Startup nonprofits - Mark Lutter

Deep challenges facing society can't be solved by for profit companies. A startup nonprofit is an outline for thinking about an organizational form to solve them.

Silicon Valley values building and is good at it. First, it built companies to build computers, e.g., Fairchild Semiconductor and Apple. Then, it built companies to build software, e.g., Google and Facebook. Now, as software is eating the world, Silicon Valley is expanding into the world of atoms, e.g., Boom Aero and Tesla.

Our societal problems, however, cannot be fixed solely by building for-profit companies. While our private sector responded magnificently to the challenge of covid, developing multiple vaccines in record time, our public institutions failed. First, those institutions downplayed the nature of the threat. Then, they ignored the evidence regarding masks. Then, our regulatory agencies took their sweet time approving the vaccines. To add insult to injury, Astra Zeneca is still not available in the United States, Johnson and Johnson was paused, and we never adopted a first doses first policy like the United Kingdom.

It would be very much a surprise if our public health institutions were the only public institutions in such a state of decay. Therefore, one of the great challenges of the 21st century is to rebuild American institutions. I would like to propose a new category for an idea that can help the rebuilding process, a startup nonprofit.

A startup nonprofit is legally a nonprofit, likely a 501c3, but views itself and operates like a startup, meaning it has a scalable impact. Under this definition, technology companies are not the only startups; movies, which go from a script to huge productions in a short time span, as well as political campaigns, which grow from an idea to hundreds of millions of dollars in 1-2 years. The key to this startup definition is scalability, with different environments requiring different forms to achieve their goals.

In practice, a startup nonprofit has several important distinctions from traditional nonprofits: 1) it begins with a large goal and works backwards to identify incremental steps to achieve that goal, 2) it has an iterative, experimental mindset, and 3) it is an internet first organization.

Startup non-profits

Silicon Valley has a bias against nonprofits. On multiple occasions potential donors have told me that they would invest in a fund or company I started, but not donate to the Charter Cities Institute (CCI). That bias is to a certain extent justified. Many nonprofits, like many companies, are complacent, ineffective, and serve as rent extractors from the productive economy. If something can be structured as a for profit, it probably should be. However, nonprofits can serve a useful function: producing value that isn’t easily captured by a for-profit entity.

Let’s start with the CCI. For profit charter cities companies exist, including Prospera, Ciudad Morazán, and Pronomos Capital. In addition to the public projects, there is an active community that is planning and coordinating the next generation of charter cities. What then, is CCI’s role?

It is important to note that most of the current energy is coming from the high income remote work space. There is an interest in pushing the frontier of governance, unlocking new forms of social organization. While a worthy goal, CCI is focused on catch up growth, how to accelerate economic development in emerging markets. While there is much overlap between these two goals, they are sufficiently distinct to justify separate approaches.

CCI’s value proposition is based on two distinct factors. First, charter cities have slow feedback loops which makes early stage planning extra important. Second, maximizing the benefit of charter cities requires socializing multiple stakeholders to the idea of charter cities who wouldn’t otherwise be socialized by for profit ventures.

The bet of the Charter Cities Institute is that research and community building is valuable, particularly in early days, to catalyze the growth of the industry. In 10 or 20 years the industry will be substantially more developed than had the Charter Cities Institute not existed. However, the nonprofit structure works better because the value we are creating is difficult to capture.

A consensus has emerged that science funding mechanisms are ineffective, if not broken. The NIH was glacially slow in awarding grants to research covid compared to new organizations like Fast Grants. Basic research is important, however, by its nature it is difficult to monetize. Fast Grants is one way to push reform, by illustrating the possibility of making funding decisions much more rapidly. What would it look like to scale Fast Grants to fund research that isn’t covid related? Alexey Guzey is working on it with New Science.

America’s foreign policy establishment is broken. While it appears that President Biden is finally withdrawing American troops from Afghanistan, it is a decision long overdue. Part of the challenge is a foreign policy establishment that lies to our elected officials about troop numbers to prevent them from bringing our troops home. While for-profit defense startups like Anduril are improving our military effectiveness, there is also the need for policy reform which isn’t as easily monetizable.

Improving our institutions requires a pluralistic approach. While for-profit startups are great, there are some problems they can’t solve.

Characteristics of the Nonprofit Startup

Given the novelty of the category of startup nonprofit, I’m not able to fully define what it entails, however, I can outline some characteristics that I have learned since I began building the Charter Cities Institute in 2017.

Vision: A nonprofit startup starts with a vision. There must be some large, intractable problem, for which the solution is hard to capture value from. This must be the animating vision behind the nonprofit, like Stripe’s ‘increasing the GDP of the internet’ or SpaceX’s ‘colonize Mars’. The vision must be sufficiently ambitious to attract talent and funding, but sufficiently well-defined to be achievable. In the previous section I outline two other ideas that could animate startup nonprofits, improving science funding mechanisms and reforming American foreign policy.

Momentum: Like a technology startup, momentum is crucial for a nonprofit startup. They need to accomplish more every year. They are selling their ability to execute on the vision. If they lose momentum or take substantial missteps, they risk losing donors and talent. The goal should seem inevitable by the constant momentum that the nonprofit is able to generate.

Incrementalism: The vision must be broken down into incremental steps. If you are building the ecosystem for charter cities, where do you start? Who are the first groups you need to build a coalition with, how to get early wins to demonstrate credibility to various stakeholders? How do you balance the decades long nature of city development with getting a foot in the door? Having clearly defined incremental steps to achieve the goal is key.

Milestones: Technology startups have clear milestones they must meet to raise their next round of funding. Depending on the industry, the milestones can include, growth, ARR, DAUs, and CAC. There have evolved generally accepted industry standards for success, the ultimate test being the ability to make money. Nonprofit startups need similar metrics. How to you define success, momentum, and achieving relevant milestones?

Iteration: Silicon Valley is defined in part by its iterative approach. The key question isn’t success, but rate of learning and growth. Nonprofit startups need a similar iterative method. You won’t know exactly what tactics will get a startup nonprofit to its vision. Some ideas might work, while others might fail. The ability to test some ideas, scale them up if successful, or kill them off if unsuccessful, is a key component of a nonprofit startup.

Hiring: Nonprofit startups necessarily exist in the space between startups and legacy institutions. Hiring is a challenge. If you hire too exclusively from startups and the very online, you will build a team that is unable to effectively interact with legacy institutions, weakening your ability to garner influence. If you hire too much from the legacy institutions, you won’t be able to think from first principles and build something new. Striking this balance right is key.

General funds: Most foundations give restricted funds. The money can only be spent on a predetermined program. I am increasingly convinced that this problem is an order of magnitude more harmful than most realize. The Charter Cities Institute could never have been founded with restricted funds. Our vision required the flexibility that general funds provide. Some ideas we had didn’t work, so we had to stop them. Even now, we are greater than the sum of our parts. Defining our programs into grant sized bites is sometimes an exercise in creativity. Not to mention, much of the work of building something is a boring grind that is not appealing to supporters. Luckily, folks like Paul Graham and Tyler Cowen realize this and are taking steps to address it.

Conclusion

Silicon Valley inspired me to start the Charter Cities Institute. I listened to podcasts, read articles, and consumed the media. I was inspired by the stories of great founders, wanting to follow in their footsteps. When hiring people, I consult Marc Andreessen’s famous essay. The Charter Cities Institute would not exist without these influences.

That being said, I was also naïve. Working in Washington, DC only allows so much exposure to Silicon Valley. The problems facing nonprofits are substantially different from those facing for-profits. While I consider myself a founder, the mold is a bit distinct from a tech company founder.

I now believe realizing those distinctions was a crucial part of the growing pains of building a new type of organization. I hope these lessons on building a nonprofit startup can be useful for those who want to build organizations in spaces the value is not easily capturable in the traditional for-profit mold.