Reviving the Case for Non-profits

Late last year at Laboratoria, we announced a $4 million dollar unrestricted donation from billionaire philanthropist, MacKenzie Scott. Not only will the donation contribute significantly to advance our mission of empowering women who dream of a better future to start and grow transformative careers in technology, but it’s also a testament to what we’ve been able to build: a solid world-class education program with significant impact in the lives of the women we serve. It also represents a notable milestone in a region where “big tickets” in the non-profit world are uncommon and extremely hard to get by. Between the feelings of accomplishment and the sighs of incredulity, I’ve taken some time to reflect on what it means, not just for our organization, but for non-profits in general, specifically in Latin America.

Over the years, I’ve lost count of the number of times we were questioned by investors, friends, family, colleagues and others why Laboratoria was not a for-profit company. The truth is we questioned it ourselves several times in our 8-year story. All around us, headlines of million dollar raises for edtech companies, entrepreneurs founding their second or third startups after successful exits, and the “cool” factor surrounding the tech-startup world, made us wonder if we were limiting ourselves. It was all very tempting and it wasn’t the first time we were enticed. I vividly remember the moment I learned of the for-profit social impact world. After years of being inspired by non-profits and the people who dedicated their professional lives to solving many of society’s biggest problems, I felt invigorated by the “sexiness” of the for-profit social impact world. The phrase “do good by doing well” was catchy and effective in luring would-be non-profit leaders into for-profit social impact companies that could provide return of investment to shareholders. Capitalism, working its magic.?

I’m lucky to have co-founders who are my partners at work but also in life. We help each other correct all the time, especially when one of us seems to veer off into lands that may seem exciting, but drift us away from why we’re here in the first place. Every time we talked openly about the possibility of becoming a for-profit, we came back to a truth that is rarely discussed. It was evident, in each attempt, that the only people who would benefit, by Laboratoria becoming a for-profit, would be ourselves and potential investors. Every single time, our students, Laboratoria’s sustainability and the mission we were trying to achieve were better served by a non-profit model.?

Before the Twitter trolls accuse me of being anti-capitalism, let me clarify. The non-profit model is in no way the right fit for every organization nor should it be the only option. And I’m not suggesting that for-profit companies don’t have a positive impact in society. Many do. I am an angel investor myself in different tech startups, and I’ve advised organizations toward a social-impact, for-profit model when I felt it was the right thing for the company’s goals. If we decide to launch something different as second-time founders in the future that serves a different population and has different goals, we may likely consider going the for-profit route.?

Non-profits are, however, a viable option, and in many ways the preferred route depending on the pain point being addressed and the population being served. I wonder, therefore, why it is that over the years, non-profit organizations have lost the cachet they had in the 90s, and why they’re often boxed into a misconceived notion that they’re not as competent, relevant, or have the potential for growth. It’s worrisome, mostly, because they’re necessary. Ideally, wealthy individuals and corporations would all pay more taxes and our governments would represent the interests of different groups equally and philanthropy wouldn’t be necessary. Unfortunately, that’s currently not the case, and until it is, non-profits play an important role in ensuring social, economic and environmental development. They can have an enormous positive impact, they’re essential in advancing specific, underserved interests, and many non-profits have, indeed, become successful and scaled. We need to start telling a different story.?

Like most “over-night successes”, it’s taken Laboratoria almost 10 years to reach some of our more significant milestones. It hasn’t been easy and we’ve made painful mistakes along the way, but we’re proud to have reached a point where we can say Laboratoria is here to stay. We have served almost 3,000 women in our bootcamps, 85% of whom have started transformative careers in technology, earning approximately 3x more, on average, than their previous income, and changing the face of technology with their talent and diversity. For every dollar spent, Laboratoria’s social return on investment is $4.57 in only 5 years. Due to this impact, Laboratoria has been awarded recognition by MIT, the BBC and President Barack Obama. And yet, I have a strong conviction that we would not have been successful in achieving a fraction of our goals had we not operated under a non-profit model. Here are a few of the many reasons why.

• Early on, we would’ve had to sacrifice quality for either profit or growth. Like every startup, we were learning on the go, and figuring out how to best serve our user’s needs. We needed freedom to experiment, to fail and to pivot without the pressure of economic returns or fast growth. More importantly, as an education program, we needed time to measure and evaluate actual learning (not just engagement and graduation rates), something that we have always known would be critical to our success in the long run. Being forced to prioritize growth or profit, would’ve shifted our focus and would’ve been suicide.?
• We serve a population that is unable to pay for the real cost of a quality education. They’re in that situation due to structural failures of the economy to provide better education and quality labor opportunities to a major percentage of young people in Latin America, especially women. Ideally, the state would provide a safety net, ensure basic needs are met. Unfortunately, in Latin America and elsewhere for that matter, the state doesn’t always fulfill the role of closing that gap. In order for young women from economically underserved backgrounds to transform their future and actually change their destiny at the root, someone else needs to cover part of that cost. At Laboratoria we found that the combination of our in-house financing, hiring company contributions and philanthropic capital, allow us to continue prioritizing quality and serving the needs of our students.?
• When the Covid-19 pandemic hit, and the population we serve was disproportionately affected, even knowing that we might not reach the projected milestones that year, even risking having to discontinue the program (Laboratoria back then was an in-person training program), our donors doubled down and lifted any restrictions on the use of their funds. As a result, we were able to provide the direct, economic support many of our students needed in order to avoid dropping out.?
• As a non-profit we’ve been able to consistently put the needs of our students first. Each time we faced a challenge, a difficult decision or we needed to pivot, at the center of the discussion was always “what’s best for them?” And we were able to act accordingly with our donors’ support. I am not saying that for-profit startups fail to prioritize their student’s needs. I know first hand from many good friends running edtech companies that they do. But as a non-profit, for us and our donors, this is the key priority above any other, even when it comes at the expense of other goals. This truly makes a significant difference.?

Still, the challenges facing non-profits in Latin America are enormous and few are able to grow and sustain themselves over time. Despite serving some of society’s most pressing needs, often where there isn’t much money to be made, non-profits are often left without the financial support and visibility required to succeed. I’m not an expert on the topic, but I can provide some insights on what I’ve learned from my experience.?

• Non-profits in the region are significantly underfunded. Between 2016 and 2019, philanthropic funding in the region added up to US$6.6 billion. In comparison, only in 2019, social impact investment funds totaled US$3.7 billion, more than double if you consider the yearly average. In Mexico and Colombia, for example, foundations’ assets are worth 1% of annual GDP, compared to 4.8% in the United States. Most of the problems that non-profits are trying to attack are challenging and they require not just time, but also money. Without the necessary investment, it may not actually be possible to find real, sustainable solutions.?
• There are also fewer incentives to donate in Latin America. In many countries, the tax benefits are capped at a low percentage. In Mexico, it’s 7% for example, not to mention the bureaucratic difficulties of actually obtaining that benefit. Additionally, it’s rare for those high net worth individuals who do donate part of their wealth, to do so to other non-profits. Most prefer to create their own foundations and run their own projects. As a result, the number of organizations attacking the same problem can be high, with the majority of money concentrated between only a few. A fragmented sector lacking an institutional ecosystem that unites them and can incentivize collaboration and sharing, inadvertently reduces the impact that each of them has individually, and the influence that collectively they could otherwise exert.?
• Several countries have restrictions on non-profits’ use of funds that hinder the diversification and flexibility needed to successfully operate. In Mexico, for example, with extremely rare exceptions, non-profits are not allowed to have credit. They also can’t invest. This leaves non-profits relying solely on liquidity, which puts them at a disadvantage in times of economic hardship where donations are scarce and the cost of goods are high due to inflation. It incentivizes current spending over long-term saving and leaves them unprotected. Likewise, tax-exempt revenue is limited to only that which is directly related to its mission. So non-profits who serve a population that can’t afford to pay for their service have limited incentive to build a social business model that in the long run doesn’t force them to rely on donations.?
• Finally, all of these limitations force non-profits to cut costs everywhere they can, which often ends up driving down mainly salaries and limiting other benefits. In Brazil, for example, not-for-profit organizations can’t offer performance bonuses to its collaborators. Uncompetitive income structures, without the possibility of offering equity like for-profit social impact startups have the option of doing, keep top talent out, making non-profits an unlikely choice for highly qualified professionals.?

With the craze of VC capital funding, the almost rock-star aura of startup founders and the billion-dollar valuations that seem to happen almost overnight (spoiler alert: they don’t), becoming a non-profit founder seems almost like a missed opportunity. Well, it shouldn’t be. And as a society we need to rethink what mechanisms are actually going to allow us to solve society’s deepest problems. Some of them demand time, long-term dedication, and non-linear solutions where economic returns are not guaranteed. At least not in the short-run and in the magnitude that investors desire. Most of them do, at the same time, create positive, long-term benefits for everyone in society. Serving the needs of a few almost always generates economic and social prosperity for all, and not only the immediate beneficiaries. It is thus imperative that we begin to question the status quo and start working towards changing the reality of this sector.?

Though there can be greenwashing and social washing in philanthropy (case in point FTX’s founder’s recent downfall), most of the time there are extremely talented, passionate and ambitious people, both on the donor’s and the non-profit’s teams, working genuinely to solve big, challenging problems and make a positive impact. One that can scale and transform not just lives, but entire regions and generations. My hope is that our story, Laboratoria’s story, will inspire many more non-profit leaders in Latin America who will learn that they, too, can be a success story and build something meaningful and sustainable. We’ll have to change a few things along the way, but we can begin by changing our perception of powerful initiatives and ideas whose leaders choose to run the not-for-profit way.