Paul Graham on startups as nonprofits and vice versa

Paul Graham (of Y Combinator fame) recently posted an interesting article “Be Good” (which I found via John Gruber’s Daring Fireball site) about the connections between startups and nonprofits:

About a month after we started Y Combinator we came up with the phrase that became our motto: Make something people want. … Another thing we tell founders is not to worry too much about the business model, at least at first. … A couple weeks ago I realized that if you put those two ideas together, you get something surprising. Make something people want. Don’t worry too much about making money. What you’ve got is a description of a charity.

Graham mentions Craigslist as an example of a corporation that deliberately avoids profit maximization in the interests of serving users, and Google as an example of a company that initially focused solely on serving users, to the point of looking like a nonprofit service, and only later found a business model. He then notes:

If you start from successful startups, you find they often behaved like nonprofits. And if you start from ideas for nonprofits, you find they’d often make good startups.

Graham then goes on to talk about a nonprofit “be good” orientation as a way to establish a market position, maintain employee morale, attract support from others (customers, investors, etc.), and provide guidance when tough decisions need to be made. All great points, and you can read them for yourself. However there’s one thing I wanted to note and one point I wanted to expand on.

First, I’m surprised Graham didn’t mention Mozilla in this context; it seems a textbook case of succeeding by focusing on what users want, starting from a nonprofit orientation and then evolving into a hybrid organization combining a public benefit purpose and a revenue-producing business model. Netscape spent a lot of time focusing on how the browser could drive server software sales and create new lines of business, and Netscape Communicator was the result. AOL spent a lot of time focusing on how the browser could drive AOL subscription and ad sales, and, well, not much was the result. Once revenue and profit were de-emphasized the Mozilla Foundation spent its time focusing on making a great browser people would want to use, and Firefox was the result.

Second, Graham speculates “Would all good nonprofits be good companies? … Could you, for example, grow a successful startup out of curing an unfashionable but deadly disease like malaria?” Though he doesn’t use the term, he’s describing a “social enterprise“, one of the hottest topics of recent years in the nonprofit world, along with its sister concept, the “social  entrepreneur“. Graham briefly considers why more nonprofits don’t follow this path:

The idea of starting a company with benevolent aims is currently undervalued, because the kind of people who currently make that their explicit goal don’t usually do a very good job. … The problem with most of [such efforts] is that they either have a bogus political agenda or are feebly executed. … Most explicitly benevolent projects don’t hold themselves sufficiently accountable. They act as if having good intentions were enough to guarantee good effects.

In other words, they’re not run like good businesses, and don’t subject themselves to the internal and external discipline (including the discipline of the market) that would force them to do so. It’s a superficially plausible dismissal, but is this the whole story? That’s a question I’ll try to explore in a future post.

2 thoughts on “Paul Graham on startups as nonprofits and vice versa

  1. Steve Lee

    “Once revenue and profit were de-emphasized the Mozilla Foundation spent its time focusing on making a great browser people would want to use, and Firefox was the result”

    I can’t help thinking that people want to *share* it as much as use it. Viral marketing as a result of being something of great utility..

  2. Dave

    Why don’t more nonprofits follow this path (social entrepreneurship)?

    I think it is a function of a needed paradigm shift among nonprofit leaders/managers regarding startups funds/mechanisms as well as a fundamental change in the structure of financing nonprofits. I think both are happening currently:

    The traditional model of financing nonprofit startups is grants from foundations. There is a trend towards a wide base of support of citizens. (we are calling it a Citizen Base here at Ashoka). Open source collaboration by citizens on the internet in the form of Mozilla, Wikipedia, and OpenSource software are examples of the power of a strong citizen base of support. Out on the streets it is happening as well and we are trying to document it at citizenbase.org.

    The financing of startup nonprofits is also changing. Money is pouring into philanthro-venture capitalism. Foundations are providing the money while these venture minded philanthropists perform the due diligence and require the business like discipline from applicants. Even larger changes are in the works with groups like Ashoka and their Social Financial Services Initiative (http://ashoka.org/financial_services). Citizen sector startups will have more efficient options for funding.

    So, I think, exciting changes are happening as we speak, the question is how fast will the pendulum swing and when will it reach that tipping point after which it is the norm across society.

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