the question remains: if Guided Consumption is a more effective means of funding charities than direct donation, why has this not been more fully explored already? I suspect that the reason stems from a deep-seated psychological separation between the way that people think about the business world, essentially a rather competitive, dog-eat-dog mindset and the kinder, more magnanimous mindset involved in charity work.
I think you’ve got a great idea and I hope to see it work. The default answer—the obvious answer—to the question you raise is that a for-profit structure provides a fitness advantage in the Darwinian environment of business competition. The burden of proof sits with youto disprove that. That would mean coming up with a compelling theory why every sufficiently large successful corporation has, to date, pursued a for-profit structure; and because of the sheer lopsidedness of the numbers, that’s a much higher burden of proof than you meet, I think, with the answer you provide here (an appeal to our intuitions about widespread beliefs without any grounding in, e.g., psychology or sociology research).
A related question: what’s the largest public benefit corporation? Why isn’t it bigger? Is there any evidence that any of the FAANG/Fortune 500 companies has considered shifting gears to giving away 100% of profits to charity? That would probably cause a shareholder revolt, but theoretically, someone could take a large company private (a la EM’s bid for Twitter) and then totally change its governance and profit distribution structure. Perhaps we want to explain the fact that this hasn’t been done as a collective action problem? Or has it been done?
Again, interesting idea, I’ll be stoked to see it succeed!
I suspect the main reason is just that regular for-profits can attract far more investment, because they attract investment from investors who want the profits for themselves, not given away to charity. This allows them to scale faster and bigger, and for more of them to exist. EDIT: And then economies of scale or other benefits from size (recognition, network effects) may favour them further.
If something is a mostly or completely non-profit company but takes (or starts to take) private for-profit investment, two things could happen to cause the non-profit shares to remain low in total value:
It could scare away for-profit investment, because investors may be skeptical that the company will prioritize profits over helping others or being ethical. Then the company struggles to scale.
The company attracts significant for-profit investment and scales, but then becomes a primarily for-profit company.
Also, with easier access to financial capital, for-profits could potentially sell below cost of production for longer than non-profit companies to drive out competition and increase their market share.
You could also just compare the size of all philanthropy vs all investment. The funding available for non-profit companies would be relatively tiny, so we should expect few such large non-profit companies. These non-profit companies would be funded initially or acquired through philanthropy. There’s just much less money for this, and this is just one competing use of philanthropic funds, with some alternatives being to donate directly to charitable work or invest more broadly in the market.
The firms would not be looking for (much) investment on behalf of typical shareholders. So your numbered points are immaterial… PFGs are 90%+ charitable equity.
Your characterization is a bit off… These Profit for Good Companies are not “nonprofit. ” They exist to make profit, but for a specific kind of shareholder.
You’re right… Currently PFGs cannot get adequate investment because this isn’t on the menu for philanthropists as means to multiply their donations. But if philanthropic money could be multiplied by leveraging consumer (and other economic actor’s) discrimination in favor of charities, there would be ample incentive to invest… Philanthropists want to multiply the funds that are available and leveraging the good will of economic participants gives them that opportunity… If people can buy your laundry detergent for the same cost and help fight malaria, they will. The fact that we are not trying to give them this power is foolishness.
Anyone would rather buy in a way that benefits charities rather than traditional shareholders, and equity being held by a particular kind of entity does not necessarily increase costs or otherwise compromise a product.
You’re right, capitalizing PFGs would compete with direct donations and “more broad investment.” In these competing cases, you’re leaving money on the table because you’re failing to leverage the good will of consumers and other economic actors.
The bottom line is that PFGs, if capitalized, have all the advantages normal firms do, plus an extra advantage in that economic participants value their success more than competitors. The only thing keeping such firms from thriving and offering a huge multiplier opportunity is that we haven’t created an environment of public awareness of the opportunity (which is what my nonprofit is trying to do).
The problem is “if capitalized”. Even with widespread awareness, they could still be at a disadvantage for raising capital and scaling, because the pool they’re targeting (philanthropic capital) is much much smaller.
Yep. Acquiring capital without selfish profit motive is a key challenge.
However, if there is an environment in which PFGs enjoy a large advantage and this is clear to the relevant parties, there should be no problem raising funds through philanthropists and debt.
You can frame it as
F(C) = F(K) +P
F(C) is a firm capitalized mostly by charitable equity
F(K) is an identical firm capitalized by private equity
P is the monetary value of positive discrimination in favor of charities
If we have an environment in which P is high enough (I think this could be true in a lot of lower differentiation products), a PFG could probably be capitalized wholly by debt...
If PFGs offer a high enough value proposition (and this is clear to the relevant parties), the financing issues will work themselves out.
Thus, the question is, are the costs of creating the environment we’re looking for worth it? I think with the amount of money on the table, it is definitely worth determining what P values are possible in different contexts because money in the hands of effective charities is such high impact.
Thanks for raising these points Seth. I agree that the burden of proof is higher than what we currently have. This paper and the companies that some of us are building are just the start of proving that this might someday happen.
I think it’s critical to note that guiding companies are basically for-profits. There’s nothing distinguishing them from for-profits except that the profits go to charities and that the investors are philanthropists buying out companies or funding new guiding company initiatives.
The good news is that there’s one large successful case with Newman’s Own, who have donated about 570 million USD to charities and give away all of their profits. There’s more smaller projects that are successful and donated millions, but nothing that I know of that’s close to Newman’s . I see one big difference between Newman’s Own and the other initiatives that are less successful: money.
I hired a research intern to validate that and he’s now drafting up his thesis on the economic sustainability of this business model (I can share it here once it’s done), and the main conclusion is that the issue with this is money. If you have someone like Paul Newman funding your guiding company there’s no reason it can’t be big, and that turns out to be true, because Newman’s Own is a multi-billion dollar company in a very competitive space.If the wealthiest philanthropists put their weight behind this and “invest” in the next best guiding companies, I don’t see why these companies cannot be the biggest in the world. With the money you can hire the best team, and the best teams build the biggest companies. Currently, the infrastructure (venture capital, stock markets, etc.) are lacking for guiding companies, but these can be built. This will take a long time.
To answer your other questions, I have no evidence that any Fortune 500 company tried this, but I don’t think that kind of initiative would be public. You could argue that Warren Buffet, who intends to give away almost all of his wealth, is buying and investing into companies to generate more profits that he can give away to charities. But that’s indirect. Why hasn’t he bought a company and turned it into a guiding company? Twitter and EM are an interesting example as well. Maybe EM would use Twitter to fund his next EA endeavor (e.g. backing up humanity to another galaxy). Would Twitter be a guiding company in that case?
Thanks for the thoughtful reply—I think that I should have specified ‘shareholder-corporate-governance-structure for-profit’ rather than just ‘for-profit’ 😃 and once we get to that level of granularity, maybe it is plausible that alternatives haven’t abounded simply because of a lack of imagination!
Newman’s is indeed a nice counter-example.
And FWIW, I am a coworker of Jasper’s at Global Income Coin, and we’re trying to do something exactly like what you propose but with currency...so I really hope it’s viable!!
Regarding the burden of proof… I would think that such a burden is a function of the purpose that it serves. In the criminal justice system, we require a very high burden of proof, “beyond a reasonable doubt”, because of the enormous cost of a false positive: depriving an innocent person of life and/or liberty. In the civil context, a mere preponderance (greater than 50%) as if it is more likely than not that one has violated another’s rights and harmed them, they should be compensated commensurately, even though there may still be a significant chance that we are wrong.
Regarding the burden of proof here, in considering whether and to what degree one should support a project, one should consider the probability associated with different outcomes and the utility associated with said outcomes. This is why even if you are very skeptical of Guided Consumption, supporting it, especially at early stages, is justified.
I am interested in learning more about GIC and will very soon be taking a look at the project. I love the idea of global UBI and very much want to work toward a world in which everyone has a chance toward living a life of dignity and having a chance at his or her dreams. Perhaps there are some opportunities for collaboration here!
I think you’ve got a great idea and I hope to see it work. The default answer—the obvious answer—to the question you raise is that a for-profit structure provides a fitness advantage in the Darwinian environment of business competition. The burden of proof sits with you to disprove that. That would mean coming up with a compelling theory why every sufficiently large successful corporation has, to date, pursued a for-profit structure; and because of the sheer lopsidedness of the numbers, that’s a much higher burden of proof than you meet, I think, with the answer you provide here (an appeal to our intuitions about widespread beliefs without any grounding in, e.g., psychology or sociology research).
A related question: what’s the largest public benefit corporation? Why isn’t it bigger? Is there any evidence that any of the FAANG/Fortune 500 companies has considered shifting gears to giving away 100% of profits to charity? That would probably cause a shareholder revolt, but theoretically, someone could take a large company private (a la EM’s bid for Twitter) and then totally change its governance and profit distribution structure. Perhaps we want to explain the fact that this hasn’t been done as a collective action problem? Or has it been done?
Again, interesting idea, I’ll be stoked to see it succeed!
I suspect the main reason is just that regular for-profits can attract far more investment, because they attract investment from investors who want the profits for themselves, not given away to charity. This allows them to scale faster and bigger, and for more of them to exist. EDIT: And then economies of scale or other benefits from size (recognition, network effects) may favour them further.
If something is a mostly or completely non-profit company but takes (or starts to take) private for-profit investment, two things could happen to cause the non-profit shares to remain low in total value:
It could scare away for-profit investment, because investors may be skeptical that the company will prioritize profits over helping others or being ethical. Then the company struggles to scale.
The company attracts significant for-profit investment and scales, but then becomes a primarily for-profit company.
Also, with easier access to financial capital, for-profits could potentially sell below cost of production for longer than non-profit companies to drive out competition and increase their market share.
You could also just compare the size of all philanthropy vs all investment. The funding available for non-profit companies would be relatively tiny, so we should expect few such large non-profit companies. These non-profit companies would be funded initially or acquired through philanthropy. There’s just much less money for this, and this is just one competing use of philanthropic funds, with some alternatives being to donate directly to charitable work or invest more broadly in the market.
The firms would not be looking for (much) investment on behalf of typical shareholders. So your numbered points are immaterial… PFGs are 90%+ charitable equity.
Your characterization is a bit off… These Profit for Good Companies are not “nonprofit. ” They exist to make profit, but for a specific kind of shareholder.
You’re right… Currently PFGs cannot get adequate investment because this isn’t on the menu for philanthropists as means to multiply their donations. But if philanthropic money could be multiplied by leveraging consumer (and other economic actor’s) discrimination in favor of charities, there would be ample incentive to invest… Philanthropists want to multiply the funds that are available and leveraging the good will of economic participants gives them that opportunity… If people can buy your laundry detergent for the same cost and help fight malaria, they will. The fact that we are not trying to give them this power is foolishness.
Anyone would rather buy in a way that benefits charities rather than traditional shareholders, and equity being held by a particular kind of entity does not necessarily increase costs or otherwise compromise a product.
You’re right, capitalizing PFGs would compete with direct donations and “more broad investment.” In these competing cases, you’re leaving money on the table because you’re failing to leverage the good will of consumers and other economic actors.
The bottom line is that PFGs, if capitalized, have all the advantages normal firms do, plus an extra advantage in that economic participants value their success more than competitors. The only thing keeping such firms from thriving and offering a huge multiplier opportunity is that we haven’t created an environment of public awareness of the opportunity (which is what my nonprofit is trying to do).
The problem is “if capitalized”. Even with widespread awareness, they could still be at a disadvantage for raising capital and scaling, because the pool they’re targeting (philanthropic capital) is much much smaller.
Yep. Acquiring capital without selfish profit motive is a key challenge.
However, if there is an environment in which PFGs enjoy a large advantage and this is clear to the relevant parties, there should be no problem raising funds through philanthropists and debt.
You can frame it as
F(C) = F(K) +P
F(C) is a firm capitalized mostly by charitable equity
F(K) is an identical firm capitalized by private equity
P is the monetary value of positive discrimination in favor of charities
If we have an environment in which P is high enough (I think this could be true in a lot of lower differentiation products), a PFG could probably be capitalized wholly by debt...
If PFGs offer a high enough value proposition (and this is clear to the relevant parties), the financing issues will work themselves out.
Thus, the question is, are the costs of creating the environment we’re looking for worth it? I think with the amount of money on the table, it is definitely worth determining what P values are possible in different contexts because money in the hands of effective charities is such high impact.
Thanks for raising these points Seth. I agree that the burden of proof is higher than what we currently have. This paper and the companies that some of us are building are just the start of proving that this might someday happen.
I think it’s critical to note that guiding companies are basically for-profits. There’s nothing distinguishing them from for-profits except that the profits go to charities and that the investors are philanthropists buying out companies or funding new guiding company initiatives.
The good news is that there’s one large successful case with Newman’s Own, who have donated about 570 million USD to charities and give away all of their profits. There’s more smaller projects that are successful and donated millions, but nothing that I know of that’s close to Newman’s . I see one big difference between Newman’s Own and the other initiatives that are less successful: money.
I hired a research intern to validate that and he’s now drafting up his thesis on the economic sustainability of this business model (I can share it here once it’s done), and the main conclusion is that the issue with this is money. If you have someone like Paul Newman funding your guiding company there’s no reason it can’t be big, and that turns out to be true, because Newman’s Own is a multi-billion dollar company in a very competitive space. If the wealthiest philanthropists put their weight behind this and “invest” in the next best guiding companies, I don’t see why these companies cannot be the biggest in the world. With the money you can hire the best team, and the best teams build the biggest companies. Currently, the infrastructure (venture capital, stock markets, etc.) are lacking for guiding companies, but these can be built. This will take a long time.
To answer your other questions, I have no evidence that any Fortune 500 company tried this, but I don’t think that kind of initiative would be public. You could argue that Warren Buffet, who intends to give away almost all of his wealth, is buying and investing into companies to generate more profits that he can give away to charities. But that’s indirect. Why hasn’t he bought a company and turned it into a guiding company? Twitter and EM are an interesting example as well. Maybe EM would use Twitter to fund his next EA endeavor (e.g. backing up humanity to another galaxy). Would Twitter be a guiding company in that case?
Thanks for the thoughtful reply—I think that I should have specified ‘shareholder-corporate-governance-structure for-profit’ rather than just ‘for-profit’ 😃 and once we get to that level of granularity, maybe it is plausible that alternatives haven’t abounded simply because of a lack of imagination!
Newman’s is indeed a nice counter-example.
And FWIW, I am a coworker of Jasper’s at Global Income Coin, and we’re trying to do something exactly like what you propose but with currency...so I really hope it’s viable!!
Regarding the burden of proof… I would think that such a burden is a function of the purpose that it serves. In the criminal justice system, we require a very high burden of proof, “beyond a reasonable doubt”, because of the enormous cost of a false positive: depriving an innocent person of life and/or liberty. In the civil context, a mere preponderance (greater than 50%) as if it is more likely than not that one has violated another’s rights and harmed them, they should be compensated commensurately, even though there may still be a significant chance that we are wrong.
Regarding the burden of proof here, in considering whether and to what degree one should support a project, one should consider the probability associated with different outcomes and the utility associated with said outcomes. This is why even if you are very skeptical of Guided Consumption, supporting it, especially at early stages, is justified.
I am interested in learning more about GIC and will very soon be taking a look at the project. I love the idea of global UBI and very much want to work toward a world in which everyone has a chance toward living a life of dignity and having a chance at his or her dreams. Perhaps there are some opportunities for collaboration here!