A surprising fact that OpenAI, IKEA and Patagonia have in common.
In the dynamic startup landscape, choosing the appropriate business model is crucial. A question that entrepreneurs often consider is, “Is it more effective to scale as a for-profit or a non-profit?” In this post we will dive into this latter question and compare a few very distinct companies who have lived both the nonprofit and for-profit lives. The journey of three giants, OpenAI, Patagonia and IKEA, provides insights on how these disparate companies have deliberated on this critical decision.
For-Profit: The OpenAI Way
This may be news to you, but OpenAI was originally founded as a nonprofit “with the goal of building safe and beneficial artificial general intelligence for the benefit of humanity” – and they had a target of raising $1bn in donations to reach that goal. However, three years after its founding, with only $130mm in total donations raised, OpenAI transitioned to a “capped-profit” model. Why? Simply put, they felt that the private markets would provide better opportunities to access the investment and talent pool necessary for their monumental AI objectives. This move is a common pivot for many mission-oriented startups with founders eager to scale their initiatives, as the nonprofit capital markets are typically slower, more risk averse and demand time-consuming annual fundraising cycles.
OpenAI’s benefits of being a for-profit:
Financial Incentive: For-profits can generally draw more substantial investments, providing the necessary fuel for large, innovative projects (despite the philanthropic capital markets being larger than the venture markets)
Talent Pool: Offering competitive compensation, for-profits attract and retain industry-leading talents, crucial for tech startup growth and competitiveness
Market Orientation: For-profit startups tend to be more responsive to market demands, crafting solutions that resonate with customers which could translate to revenue and profitability in long term. Simply put, they survive by profits vs. donations.
Non-Profit: Patagonia vs. IKEA
There was a lot of news surrounding the move that Patagonia owner Yvon Chouinard made in 2022 to transfer his ownership of Patagonia, valued at about $3 billion, to a specially designed trust and a nonprofit organization, with the goal of using all profits to combat climate change and protect undeveloped land.
On the other hand, a well-kept secret is that IKEA originally started as a for-profit but converted to a nonprofit in the 1980s, with the mission of “furthering the advancement of architecture and interior design”.
Similar to OpenAI, these businesses changed their legal structures for business-related reasons – albeit very different business-related reasons. In Patagonia’s case, it was to preserve the company’s independence and ability to run a socially responsible business; in IKEA’s case, it was primarily to avoid paying taxes.
IKEA’s legal structure is complicated (good article here explaining it), but the catch is that Ikea Group is owned by Ingka Holdings, which is in turn wholly owned and operated by Stichting Ingka Foundation - a Dutch nonprofit. IKEA operates over 450 stores worldwide, and welcomes nearly 900 million customers each year; and with an estimated endowment of over $36 billion, you could say that IKEA is one of the world’s largest nonprofits. However, it appears that most of the profits generated by IKEA are distributed (via a tax loophole) to family members or recycled back into the business. In recent years, however, more funds have been donated to the separate IKEA Foundation, funded by the Stichting Ingka Foundation – in 2022, total grants disbursed by the foundation amounted to $220.67 million.
Patagonia’s and IKEA’s (somewhat controversial) benefits of being a nonprofit:
Tax Benefits: This is the obvious one (mainly for IKEA). Non-profits enjoy tax exemptions that can be strategically utilized for long-term financial planning and corporate philanthropy initiatives. IKEA, for example, pays a measly 3.5% tax rate each year.
Mission-Driven: A non-profit structure may align more closely with a company’s social mission and values. This is very apparent for Patagonia, and is a core part of their company culture/what attracts mission-aligned talent (not so much for IKEA).
Brand image: Patagonia’s sustainability initiatives foster a positive brand image, which in return help Patagonia to gain higher preference among consumers.
Scaling Impact: What to Consider?
Social entrepreneurs often wrestle with the decision of whether to establish their companies as nonprofits or for-profits in order to reach their goals. A business structure should reflect a startup’s core mission. For those prioritizing social impact over profit generation, a non-profit model may be apt. Conversely, if you need significant investment and talent to realize your vision, consider a for-profit structure. Weigh your startup's funding options. While non-profits benefit from tax exemptions and grants, for-profits have greater access to investment capital and hence the ability to test, iterate and scale quickly.
Tying it Together: Align with Impact Investors
Considering the dual-faceted approach of funds like Rise Together Ventures can also provide valuable insights. With a commitment to investing in startups driving social impact, Rise Together not only injects capital but also contributes philanthropic donations to its portfolio companies. This combined financial backing empowers startups to scale their operations and social impact initiatives simultaneously, creating a synergy of value generation and societal contribution.
Selecting between for-profit and non-profit models is a defining decision influencing a company’s trajectory of growth and impact. The examples of OpenAI, Patagonia and IKEA provide illuminating insights for startups navigating this crucial crossroads. The decision made should not only catalyze growth but also amplify the startup’s positive impact on society, creating a harmonious blend of profit generation and purpose-driven initiatives. Rise Together Ventures’ approach of combining investment with philanthropic donation creates a cycle of value creation that benefits the company, its stakeholders, and society at large, steering startups towards a future where profit and purpose coalesce seamlessly.
Written in collaboration with our wonderful intern, Pengfei.