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David and Tom Gardner

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from: David Gardner

Why For-Profit Should Be Cooler

Posted Monday, May 7, 2001, at 5:38 PM ET

Dear Tom,

Glad to know we could lure you off the beach. Truly, the dream vacation ... Hawaiian sunrises, Kohala Coast snorkeling, and the constant nagging need to answer two of your brother's e-mails, day in and day out. What more could a human being ask for?

It's amazing to think that all drugs might be legal within 50 years, but I, too, think it'll happen. Consider that less than 100 years ago, women couldn't even vote. Less than 70 years ago, the sale of alcohol was illegal. Less than 50 years ago, if you were black, you couldn't vote. Etc. In societies based on freedom (and free markets), freedom will eventually win out.

I wanted to throw one more fly out over the river today:

Fly No. 4: Don't you find that the distinctions between for-profit and not-for-profit--between investing and charitable giving--are far too loaded and divisive? They fail to recognize the essential similarities of these acts.

I say "loaded" because the implications are that the former is motivated by greed and selfishness while the latter is motivated by love and altruism. "Divisive" because these impressions cause people to draw radically different conclusions; we tend to venerate and uphold the giver and only tolerate, envy, or even despise the investor.

In fact, both charities and corporations--all organizations!--are attempting the same things: either to solve a problem or to create a new possibility. The capital that is given to them, whether in the form of investment or donation, enables these organizations to work toward achieving their missions.

Thus, the primary difference between the investor and the giver is that the former becomes a part-owner and the latter doesn't. It's rather like the difference between owning or renting habitation. If you know the difference between keeping up your own property versus expecting your landlord to do so--in so many ways--then you know what I mean.

Indeed, investors--because they have a stake, because they have truly become owners--are in my experience more responsible and concerned givers. And for the most part, they are giving to institutions that will be more effective in the use of their capital to solve that problem or create that new possibility.

I believe that in time, we will achieve for-profit solutions to most problems; I think it's already evident that in terms of creating new possibilities, almost all this creation is coming from the private sector. (Technology, etc.--in fact, in the decade to come, largely for the reasons stated above, I expect a flight from not-for-profit university research to for-profit ventures among scientists in biotechnology and other fields.)

Thus, I think in time we will see a marked decline in either the number or influence of not-for-profits once more of us realize that 1) for-profit entities are, by and large, more effective and self-sustaining than not-for-profits and 2) we can become part-owners of the one but not the other. This is straight logic aligned with what I know of human nature.

What still must happen that hasn't happened yet is that entrepreneurs must look deeper at society's problems today and imagine, create for-profit solutions to them. That's why "venture philanthropists" are now "in," cooler than mere philanthropists. In the end, I see even the role of venture philanthropists being supplanted by venture capitalists as the efficiency and benefits of privatization play themselves out.

Aloha.

the breakfast table
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from: David Gardner

Why For-Profit Should Be Cooler

Posted Monday, May 7, 2001, at 5:38 PM ET
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David and Tom Gardner are co-founders of The Motley Fool, a personal finance company. They are dedicated to educating, amusing, and enriching people through their Web site, books, newspaper column, and radio and television shows.
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[Notes from the Fray Editor: We're running Arthur Stock, because of his starring role in this week's "Breakfast Table" (this was his featured post), but Kate persuasively argues the opposite about Krispy Kreme here ("Hot sugar and fat beat microchips..."). Some good ruminations about the quality of life of the have-nots: try LT here (the lifeguard was a woman in fact--LT knows why that would be ironic...), or this post: "Short sightedness does not magically transform the HaveNots into Haves, it just keeps them from griping about the inequities." RonK has a comprehensive flame post for anyone looking for an argument here. There are Questions for Sowell here from Tom R, and two points of view on what The Fray has to offer in this thread.]


Krispy Kreme is a pure momentum play, and its momentum is played out. It's a product that appeals to the stock-buying class, and was new to many in that class (since it went national very recently) when they bought the stock. These stocks do well at first because people buy the stock after enjoying the product, without looking at balance sheets. Then the stocks collapse to sane levels--P/E closer to 20 than 90. Think of Calloway Golf Clubs some years back, mircobreweries, cigar sellers, Yahoo, and in the food world Snapple and Boston Chicken. Starbucks is almost an exception that proves the rule, but even it had several 50% falls along the way.

Krispy Kreme has limitations that can't be fixed: food is a competitive industry; Dunkin' Donuts demonstrates that there is competition even in the sub-category; franchise operations are subject to all kinds of accounting gimmicks for the first year. Boston Chicken, now in bankruptcy, was notorious--I don't know if Krispy Kreme is playing accounting games, but it would be difficult to determine that it isn't.

Foods with holes in them are especially poor investments, as Manhattan Bagel, Einstein Bagel, and several other bagel purveyors proved.

--Arthur Stock

(To reply, click here.)


 Whenever I hear someone start talking about finding for-profit solutions to social problems [Monday's entry] I think of a quote by Bill Speidel about Seattle's city fathers. "If they could have made more money by not building a city, they would have."

And there, in a sentence, you have the promise--and the problem--of for-profit ventures. What looks from outside like a remarkable feat of a healthy social conscience, in truth, relies on nothing more than a healthy respect for the bottom line.

The trouble is there in that "if" clause: when that bottom line comes into conflict with the social goals and one or the other has to give, which way are the venture philanthropists going to jump? Especially with any philanthropy that ventures into the tricky area of public goods, the good accomplished is only rarely monetizable.

--James Grimmelmann

(To reply, click here.)


 As far as I know, no society has yet come up with an incentive structure which rewards leaders by how well they are able to make impartial policy decisions, though it would be a great discovery. It's a nice try, but I don't think hiring economists to run the country would be the perfect solution.

The problem with economists is that they study only certain social relations, those that can be converted into cash. There are indeed harsh economic realities that we must face in making policy decisions. However, there are also harsh social, diplomatic, and environmental realities which economists do not take into account in their analyses. Of course economic growth is important, and policy makers should know exactly what they are doing to the economy and to individual businesses, but they should not assume that commerce trumps all other interests. (Stop waving those copies of Atlas Shrugged at me! Ayn Rand isn't even an economist!)

--Jane Grey

(To reply, click here.)

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