After a few years working in management consulting I moved to the nonprofit sector, wanting to use my passion for business to do some good. My years in the nonprofit sector included three years as COO of College Summit, a nationally-recognized model that has helped lift some 40,000 students in low income high schools into college.
Because of my success in the nonprofit sector, when I set out to start my own enterprise focused on community redevelopment and assisting first-time homebuyers in northeast Washington D.C., my colleagues, family and friends expected me to stay on the nonprofit track. But they were wrong.
My experiences at College Summit and elsewhere led me to believe that our current thinking around "for-profit" and "non-profit" unnecessarily polarizes organizations.
Either an enterprise was organized as a profit-maximizing organization, with a focus on selling to consumers, or it was a nonprofit which provides consumers with a good or service at little to no cost.
Both approaches have positive elements. The profit-focused private sector harnesses the power of market dynamics and succeeds or grows only when it provides goods and services for which consumers are willing to pay. The non-profit sector, meanwhile, harnesses the power of our nation's wealth and charitable consciousness. However, the dichotomy of our existing structure also has negative, albeit unintended consequences. It creates a culture that on one end can focus on profit at the expense of ethics and can ignore the broader implications of the work. On the other end it creates an entitlement/charitable culture that does not adequately value the contribution of the consumer.
What did I find wrong with the traditional nonprofit model? It doesn't allow for sufficient scale and it often sends the wrong message to beneficiaries.
The problems we are seeking to solve are large. But charitable contributions are finite, small enough that they don't allow innovators to grow a new model or idea to meet demand. Nonprofits looking to grow typically turn next to government, which controls the bulk of social service dollars but presents a unique set of challenges: it often requires politically motivated growth; granting and procurement can be highly volatile; and the added bureaucracy can undermine the entrepreneurial culture that made the organization successful in the first place.
Finally, third party funders, whether government or private philanthropies, often require non-profit providers not to charge for their products or services. While well meaning, philanthropic foundations perpetuate the assumption that "consumers" or "clients" do not have the resources to support the services needed. Consequently there is a disconnect between where resources come from to produce impact, and who the beneficiaries of that impact are. Social innovations that grow are not necessarily those with the greatest "client" impact. Instead, they are the organizations led by the social entrepreneur who are best able to garner resources and effectively tell their story.
Even when it is "allowed" non-profits might look to their ability to extract some nominal fee for service revenue only after first looking at third party resources available.
I suggest that to fully maximize our potential for impact, the sequencing needs to change. Nonprofit entrepreneurs need to first asses the issues at hand, but they then should asses the clients' existing capacity and willingness to pay. The organization would thus be looking first to the recipient of the goods or services as a potential consumer--not as a beneficiary of a charitable or government third party payer.
Indeed, I very much consider our work at the Menkiti Group to be business with a social purpose. At The Menkiti Group, we believe "housing is a fundamental social good," The Menkiti Group, our community based development company is focused on enhancing the fabric of life in America's urban communities through the strategic development, management, and sale of middle market residential and commercial property. We have entered this market and have profitably driven mission-focused activity in the single family rehab space. We provide a high quality, affordable renovated home to qualified first time home buyers who move in and as homeowners become integral parts of the neighborhood even more greatly invested in its success. By purchasing and renovating vacant, abandoned and foreclosed properties, we stabilize neighborhoods, reduce blight, and create jobs.
I created The Menkiti Group as a for-profit because I believed that the added pressure forces our firm to develop in a more sustainable manner and to better serve and better understand our clients. As a for-profit company dependent on earning all revenue from our customers, our firm's survival does not depend on our ability to influence a third-party payer but on our ability to acutely respond to consumers' needs in an efficient manner.
From a mission standpoint, I believe "customer-first" funding models are more effective because they tap the existing assets of the individuals and communities being served. These models allow us to leverage their financial and other resources for more sustainable outcomes. Traditional charity often meets immediate needs but too often fails to enable people and communities to solve their own problems over the long term. The poor seek dignity, not dependence.
The current capital markets have a very difficult time dealing with organizations that don't fit nicely into the profit maximizing or charitable boxes. I cannot count how many times I have been laughed out of a private equity firm the minute I mentioned that our organization had a social purpose and mission beyond just making a profit. The mere existence of a social purpose, even with a demonstrated track record of attractive financial returns, was considered a liability. Potential equity and debt providers thought it irresponsible and foolish to have a focus other than maximizing one's profits. On the flip side we have been unable to get significant interest from traditional philanthropic or charitable sources who find our for-profit status an immediate non-starter.
Hybrid funding models and socially conscience business models are not new ideas. But they are different enough to limit their effectiveness in practical application until we determine the most effective mix of the three funding sources--client fee-for-service, charitable third party payers, and government third party payers--based on the nature of the issue one is trying to solve or of the innovation itself.
When there is high willingness on the part of customers or clients to pay, especially but not limited to the most obvious scenario of low third party willingness to pay, then we should consider charging clients.
I suggest that a client-first funding model is one answer to this question that merits further consideration. Seeking first what assets the client has to contribute to his or her own social progress is not only financially feasible, as demonstrated by the experience of The Menkiti Group and the countless efforts happening outside the U.S., but fundamentally a stronger, more effective programmatic model for social betterment as well.
Bo Menkiti is the founder and CEO of The Menkiti Group. A cum laude graduate of Harvard University, Bo was awarded the Houston and Morland Awards for Public Service and Social Action, as well as the City of Cambridge's Mack Davis Award for the highest service to the Cambridge community. Bo currently serves on the boards of a number of non-profit organizations dedicated to uplifting youth and developing inner city neighborhoods.
