aligns closely enough with that of the grantor.
We want to attract the best people to work with us at Startup Genome. How can we compete with for-profit startups offering stock options? As a nonprofit, there is no ownership, no equity, and no cash windfall for founders and early employees if the company has an exit.
Two nonprofits that seem to have no problem recruiting top-notch talent are Startup Weekend and charity:water. They do three things right: culture, identity and salary. When I meet someone that works at one of these companies, I tend to think “this person is probably legit and likely a lot of fun too.” That thought enters my mind because the teams at Startup Weekend and charity:water have a reputation of being both effective and fun. Their employees are proud to work there not just because they identify with the company’s mission, but because they have deep friendships with their coworkers and they genuinely enjoy being at work every single day.
And they don’t pay ridiculously low salaries. They aren’t paying above market rates either, but they pay their employees enough so that they don’t have to worry about money. If an employee is worried about making rent next month, they tend to be less happy and less productive. As a nonprofit, there’s no reason you have to pay the low salaries people expect at nonprofits.
There’s nothing about the Startup Genome website that couldn’t be replicated. What can’t be replicated is the Startup Genome curator network. We rely on volunteers to curate the data for the cities in which they live and work. Some of our curators make edits every single day. It’s been much easier to grow our community of curators as a nonprofit than as a for-profit. Our purpose in life is to help our volunteer curators be better community builders. We build tools to make their lives easier. We tell their stories in our weekly community highlight series. They contribute thousands of hours of work to help improve the Startup Genome dataset. We can’t imagine using their selfless work to profit personally.
We are constantly asking organizations to share their data with us. I find this reality a little odd, but when we were a for-profit, people tended to be less open with their data, while as a nonprofit, people have been much more willing to send us their data. Thomson Reuters shared data with us from their MoneyTree report – something they wouldn’t have been as eager to do had we been a for-profit. Being a nonprofit makes partnership discussions much easier.
Nonprofit ≠ no revenue
Being a nonprofit doesn’t prevent us from earning revenue. We are testing a subscription-based product that we plan to market to universities, governments and other nonprofits. We can do that. We can build revenue streams that help sustain us. We can scale our products globally. We can compete against for-profit companies with similar offerings. The only thing we can’t do is use excess profits to make a dividend payment to employees. All profits must be put back into the company. We’re okay with that.
If you are facing the nonprofit versus for-profit decision and you want to get my take on your situation, email me at firstname.lastname@example.org.