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Why HGL invests in for-profits

Each year when we issue our Accelerator Open Call, we immediately get asked if nonprofits can apply. 

Higher Ground Labs invests only in for-profit companies. We have chosen this model intentionally. While we believe that there is a role for nonprofits in political technology, we also believe there is a role for for-profit startups. Over the past six years, our job has been to find, fund, and support those startups to scale across the progressive ecosystem. We intend to continue filling that niche excellently and exclusively while partnering closely with organizations of all tax structures across the space. 

HGL believes that technology can help campaigns and organizations save time and money by running more efficient, effective programs. We were founded on these values and strive to live them out through our investments. We believe that for-profit companies are the best vehicles through which we can achieve these goals. For legal, economic, and cultural reasons, we continue to see for-profit investment as the most efficient path to impact for our industry. 

Legal: Perhaps the most obvious reason we chose to invest in for-profits is because of the flexibility companies have to work across our space. A for-profit company can sell goods and services at fair market value to any type of entity concurrently: another company, campaigns themselves, PACs, advocacy organizations, and c3s. In politics, the programs, talent, and funding sit in a different combination of entities each year. Companies have the necessary flexibility to actually serve the entire ecosystem. 

Economic: Companies look to the market for validation that they are building the right thing – and ultimately, to survive. The political market is small and finicky. While there is money in the industry, every dollar is coveted and resources are scarce. Campaigns and organizations are careful to use their hard-raised capital in smart, efficient ways. Companies are dependent on these spending decisions to create sustainable platforms. The most successful companies build quick MVPs and check for market validation before scaling their products. Once they do scale, the lack of ongoing capital forces companies to get to profitability as quickly as possible in order to sustain operations. We see this focus on revenue growth and sustainability as a strong path to building and sustaining a technical infrastructure that meets the needs of this market. 

This is a stark contrast to the nonprofit models that require constant fundraising for innovation and development. The funding landscape for nonprofit organizations is not designed to build and maintain technology. Grants are often awarded for specific programs rather than for technology maintenance, sales, and customer success. In politics, we believe that nonprofit dollars are better spent in campaigns and organizations that are designing programs that can then choose what technology they need to operate and use their non-profit donations or political contributions to purchase those platforms. 

Cultural: Startups typically have a distinct culture from more established companies and organizations. The industry’s best practice is to get to market quickly and iterate rapidly to meet customer needs. In addition to salary, employees are awarded equity, aligning incentives around growing the business. Prioritization of features can happen based on the needs of users rather than the interests of the grantors. These cultural “truths” are helpful in building technology for a small, particular market with distinct needs and users. We see better retention, employee satisfaction, and compensation as a result. 

We believe that there is a core role for nonprofit organizations in political technology. If a nonprofit leader or board can secure ongoing funding for a technology that serves a core need of the ecosystem, then building it as a nonprofit might make a lot of sense. There are some pieces of technical infrastructure that lack a clear business model but address a core ecosystem need that are best supported in the short- and long-term by nonprofit organizations. In those circumstances, we fully support the creation of those entities and are proud to partner with many of them. 

The primary concern we hear from our partners in the space around for-profits is how to protect the mission and IP from falling into the wrong hands. There are several levers that can be used to manage companies to prevent undesirable outcomes. Here are a few suggestions we have seen used in the past to consider when setting up your company:

  • Incorporate as a public benefit corporation and/or certify as a B Corp. This gives the board of directors the ability to balance its fiduciary responsibilities to shareholders with the company’s mission. 
  • Build the right Board of Directors. The Board is the governing body of a company and makes the ultimate decisions regarding the overall direction and strategy of the business and the hiring and firing of the CEO. If the Board includes movement leaders, they will direct the company to remain a solid actor in the ecosystem. The company can and should pre-determine board composition in their bylaws at inception in order to protect against undesirable outcomes. 
  • Adopt bylaws that protect your mission. Bylaws state the rules and organizational structure a corporation will follow. They establish important policies and decision-making roles.
    • Mission-driven companies might decide that the Board always has a vote in change-in-control scenarios. 
    • The bylaws might also provide that the Board has oversight of customer selection (targeting a majority of industry customers) and budget approvals. These levers can all help ensure the Board has control over the company alongside investors. 
    • Build in appropriate “poison pills” to disincentivize bad actors. This is a tactic commonly used by companies to protect against shareholder takeovers. They can be adapted and used in political technology to protect the company from ending up in the wrong hands. There are several types of poison pills that can be woven into a company’s bylaws. You can read more about common poison pill options here

At the end of the day, a tax status doesn’t dictate mission. Deliberate decision making does. As investors, we check how each of our companies are approaching governance and mission protection. We have chosen to try to take the best of the for-profit model and employ strong governance best practices to build a stronger, sustainable technology ecosystem. We hope you will join us.