Breaking the nonprofit lifecycle into the typical “early” and “late” stages, as in my previous post, elides a vital stage—the “exit” stage. Is your org intending to exist forever, or is it intending to lead a non-eternal life?
Path away from profit
Pose this question to the founder of any for-profit startup in the venture pipeline, and they’ll know their answer without hesitation. Either they plan to get acquired or they plan to IPO. Everyone gets rich, everyone is happy. Pretty simple, right?
At WattTime, thinking carefully about exit strategy was a key driver for us to forgo the for-profit model. We talked to a number of VCs and angel investors in the early months, and the more we reflected on their feedback, the more it became clear that our vision was incompatible with a for-profit exit.
To target IPO, investors want to see high barriers to entry for competitors. While we think it’s important to protect our IP for now, we feel it would be impossible (and highly counterproductive!) to shut everyone else out in the long run.
On the other hand, to target acquisition by any of the big players in our field, we would have had to make our peace with ultimately being locked into that single corporate entity. With the right acquirer, we would create scalable impact by serving internal partners—but the ultimate scope of our impact would be limited in the likely scenario that we were blocked from forming meaningful external partnerships.
To put it bluntly: pursuing a for-profit exit might scale our business, but it would actually be a pretty crappy way to scale our idea.
So, what’s our endgame instead?
For a nonprofit, there are many more exit strategies that are open to you, and often much less clarity about which strategy is the best fit. This SSIR piece from the Global Development Incubator makes a strong case for thinking as carefully about exit strategy as for-profits do, and lays out some options to get you started:
Plotting an Endgame: Six Options. Excerpted directly from “What’s your endgame?”, SSIR, 2015.
WattTime’s intended strategy is a mix of these. In fact, if we divide our work into “research,” “education,” and “assistance” programs, each program falls into a different exit strategy.
- Our research program is a classic example of the “open source” path. Environmental demand response is a “breakthrough idea,” and we are well equipped to conduct and disseminate the foundational research to place the field on firm scientific footing and promote it towards maximum impact.
- Our education program follows the “replication” path by operating pilot projects that lay the groundwork for commercial adoption, with the ultimate goal of evolving into a certification program that keeps for-profit players in check while providing them with highly-desirable branding opportunities.
- Our assistance program follows the “commercial adoption” path by helping for-profits incorporate environmental demand response into their existing products, from electric vehicles to commercial HVAC. In many cases, this looks like providing a software API that links our data and algorithms to their consumer-facing products.
Although the article uses the phrase “pathologically cooperative” to describe the open source model, we live that value across our programs, and probably most actively in the assistance program. Interestingly, this means that our bias toward cooperation is strongest in the area of our work that would be most strongly competitive if we were a for-profit!
In the very latest stages, we hope to follow a variant of the “government adoption” path. Government can “acquire” most of our activities by folding them up into one of the existing Department of Energy national labs, which already have deep expertise in scientific research, pre-commercial pilot projects, commercial assistance, and certification programs. (In fact, we considered moving under the umbrella of a national lab early on, but hoped we could create impact faster by staying small and nimble in our early stages.) Government has a weaker track record for maintaining delightful software that companies are happy to build their products on top of, but it’s not unprecedented, and efforts like the US Digital Service are paving the way to improvement on this front.
There’s one key role of government that’s missing from the article but present in our long-term strategy: regulation. If legislatures, DOE, or public utility commissions mandate corporations to participate in our commercial adoption program, then that’s a huge step toward mission achievement for us. Like I mentioned above, many companies are perfectly capable of copying our activities once they have an incentive to do so, and regulation can be an effective incentive. So government regulation could be the most impactful outcome of our work, while also putting us out of business for good. I suspect this is true of many other nonprofits, and I’m surprised it wasn’t explicitly included in the SSIR piece.
Putting it into practice
Once you’ve clarified your nonprofit endgame, there’s of course the little matter of making it useful.
Knowing WattTime’s exit plan has given us a great answer to that perennial question, “why aren’t you a for-profit?” Acting like a scalable Silicon Valley for-profit would be inconsistent with our values, in large part because we think it would lead to a smaller scale in the long run.
Another benefit is giving us a framework for thinking about how scalable we should make different arms of our business. For instance, remembering that our ultimate goal is to enable others to replicate our model helps us resist over-investing our limited resources in any one pilot project. But the core R&D—that should stay in known hands (like our own) to build a trusted brand for the eventual certification program.
Of course, it’s not always easy to be growing something you care about to the depths of your being, yet planning its demise at the same time. Keeping a mental distance between the organization and its vision helps with this. So too does remembering that your mission is to actually create real change—and if that change means that your org winds down, you and your colleagues can free up your energy to tackle the next big problem.
- Are you leading a baby for-profit? Think carefully about the implications of pursuing acquisition or IPO, and make sure that the benefits outweigh any compromises you’ll have to make before or after your exit.
- Are you leading a baby non-profit? Read this article and build one or more endgames into your theory of change from the beginning.
- WattTime’s endgame is a mix of a few nonprofit exit strategies, but “sustained service” is not one of them. If all goes well, our impact will continue far beyond the lifetime of the organization.
- Knowing our exit strategy has helped us stand firm on our values, and will help us allocate resources moving forward.