The Purpose-Driven Social Entrepreneur

by Karim Abouelnaga

  Attracting the Right People:Being a benefit corporation or a B Corp gives you the opportunity to make a very public declaration that you care about more than profit. This is a signal to your investors, your customers, and your employees (both current and future) that you are more than just your numbers.

  Being a benefit corporation or a B Corp isn’t a walk in the park. The assessments take time, and they require a sincere commitment to doing right by ALL of your people—employees, customers, and shareholders. It also isn’t free, but it’s well worth the value if you take advantage of the 2,000+ member community that spans forty-two countries and over 120 industries.

  Chapter Twenty-five

  Before Converting a Nonprofit to a For-Profit

  “Courage isn’t a matter of not being frightened, you know. It’s being afraid and doing what you have to do anyway.”

  —Jon Pertwee

  Deciding to convert Practice Makes Perfect from a nonprofit to a for-profit public benefit corporation was one of the most challenging undertakings of my business career. Not only is restructuring a business incredibly difficult, but there were a few things I wish I had known before I embarked on the transition that caught me off guard. Before converting your business, consider the following:

  Timing:No one can really tell you how long the entire process is going to take. We had the best lawyers in the world during our conversion, and at one point they told us the process would take six to eight weeks. From previous experiences, we knew that lawyers tend to overpromise on timing, but nothing could’ve adequately prepared us to go through an almost eighteen-month process.

  Fundraising:We spent a lot of time trying to raise capital. One of our initial investors encouraged us to make the conversion and promised to support us through the transition. When we eventually started the process and went to this person for the capital, we realized we had never agreed on the terms of the investment (he wanted a percentage of our company), so we lost our lead investor. We realized our last option was to raise the money through our customers, and we were fortunate that this route worked out for us. We made the conversion successfully and didn’t have to give up any control or ownership of our business.

  People:Be ready to have conversations around equity. This could make or break your company. I was ignorant to the notion that my teammates who originally came to work for a nonprofit would have strong opinions on how much equity they should receive in the newly formed company. It was difficult to distribute equity in a rational way. There are no good rulebooks or guidelines for how to do this properly. Equity distribution is more of an art than a science. But if you don’t get the equity distribution right, you risk breaking your new company before it starts.

  Banking:Our banking relationships are where we got blindsided the most. The lines of credit and the credit history we had built with the nonprofit were pretty much disregarded. Banks don’t traditionally work with companies that have less than two years of operating history. That’s because the odds of failure are so much greater in the first couple of years. After months of discussions, negotiations, and raising alternative capital, we mended relations and got waivers to many of the rules. It also didn’t hurt that we had done over $1 million in business within six months of our conversion.

  Board:For the conversion process to be perceived as in the best interest of the mission, your board members should not transition with the management team. In fact, there needs to be an “arms-length” transaction. This means that no one on the buyer’s side should have influence on the board’s final decision to sell or not sell the assets. If board members move to the for-profit side, it can be perceived as private inurement.

  Unfortunately, board members on nonprofits are not compensated. As such, getting decisions made, having critical conversations, and having paperwork signed can sometimes drag the process. If you’re a board member on the nonprofit side of the transaction, you have nothing to gain in the asset sale, but are taking on a risk by agreeing to the asset purchase, since this process is scrutinized closely by the Attorney General. And if the process goes smoothly, then you lose your board seat. If it weren’t for the external support from one of the top legal firms in the world and the promise of financial support from a billionaire investor, I’m certain the board would’ve voted to table the discussion of a legal structure conversion. You need to be very thorough in making the case for the for-profit company to be able to better execute on the mission set forth by the nonprofit.

  Making our conversion was a big commitment. We delivered on our initial promises, but sold an ambitious plan, and we’re going to have to continue working toward fulfilling the rest of our promises. Today, I can confidently say that the decision to make the conversion was in the best interest of our mission, our people, and our kids.

  Chapter Twenty-six

  How to Convert a Nonprofit to a For-Profit

  “Don’t wait for the perfect moment, take the moment and make it perfect.”

  —Zoey Sayward

  After my team made the decision to convert our legal status from a nonprofit to a for-profit, the next thing we needed to figure out was how. It is very easy to go from a for-profit to a nonprofit. Going the other way is not. After having gone through the process, I completely understand why.

  In making the conversion happen, timing matters. Most of the founders I spoke to who had completed the conversion but failed after the fact stated that it was because they didn’t find a product-market fit. They anticipated that their service or product could work for a for-profit business, and they jumped to make the conversion before they gained full acceptance of their product or service. However, if they had waited until the business was too mature, then the cost of converting the business might have outweighed the benefits.

  Assuming you have the timing right, which is subjective and will vary across businesses, there are few options for how to convert a nonprofit to a for-profit. Below are the three most popular options, with pros and cons:

  Licensing, Leasing, or Renting the Assets:This requires you to set up a new legal entity that you can incorporate in any structure you want. Then you work with the board of the nonprofit to draft an agreement that will allow you to rent, license, or lease the assets that you need for the new company.

  a. Pros: This is quick and easy. It provides you with immediate access to the assets that you need to do business.

  b. Cons: You manage multiple entities. You do not own the assets outright. The board of the nonprofit can change its mind and terminate its agreement with you, which could put you out of business.

  Complete Asset Purchase:This option is the direction my team decided to go. This option requires you to set up a new legal entity that you can incorporate in any structure you want. Then you have to hire counsel to represent the management team (buyer) and counsel to represent the board (seller). Once the counsel is in place, then you have to hire an accounting firm to provide what they believe to be a fair market value of the assets. The value is determined based on conversations with the board, an evaluation of the balance sheet, and any hard assets that are being transferred. The management team then has to raise the money to purchase the assets. The board must approve the asset sale. Finally, the last approval must come from the Attorney General in the state where the transaction is taking place.

  a. Pros: You own the assets once the process is approved.

  b. Cons: This is the costliest of the different routes. This route also takes the longest of the three to accomplish.

  Full Restart:During the process of the asset purchase, I wished several times that I had gone down this route. This route requires you to start a new entity and start over. It means walking away from what you built. Nonetheless, the most valuable piece of the experience is what you learned. Sometimes that chance to start over means you could probably do it even better. This option is only available for companies that are providing a service. Most
states have loose noncompete laws, which means anyone can start a competing business that copies exactly what you’re doing without any penalty unless you have a patent. It would require you to change the name and the branding, but those things shouldn’t be that valuable at the time of your conversion; otherwise, you’ve probably waited too long to make the switch.

  a. Pros: This is the cheapest route to undertake. You do not need to hire any counsel and can pretty much walk away from what you have built to date.

  b. Cons: The perception that you used donor assets to build something, get traction, and then use it with a profit motive is poor. However, if you’re genuinely doing it for the greater good of the mission, you shouldn’t care too much about that.

  When my team and I made the decision to make our conversion, we only really knew of the first two options. The intricacies of making this conversion happen are complicated. Though you may not need counsel to go through the entire process, depending on the route you choose to go, you should consult counsel at the start of the process to evaluate if there are any other options for you to consider that may be specific to your business.

  Part vi: Operations

  A business is a business is a business. I say that to say that all organizations—nonprofit, for-profit, LLC, benefit corporations, etc.—are all businesses in some form or fashion. They may not have the same goals of maximizing profits or of maximizing impact, but they all are run by people and governed by a set of laws, require strategy to be positioned for success, and require execution to be successful. Having operated the same company in two different legal structures, I know that those are all just legal designations. In both instances, I’ve had to take steps backward in order to move forward stronger. I’ve learned that forward isn’t always straight forward. In this next section, I cover what I’ve learned about managing the early operations of a business.

  Chapter Twenty-seven

  Creating a Business Model

  “Luck is not a business model.”

  —Anthony Bourdain

  For young entrepreneurs, your first order of business must absolutely be making sure your bright idea will pay off.

  As a freshman in college, one of my professors told me that profits, marketing, location, and people are all important, but the real secret to any successful business is a great business model.

  He then illustrated his point by way of the franchising industry: The most successful models, like Pizza Hut and McDonalds, for instance, are so simple to understand that, with minimal training, individuals of all stripes can operate the business. I often find myself echoing this wisdom when I chat with other budding entrepreneurs.

  At Practice Makes Perfect, we partner with low-income schools across New York City to get them to outsource their summer learning programs to our team. We realized that over the summer kids in low-income neighborhoods forget what they have learned, while their middle-class peers make gains. We also noticed that schools struggle to execute and implement high-quality summer learning programs. Today, schools pay us to operate summer learning programs for their children, which prevents them from forgetting what they have learned and returning to school ready to succeed the following year.

  My friends at Barnana realized that many farmers lost up to 20 percent of their bananas because they were no longer ripe or yellow. In an effort to reduce food waste, they started upcycling the bananas by creating tasty and nutritious snacks out of them. From a business standpoint, they are able to purchase food that would otherwise have been thrown out, which allows them access to lower food costs for a very similar end product. The more snacks they sell, the less food is wasted. They are well on their way to upcycling other foods.

  When devising your business plan, keep these points in mind to ensure your business model is on track for success:

  Does this business model make sense?You may come into communication with investors through business plan competitions and other funding opportunities. Think about your business idea from their perspective. Would you willingly pour time, energy, and personal resources into your venture?

  What do you do?This is plain and simple: if your customers don’t understand what you do or how you do it, they won’t buy what you’re selling. As soon as you have a minimum viable product, let everyone you know test it and tell you what they think. It’s that early feedback that will be invaluable when you’re trying to attract new customers.

  Can others explain your model?The people working for you need to be able to articulate your vision. They need to understand the value that your goods or services provide and why consumers should be purchasing them from you. A clear business model makes it easier for employees to communicate your business’s value proposition.

  Can the company break even?Sustainability is crucial. Your business model must communicate how your company brings in revenue (or plans to bring in revenue) and covers its expenses. If the business model fails to do this, then your company won’t last. Be sure you have a long-term growth plan in place for making money.

  Once you’ve figured out the answers to these questions and can effectively implement them into your business model, you are on your way to building a scalable business.

  Chapter Twenty-eight

  Know When to Pivot

  “Write your principles in pen and your business model in pencil.”

  —Josh Kopelman

  As almost every entrepreneur knows, the initial idea is never the end result. To ensure your startup doesn’t fail, you need to make pivots to your plan based on feedback, knowledge, and variables out of your control.

  Figuring out when and why to pivot is difficult. Here are a few insights I learned about changing gears along my entrepreneurial journey:

  The gut-based pivot:

  These pivots are based on the founder or founding team’s instincts. They are common earlier in the development of the business model.

  When we were first putting together our concept for Practice Makes Perfect, we wanted to pay the high school mentors and the college interns minimum wage. The cost to operate the model for thirty students would have been almost $50,000. Our inability to raise the funds necessary to execute that model forced us to pivot or live with the idea of not existing. As a result, we discovered how to create value in nonmonetary ways by including test prep and college readiness support for our mentors, which allowed us to pay them a more modest stipend.

  Research- and need-based pivots:

  These shifts are based on information that already exists.

  When we ran our first program in 2011, we were serving fourth-grade and ninth-grade students. If we wanted to serve the bigger needs, we realized we would have to find a way to expand our programming or become obsolete. Donors and parents were asking us what would happen to our students after the summer. Instead of continuing to say we didn’t know, we pivoted our model and expanded our services to support students from grades kindergarten through twelfth grade.

  Experience- and evidence-based pivots:These pivots come from piloting and evaluating results.

  For our first few summers, we experimented with different numbers of Teaching Fellows (college students who lead instruction) in our classrooms. We got to a point where we had two fellows in our elementary school classes and one in our middle and high school classes. After several years of running with this model, we noticed that the elementary school Teaching Fellows would always complain about how the workload was divided. There also weren’t any meaningful differences in outcomes between our elementary and our middle and high school classes. After a couple of years of close monitoring, we shifted the model to include one Teaching Fellow across all of our classes.

  Feedback-based pivots:These pivots are based on what your stakeholders suggest.

  Depending on your line of business, time, and scope of work, you may or may not have the capacity to conduct extensive market surveys to ide
ntify your customers and how much they are willing and able to pay for your product or service.

  Following our final pilot, we transitioned our organization’s business model from one that relied heavily on philanthropy to one that relies on fees for service. As such, in trying to lock in the appropriate price point, we had several calls with charter school principals and public school leaders. Each potential customer provided feedback, and we ultimately decided the direction.

  Chapter Twenty-nine

  An Ideal Workplace

  “We’re all working together; that’s the secret.”

  —Sam Walton

  Your business should do everything and anything it can do to take care of and protect its people. That means a laser focus on your mission and bottom line to ensure that you can maintain your sustainability. If you run out of cash or if you burn through money too quickly, you’ll bring your mission and your dream to a dead end.

  As Practice Makes Perfect continued to grow and evolve, so did my views on productivity and work. We realized that if we created an environment that expended people daily, we’d have two or maybe three years, if we were lucky, before they burned out. Armed with that knowledge, we knew we needed to make changes quickly or else we would lose the people we needed to solve our problem. As we started to think about hours spent and productivity, we considered what the total environment looked like. We wanted to build an incredible company that everyone would be proud to work for.