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.
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.