Tax Status Revisited

A big theme of the journey through Kiva has centered around the decision of organizational type. Jess and I started out right away thinking it would be formed as a nonprofit. One of the first things she did was to look for an attorney to incorporate us as a 501c3. It took over a year from start to finish to get 501c3 status and it was a serious pain.

This summer was kind of rough in this regard. It was taking forever to hear back from the IRS. We sent a letter to them to expedite the process but didn't hear back for months. Kiva was crawling along at $1-$2K in loans and 25 new users a day. We weren't making traction very fast.

There are a lot of debates in social entrepreneurship around the topic of whether to become a 501c3 or become a for-profit. It's my impression that prevailing winds within the field suggest the for-profit model whenever possible. "It's hard to scale a non-profit" , I would hear a lot. Or, "you can access so much more capital" if you convert to a for-profit model.

That was just my experience with people in the social sector. However, It contrasts sharply with what I heard from the financiers of the tech world, Premal and I spent a fair amount of time in the offices of Sand Hill Road...especially last summer. In general, the VCs we talked to wanted to consider ideas that had a decent shot at a 10x return on their investment. When we ran models of trying to eke a 10x return out of Kiva's model, it never felt quite right.

We also briefly looked for "patient capital" investors but turned up very little. There just not a lot of that patient capital out there knocking down doors. This new, but limited, class of investment is arguably harder to access than donations.

I've had the luxury of working closely with three experienced angel investors on the board. This fall I was at a breaking point. At our October board meeting, we were down to $15K in cash reserves with a monthly burn rate of about $15K. Fundraising was getting pretty urgent and wasn't sure if we could hit payroll. I ran the for-profit idea past the investors . Unanimously, the board shot down the for-profit idea. One board member asked us to call him if we were about to hit zero so he could liquidate some of his assets.

Right after that, the Frontline PBS show happened. Combined with a new model around optional lender fees, we became cash-flow positive the next month. We now have much more predictable income and are financially stable. We never had to call for a liquidity event.

I'm not religiously tied to the nonprofit structure. It's working for us now, and has several advantages. Prominent among these is user good will and branding. I consider Kiva to be a public property owned by it's users. This feel would be harder, but not impossible, to pull off if we were a for-profit. There is a level of trust we gain as a nonprofit that would be harder to gain as a for-profit. Equally important are variable cost savings because of donated services. Right now, PayPal has donated free transaction processing to us, which means we aren't charged the usual 3% off of every transaction. Our model would be much more difficult to pull off without PayPal's partnership.

For anyone deciding between the two, my main thought is to be fiercely practical -- not religious -- about the org type you choose. These are tax-structures, not religions, you are choosing between. Each can be maximized in it's own way if you just focus on getting work done.