The Not-for-Profits Strike Back

I believe Not for profits (non-profits) are disrupting for-profits on the internet.  These organizations - often started by a community-oriented founder - create a simple application or database, grow their user base thru word of mouth and community  and eventually use the community to crush all the for-profits trying to provide a similar product.   Large companies try to compete but the power of the community is too powerful vs a monolithic "borg-like" competitor with a top down, control-driven approach to content/software creation.  

Examples of success include:

Craigslist - classifieds

Wikipedia - encyclopedia/biographies

Firefox - internet browsers

Openstreetmap - world maps

Linux

Various Distributed Computing projects

What's most interesting is how the not for profit structure innocently makes it VERY hard to compete with them.  They usually start out with very low overhead as its a labor of love from a founder that is cash strapped.   

They have such a low cost infrastructure (most of these orgs have less than 40 employees at scale and many volunteers) and the marginal cost of delivery of their service is so low, that they can offer much of it for free or very low cost without worry of profit maximization.  This brings in more users, which strengthens the content or application, which then provides even more value - a virtuous cycle hard to break (the "network effect") - even when the resources of large companies are turned on these areas.  

Its also interesting that most of these organizations eventually turn into for-profits or start a for-profit arm.  This hasn't changed the dynamic for the companies as most (like Mozilla) reinvest the profits back into the product/community (e.g. Mozilla likely earned $150M in 2008 revenue and $100M in pre tax profits that they put back into the foundation).   Craigslist is expected to achieve $100M in revenue in 2009 and although its for profit, remains very lean and mean.

I expect this community-driven, not-for-profit approach to start overtaking other verticals on the internet - it will be a fascinating trend to watch.

 

Comments

[Furqan Nazeeri]

You mean "not-for-profit" by *choice* I think! I know a lot of startups in that compete with those you list that have yet to show a profit...

[Todd Dunning]

How controversial would this issue become if openly debated in SV? I would love to hear the roundtable responses. I agree with the philosophy because it works. I may just add experimental functionality to see how much my growth rate is affected. Worth a shot.

[Todd Dunning]

Raj how would you classify the Freemium model then? Best of both worlds or for-profit in disguise?

After reading this post and further research, I went freemium last night and already have a slight uptick to show for it.

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Blogs are so informative where we get lots of information on any topic. Nice job keep it up!!

[Daniel Freeman]

Competing against free is never easy... Check out Atlassian's approach to distinguishing its commercial software from Open Source alternatives: www.atlassian.com/starter
Small teams without budgets only pay $10 and all of those funds are donated to www.roomtoread.org
It's a big win for all parties.

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is this low cost a problem for them?

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Not-for-profits was come to stay for a long time.

[Mernald]

Hi Rajil,

I think that it is nice that you help out start-up technology companies with your wisdom and experience, especially since you're an internet industry pioneer. I'm trying to get the word out to VC's like you, about a new website called Conektinc at http://conektinc.com. It matches VCs with entrepreneurs. If you are interested, you can enter in your e-mail address at the link I provided to receive a notice of the launch of this new site. Thank you!

[Anders]

In order to compete with not-for-profits, for-profit companies and organizations must go beyond profit. Increasingly companies must have a greater cause than just making money to attract the best developers, investors, customers etc.

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Nice topic and that's a good website there Mernald

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Yes - its funny how they all start out as non-profits, then they simply cannot help themselves when the $$ start showing up

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[Terri Brady]

Raj,
Hi! How are you? Do you remember me? Terri Estes is my maiden name. We went to CMU together (MechE 92) and I saw the recent article on you and your success with Snapfish. Yay! I am so "proud" of you! That is awesome! I don't know if you remember me; you can check Facebook if you want pictures - LOL. I think I saw Bill Cheeseman was our mutual friend. I'm a mom of 4, so not much time for FB or Twitter or Linkln, but my husband, Chris Brady (CMU - MME 92) takes care of that!

One reason that I'd love to hear from you is that my husband is looking for a success story to tell, and I read him yours (from the CMU Mechanical Engineering magazine) and he would love to talk to you. He is a best-selling author and is just finishing his 6th book on leadership. (check out his blog at http://www.chrisbrady.typepad.com/ He's just recently started "video blogging" for fun, but you can check the archives for tons of information.) Anyway, he writes a lot of historical examples of leadership qualities in his books. He'd like to include some "modern day" ones, as in someone who co-founded Snapfish in his next book, so he asked me to write you. He just likes stories like who/what tried to stop you, or when it looked like it wasn't going to work but you overcame anyway, or what made it all worth it, or why you sold, etc...

I would love to hear from you - even if just to say "hi" but not interested in being in my husband's next book. It's great to see you and your family doing so well!!

blessings,
Terri

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Its also interesting that most of these organizations eventually turn into for-profits or start a for-profit arm.

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They usually start out with very low overhead as its a labor of love from a founder that is cash strapped.

[FertilAid]

This hasn't changed the dynamic for the companies as most (like Mozilla) reinvest the profits back into the product/community (e.g. Mozilla likely earned $150M in 2008 revenue and $100M in pre tax profits that they put back into the foundation). Craigslist is expected to achieve $100M in revenue in 2009 and although its for profit, remains very lean and mean.

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Great read and I completely agree with you. I think it's following a shift in the next generation, the youtube generation where everybody wants free content. One of the only ways left to make money is to sell adspace.

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