Chapter 7: The Brick Wall
In which Carrotmob discovers that they cannot legally pursue their plans as a non-profit organization.
Let me pause this story and share a little about the revenue models we had been developing. Carrotmob creates value for a lot of people, and there are a number of different ways that we could monetize Carrotmob campaigns. At the end of 2010, we had not yet started pursuing a revenue model or making any money, but we had three revenue model ideas which we were most interested in pursuing in the future:
1) Take a cut of all spending
It’s just so clean, so simple. We would have different ways of facilitating purchases for Carrotmob campaigns, and we would keep a percentage of all the money that would flow through. Groupon takes a cut from merchants, Apple takes a cut from developers, Kickstarter takes a cut from project creators, eBay takes a cut from sellers… a classic model. People would buy things at the normal price, but we would take some percentage out of what the businesses would normally receive. Then we would use that money to create more campaigns, scale our impact, etc.
2) Lead generation for advocacy groups
Lots of large advocacy groups would find value in organizing Carrotmob campaigns to better advance their missions. We could help them with that, but we could also help them get new members for their email list, and new potential donors. How? Well, when our members sign up for a campaign we could offer them the chance to opt-in to the email list of the organization behind the campaign. If the user joins, then the advocacy group could pay a couple bucks for each new email address. This model is already quite common, and has been put to use successfully by other organizations, like Change.org and Care2.com.
3) Bringing retrofit projects to ESCOs and taking a commission
Most of our early campaigns have been related to energy efficiency retrofits. We’ve been contacted by multiple energy service companies who are interested in completing the work to make businesses more energy efficient. You can imagine that someday we might Carrotmob a big business (say, a hotel chain). Suddenly, some company would need to do the work to actually retrofit those buildings. We could partner with some such company (for example, Honeywell Building Solutions), and we could do all the work to set them up to get a multi-million dollar contract from the hotel chain in exchange for a commission fee.
I like the first model the best, but what matters most to the Carrotmob movement is that we have SOME model like this in place, because that’s the only realistic way we will have enough income to survive, grow, and create the impact we seek. When we shared these basic revenue model ideas with people in the non-profit funding community we received a very positive response. Everyone likes non-profits that can sustain themselves with revenue models besides donations. So in January of 2011 we were pretty focused on preparing to raise money. We also had some other tasks to take care of, one of which was to submit our Form 1023 (application to be a non-profit, tax-exempt organization) to the IRS, so we could graduate from being a fiscally-sponsored project of the Rose Foundation to being our own official non-profit. It was during this time that we learned something very, very interesting:
Carrotmob, as it was then organized, could not be a 501(c)(3) tax-exempt nonprofit organization.
Hahahahaha… what? That was essentially the only way I could respond as our legal team made this clear. Of course we can be a non-profit. Why did I just spend a year working to create and build a non-profit? Hahaha. Hahahahaha. What?
It’s true. You may be wondering, as I wondered, how this was possible. Why can’t Carrotmob be a tax-exempt non-profit? Well, there is a very long and detailed response to that question that I’m not actually equipped to provide, since I don’t have a law degree, nor do I have years of experience studying IRS revenue rulings. But I will try to sum up the short version:
First, we found out that some of the particulars of our planned revenue models fell outside the boundaries of what a non-profit can do for its main source of income. It would have been very difficult to proceed as planned without being able to implement our revenue models, but on top of that we discovered that our planned mission didn’t qualify as a charitable purpose, according to the definition used by the IRS. Sure, our motive is to “do good,” but that’s not enough. Non-profit organizations in the US cannot be “operated for the benefit of private interests.” Meanwhile, Carrotmob’s primary activity is basically to ask people to go to private businesses and spend as much money as possible so that the businesses make more money! Sure, the whole point is to create a positive social impact, but the IRS has a very specific definition of what it means to be “charitable,” and we don’t fit it. The fact is, we are helping businesses with sales and marketing. There’s no precedent for an organization that does sales and marketing for private businesses being categorized as “charitable.” Yes, the laws are outdated. Yes, the spectrum of available legal structures does not yet match the diversity of mission-driven organizations in the world. Yes, it’s annoying. But it is what it is.
With this news, everything hit a brick wall. Again. All the progress of the last year was forced to grind to a halt. Financially and legally, everything was falling apart. On a personal note, at precisely the same time that this was all happening, I was going through the end of a four and a half year relationship, and by extension, a move from Berkeley back to San Francisco. Thankfully, even though I had almost no money, some good friends in Bernal Heights let me move into a cheap room which was previously a storage closet for guitars and amps (the same room in which I now sit, a year later). In such a situation, what happens next? When one is completely empty, both emotionally and financially, what does one do? I think the logical thing would be to stop working on Carrotmob, get a job, get out of debt, and start doing things like having fun, taking weekends, going to concerts, meeting girls, etc. On the other hand, I’m not one to give up. Not when I’m completely obsessed with something. Not when there’s a global movement of Carrotmobbers that needs support. I believe that we have an opportunity to revolutionize how businesses work, revolutionize how we use our consumer demand, and offer one potential cure to the sickness which is hurting democracy itself. That hope is not something I can walk away from.
And so our relentless journey would continue, and Carrotmob would soon be reborn again, again, again, as you will read about in Chapter 8!