Building an enterprise is fundamentally different than buying from an enterprise. And yet, standard nonprofit accounting sheds no light on the building vs. buying distinction.

I believe that this missing distinction is a major reason why a market for nonprofit growth capital has failed to materialize. The good news is that the system can be fixed more easily than one might expect.

Building the Enterprise (e.g. investing capital towards the creation of a tutoring outfit) requires growth capital and close stewardship. It requires a patient process of trial and error. It is highly technical and has a high risk of failure. More often than not, it requires major shifts in strategic direction, and major shifts in personnel. Also, it is an episodic thing – once an enterprise is built, the builders can go on to other projects. Indeed, it is precisely by dismantling their growth capital “scaffolding” that they prove they have built an enterprise that can stand on its own.

Buying from the Enterprise (e.g. exchanging revenue for tutoring sessions) is not about trial and error. It’s about “what work will be done in exchange for my money?” It isn’t about changing what the enterprise does; it’s about asking the enterprise to more of what it already knows how to do. So it’s not about risk, or about shifts in strategy. It’s about “show me what you do, and how you stack up so I can decide whether I should buy here or go elsewhere.” Finally, unlike building, buying is an ongoing thing, in the sense that if you buy something once and like it, then you might as well come back for more.

Read the source article at Nonprofit Finance Fund