Why Are They Called 'Nonprofits' Anyway?
A nonprofit by any other name would do just as much good
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Philip
Imagine a language in which things are named not by what they are, but by what they are not. For example, what if cats were called, “non-dogs”? What a headache for veterinarians having to figure out what kind of non-dog the next person is calling about. “Does your non-dog go meow, hiss, chirp or blurble?” Silly, right?
Yet, beginning in 1969 with the Tax Reform Act, which gave us Section 501(c)3, this is how we began referring to an extremely important sector of society dedicated to the betterment of people and planet, and which is responsible for 1 in 10 American jobs — the nonprofit sector.
How strange that we call this this group of 1.5 million mission-driven entities by a name describing nothing of the causes they’re for, instead focusing only on a single principle not pursued by any of these groups — profit. To me, this framework centers profit-driven work to the detriment of cause-driven work, and the flimsiness of the distinction becomes apparent when we compare the two.
Let’s begin with the main differences. First, nonprofits must reinvest excess revenue back into operations serving the core purpose of the organization, whereas for-profits can allocate these surpluses in other ways. Did you catch all that?
Moving on to how they are similar, it really comes down to, well, just about everything else. Budgets, boards, missions, values, brands, assets, marketing, innovation, teams, leadership, products, services, supply chains, metrics, deliverables, reports, controversy — you name it and there are ample examples of both in nonprofit and for-profit varieties.
Think about it this way, among the many obvious differences between say, Microsoft and the local food bank, what they each do with excess revenue is not a particularly meaningful distinction. If a curious alien arrived on the planet and asked you to please explain the difference between the two, would you focus on their tax returns? ET quickly reverses the tractor beam and puts the accountant back in the office chair.
What else are we missing when we describe such an essential and aspirational cohort of global actors in this way? Sometimes, immaterial distinctions create significant consequences. Look at skin color, for example. Centering profit, and othering nonprofit, has the effect of distorting perceptions of both sectors through a financial lens and money is society’s easiest proxy for success and power.
Ask yourself, which of these sectors is known for hyper-efficient resource allocation? And, which for eternally ineffectual spending? Which is hard-nosed and data-driven? What about soft-hearted and conscience-guided? Perhaps most importantly, which is known for begging, and which for bestowing? The truth is both sectors are all of these things.
At the heart of any human enterprise is motivation, and our clumsy nomenclature hints at the importance of classifying cause-driven work separately from profit-driven pursuits. The non-profit designation aspires to honor a meaningful distinction of purpose, but because society reveres profit so much, it often has the opposite effect.
Perhaps a useful analogy would be to compare the different types of motivation to lights. A profit motive is like a spotlight — powerful, narrowly focused, and most useful to whoever wields it. A cause motive is like a lighthouse — powerful, diffuse, and most useful to everyone other than the lighthouse keeper. Likewise, for-profits and nonprofits are useful in their own ways, with fundamental similarities and meaningful differences.
Not-for-profits are for something incredibly important. Perhaps that’s why OpenAI, originator of the GPT large language models, began as, and is still somewhat governed by its nonprofit arm. Its CEO, Sam Altman, does not have an equity stake in the company, which is highly unusual for Silicon Valley founders. Theses intentional measures were taken by these AI world leaders to explicitly reduce profit motive from the genesis of their unimaginably powerful systems, and it’s important for all of us to understand why.
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Thanks for reading this edition of The Process. Please share and comment or you can email me at philip.deng@grantable.co
Philip Deng is the CEO of Grantable, a company building AI-powered grant writing software to empower mission-driven organizations to access grant funding they deserve.
I love this analogy: "Perhaps a useful analogy would be to compare the different types of motivation to lights. A profit motive is like a spotlight — powerful, narrowly focused, and most useful to whoever wields it. A cause motive is like a lighthouse — powerful, diffuse, and most useful to everyone other than the lighthouse keeper."
Really loved this piece.