> Posted by Sean Foote
“What’s the difference between a for-profit and a non-profit?” I ask my class at UC Berkeley every year. The first answer is almost always “Non-profits are well-intended, for-profits are not.”
The difference between a non-profit and a for-profit is 6%. That’s right, just a 6% difference between non-profit and for-profit. 6%, you see, is the average profit of the Fortune 500 (at least, before the latest economic unpleasantness). If every “sustainable” non-profit firm increased their prices by 6%, they too could receive all the benefits of a profit motive — efficiency and return on investment, to name two. And they could still be well-intended. Neither a “non-profit” nor a “for-profit”, but a “good-profit”.
Personally, the blurring of this distinction matters because I live in both the venture capital world and the microfinance world. I invest in technology startups in Silicon Valley. Plus I teach a microfinance simulcast to more than 20 business school campuses and I sit on the boards of directors of multiple microfinance organizations.
So now, these two worlds are colliding. Here’s why:
1) Profit. Ever wonder why there are so many conferences for microfinance? Or why microfinance gets more press attention than, say, digging wells for villages or distributing food aid? It’s because microfinance is the first approach to poverty alleviation that isn’t charity.
Why does that matter? Because the for-profit U.S. economy is almost $14 Trillion, while the non-profit sector in the U.S. is just $0.7 Trillion. It is WAY harder to double the size of the non-profit sector than it is to convince just 5% of the for-profit sector that they can get rich by helping the poor. That’s why Sequoia Capital, one of the best Silicon Valley venture capitalists, invested in SKS, one of the fastest growing Indian MFIs — to make outsized returns.
2) Opportunity. While there are still ways to make good money in Silicon Valley, in microfinance opportunity is lying on the ground for smart folk to pick up — while still providing valuable services for the poor. That’s in part because there is so much unexplored “white space” on the map of poverty alleviation. Compare this to the complex competitive map in Silicon Valley. For example, I’ve seen not one but three “advertising on videos on cell phones” businesses, a subset of a subset of a market which is a mere $30m market today.
Sure, swaths of poverty exist that aren’t ready for capitalism, just like tracts of the U.S. economy require subsidies (or outright purchase in the case of U.S. automakers and insurers). But now, for the first time in our lifetimes, services for the poor can be profitable.
And that’s the cool bit. That’s why we’re bothering. It’s the next “plastics” of Dustin Hoffman’s The Graduate. It’s the next internet boom for our generation. It’s no longer Horace Greeley’s “Go West, young man, and grow up with the country!” but “Go Profit, young people, and grow prosperity for the world.”
Sean Foote is a member of the Center’s Faculty Council, a Managing Director at Labrador Ventures, and a Professional Faculty member at UC-Berkeley’s Haas School of Business, where he teaches courses in Venture Capital and in Microfinance. Check out Sean’s blog at seanfoote.wordpress.com. If you’re affiliated with a business school, join his simulcast by emailing him at email@example.com