Question

When Saul Garlick was a young boy, he traveled with his family to Delani, a rural community in Mpumalanga, South Africa, and was shocked by the antiquated conditions and lack of schools in which the residents of the small village lived. He pledged to do something to help. When he was 18, Garlick launched a nonprofit organization, Student Movement for Real Change (SMRC), and raised $10,000 to build a school in Delani. Over the next few years, Garlick’s vision for the nonprofit expanded, and SMRC began to focus on sending college students to live with local families in South Africa and build entrepreneurial ventures with them. While attending graduate school at Johns Hopkins School of Advanced International Studies, Garlick took 18 undergraduate students on a five-week trip to Mpumalanga. He was dismayed when he saw that the school he had built years before was shuttered and in total disrepair.

It was then that Garlick realized that simply throwing money at a problem would not fix it.

He committed himself to finding a scalable, sustainable solution based on a social entrepreneurship model. Garlick began to reimagine SMRC. What if, he thought, he could take bright, enthusiastic college students from around the world to Africa and have them work with local people to develop new ideas and solutions to the most pressing local problems? He changed SMRC’s name to ThinkImpact and began raising money to fund its mission. By 2009, Garlick was raising $400,000 annually to support ThinkImpact; unfortunately, costs were running higher. Like leaders of most other nonprofit organizations, he was frustrated because raising money is an ongoing process that demands a great deal of time and takes away from the time they spend on achieving their mission. Still, he was encouraged because ThinkImpact had gained traction and was beginning to make a difference in local communities in South Africa and Kenya. After missing a couple of payrolls for ThinkImpact’s small staff, however, Garlick began to consider other ways that he could accomplish the organization’s mission.

After attending a workshop with other social entrepreneurs, Garlick identified three options:

• Option 1. Remain a nonprofit organization. ThinkImpact has contracts with two universities that generate $50,000 annually. In addition, Garlick expects that grants and donations will bring in up to $100,000 per year. However, if Garlick wants to realize ThinkImpact’s mission, he estimates that he will need an additional $200,000 to $250,000. As he has learned, raising money for a nonprofit is never-ending and takes valuable time away from achieving the organization’s mission.

• Option 2: Shut down the nonprofit and start a for-profit company. Under this scenario, the for-profit company would purchase ThinkImpact’s assets and pay off its debts, essentially giving Garlick and his employees a fresh start. To finance the new company, he could borrow money and approach family members and friends who have indicated that they would invest in a for-profit company if there is a chance of earning a return on their money. The for-profit business would generate revenue by charging colleges and universities a fee to provide students with meaningful, immersive international experiences that focus on social enterprise. Garlick estimates that the for-profit company would hit its breakeven point in three years. His primary concern is whether colleges and universities would be as open to working with a for-profit company as they are with a nonprofit such as ThinkImpact.

• Option 3: Keep the nonprofit organization but start a for-profit business as a subsidiary.This hybrid model incorporates the advantages of the first two options. The nonprofit could still pursue grants and donations, and the for-profit operation could utilize traditional sources of financing, including debt, which would make ThinkImpact less dependent on somewhat unpredictable grants and donations. One concern that Garlick has is the potential for a conflict of interest if he is a stockholder in the for-profit subsidiary and the executive director of the nonprofit parent company.

2. If Garlick chooses to create a for-profit entity, either to replace the current nonprofit organization or as a subsidiary, what potential sources of funding might he be able to tap?

Answer 1

There are primarily 2 sources funding for a for-profit organisation, which further can be divided into many possible sub parts. They are:

Equity financing: Equity financing involves selling a stake in the company and its profits to somebody else. So, rather than Garlick owning the whole company, he might sell a part of it to somebody else. The advantage of equity financing is that it gives investors the incentive to take the company to great heights. (This is the same as you owning a company or you working for a company. Equity gives you skin in the game and pushes you to work to make the company successful).

The disadvantage of this method is that the founder, Garlick in this case, may end up diluting his decision making power. The investor that Garlick ends up selling a stake in his company to, might have a different vision for the company which may create internal conflict. So, it is important to chose the right partner when taking the equity financing route. Garlick should go for a partner that shares his passion for social work and accordingly sell stake in the company. Garlick should also be mindful of the amount of equity he is selling. If he wants to retain control, he must not sell more than 49% of the company to somebody else.

Now, equity financing too has many different sub options which include common equity, preference shares etc.

Debt financing: Garlick could raise money by raising debt. The advantage to debt is that Garlick doesn't end up diluting his decision making ability but now he does have to pay a constant amount every month or so (depending upon the contract) irrespective of whether he makes a profit or not. Debt creates an obligation which must be fulfilled, failing to do which company may end up in bankruptcy.

(This is not the case in equity financing. Equity holders get a piece of company profits. So, if the company is not making any, there is no obligation on the company to pay the equity holders. This makes equity a more risky investing option. Investors face a higher risk of losing there money when it comes to equity.)

Even debt has many different sub types which include bonds, convertible debt (debt which is convertible into equity), debentures, commercial paper etc.