How Digital News Startups Choose Between For-Profit and Non-Profit Status

    by Elia Powers
    March 12, 2018
    Chris Groskopf and Tasneem Raja (Photo by Jamie Maldonado)

    Last spring, when Tasneem Raja and her husband, Chris Groskopf, launched a hyper-local digital magazine in Tyler, Texas, they were more newsroom colleagues than business partners. The longtime journalists spent the first six months filling The Tyler Loop with data journalism and enterprise stories rather than soliciting advertisers or seed funders.

    “Our plan was to take our skills as national journalists and apply them in our own backyard,” said Raja, the editor and publisher. “Let’s test the waters to see what type of appetite there is for in-depth magazine or alt-weekly-style reporting. The experiment we’re going to run is whether there’s even an audience for this thing before we then start running experiments about revenue and sustainability.”

    "Non-profit is really the answer to public-service journalism. I think the for-profit model is irrevocably broken." -- John Bebow, Bridge Magazine

    The results of the editorial experiment were clear: Readers wanted more content and asked how they could donate. Raja and Groskopf put their reporting on hold last fall so they could focus on the revenue experiment. They held a series of business strategy retreats at their house. Raja sought out journalists who had worked at hyper-local digital startups, and business and community leaders with experience navigating the philanthropic landscape in Tyler. Those conversations gave Raja and Groskopf clarity on their direction.


    “Pretty much instantly, we decided [The Tyler Loop] is going to be non-profit, not just because it plays more to our personal strengths, but also I want to challenge the city of Tyler, where we live, to show that East Texas can and will support a publication like this,” Raja said. “I want that story to then resonate nationally.”

    Across the country, digital journalism startups with a hyper-local, regional or statewide focus face many of the same questions as The Tyler Loop: Is non-profit or for-profit the best fit? Within these categories, what type of classifications and arrangements are common? What revenue streams are available?

    A growing number of people who lead news outlets and organizations supporting local journalism have thought deeply about these questions. Their firsthand experience and advice are instructive for anyone thinking of starting a news operation from scratch or reinventing an existing publication.


    Make full-size for an interactive map of journalistic outlets and info about their business approaches (map by Elia Powers)

    “It’s a Tax Status, Not a Business Model”

    Matt DeRienzo is commonly the first call for journalists looking to launch a digital news outlet. As executive director of Local Independent Online News Publishers (LION), a national organization that supports local journalism entrepreneurs, DeRienzo often fields questions about the pros and cons of choosing for-profit or non-profit status.

    He first likes to make one thing clear: “It’s a tax status, not a business model.”

    For-profits pay taxes on their net income, while 501(c)(3) non-profits are tax-exempt. A 501(c)(3) organization’s activities must be directed toward its exempt purpose and serve a public interest rather than the private interest of an owner, a shareholder or other organization. This means individuals associated with non-profits cannot share in any net revenue produced.

    Being a non-profit does not relieve the pressure to build sustainable revenue sources to support organization activities. It does, however, relieve pressure to satisfy owner or investor expectations for profit that may impact journalistic and operational decisions.

    “Whether it’s for-profit or non-profit, you still have to be involved in the revenue side,” DeRienzo said.

    That message was consistent among those who advise journalists starting news operations.

    “The truth is that either [for-profit or non-profit] amounts to running a small business,” said Sue Cross, executive director and CEO of the Institute for Nonprofit News (INN).

    Stefanie Murray, director of the Center for Cooperative Media at Montclair State University, works with many hyper-local newsrooms in New Jersey. She said there is often a perception among for-profit journalists that “if I could just be non-profit it would be easier, but once they start getting into the weeds, they realize it’s not easier by any stretch.

    “Being nonprofit in many ways is the same as being for-profit in that you have to build a business model and you have to figure out where your revenue is going to come from,” Murray said. “What we tell people is that it really depends on your community and what you think you can build there.”

    “Choose a Path That Fits Your Vision and Your Skills”

    Three journalists began building Berkeleyside, a news outlet covering Berkeley, California, and the East Bay, nearly a decade ago. Like Raja and Groskopf at The Tyler Loop, the Berkelyside co-founders saw a gap in local news coverage, spent six months writing news stories as a side project and focused on building a sustainable business model once it became clear that they had a sizable audience.

    Unlike The Tyler Loop, Berkeleyside went the for-profit route. Co-founder Lance Knobel said he was confident that Berkeleyside could become a sustainable business. He liked the idea of “being totally in control of our own destiny” rather than having to consult with a board of directors as a non-profit. And he had concerns about finding sustainable foundation support.

    “We knew what we were doing as a for-profit business as opposed to the non-profit world,” Knobel said. “Grant writing and developing a relationship with foundations weren’t things that any of us knew how to do or were eager to do.”

    Knobel’s advice for journalists facing a similar decision: “Choose a path that fits your vision and your skills. Not every journalist is good at the other stuff and you need to have an honest assessment of what you are good at and what you want to devote your time to.”

    Becoming a for-profit can be the path of least resistance. “We see a lot of the news organizations we work with go the for-profit route immediately because it’s so much easier for them to get started,” Murray said. “They can incorporate as a business and essentially start doing their work.”

    DeRienzo, the LION executive director, said the decision often hinges on the long-term goals of the team launching a publication.

    “If they really do think they have an entrepreneurial opportunity that they can make money from, you want for-profit and the freedom that comes with that,” DeRienzo said.

    Knobel and his co-founders saw an early opportunity with local advertisers eager for a place to reach online audiences.

    Jay Allred, publisher of the Richland Source, a news outlet covering North Central Ohio, found a similar opening to help small businesses reach local readers. Both he and the publication’s founder had experience working at for-profits. “That’s all we knew,” Allred said. “We understood that better and looked at [the Richland Source] as a for-profit from the beginning.”

    Another important consideration is how long a publication’s founders plan to stay involved. Cross, the INN executive director and CEO, said entrepreneurs who “want to start something to re-sell are most likely to go with the for-profit model.”

    Added DeRienzo: “If you really have a vision for something that may outlive you, then the nonprofit model might serve you better. There’s not huge profits to be made at this, and so you can earn a decent living but you aren’t necessarily going to flip it and sell it to somebody. If you build a nonprofit with a board of directors who cares about it, that could be something that could be around beyond you if you build it right.”

    Yet another factor is who will be selling the news outlet’s vision to potential funders.

    “If you get more excited about making a pitch to donors than you do selling advertising or services, the nonprofit route might be better for you,” DeRienzo said.

    That was true for Raja, whose experiences in non-profit journalism before launching The Tyler Loop — reporting for Mother Jones and helping to launch The Bay Citizen — taught her what it takes to make a pitch to potential supporters.

    “Getting them to invest in you and take you seriously, all of that feels very familiar to me as an editor and as a reporter,” Raja said. “It felt like I know how to talk to my readers and I know how to sell my story to the readers. That translates to me into I know how to sell a story to potential funders.”

    Emily Dech in the Richland Source newsroom. (Image courtesy Jay Allred)

    Added Allred: “If I’m coming out of a newsroom I’m a trained storyteller. I understand how to craft a narrative, and so much of grant writing is telling a story.”

    Yet it’s too simplistic to say that founders with a journalism background most often prefer to start as non-profits and those with a business background as for-profits.

    “I’ve seen very strong business-oriented people become non-profits,” INN’s Cross said. “Sometimes they are most clear-minded that this is not a viable commercial business if you are producing public-service news.”

    What’s the “Core Mission”?

    News outlets that have a public-service mission and primarily do original reporting often prefer to be non-profits.

    “Many commercial news organizations have a public-service component, but it’s not their core mission, it’s part of their mission,” Cross said. “Non-profits tend to start with [a mission] and figure out how to make enough money to support it.”

    John Bebow of Bridge Magazine

    Bridge Magazine, an Ann Arbor-based news outlet with newsrooms in Lansing and Detroit, has a civic-oriented mission that’s common among non-profits. Phil Power, the founder and chairman of The Center for Michigan, a 501(c)(3) organization that publishes Bridge, previously owned community newspapers in Michigan and the Upper Midwest. John Bebow, the center’s president and CEO, spent the vast majority of his career working at for-profit newspapers in the Midwest. Both came to the same conclusion about how to support statewide news coverage.

    “Non-profit is really the answer to public-service journalism,” Bebow said. “I think the for-profit model is irrevocably broken.”

    For-profit newspapers have de-emphasized time-consuming and resource-intensive investigative journalism and public affairs coverage. Some of the newer digital-only for-profits are attempting to fill that gap.

    One way for-profits can signal their public-service mission is by becoming a Benefit Corporation, which Berkeleyside describes as “a type of for-profit corporate entity that includes positive impact on society, workers, the community and the environment.” Knobel, Berkeleyside’s co-founder, said the decision to become a certified “B Corp” was a no-brainer because the publication is driven by a civic mission.

    DeRienzo said the vast majority of LION members are mission-driven for-profits, making the B Corp designation a potentially good fit.

    “[Our members] are doing public-service accountability journalism and in exchange for that they aren’t expecting a 25 percent profit margin to go to some shareholder,” DeRienzo said. “They don’t have that money –they’re bootstrapping this. All they are trying to do is make an OK living doing journalism in their community. When they get profits beyond their budget, they hire another reporter. It’s almost like a nonprofit model.”

    Finding Funders Who “Understand the Value of Local News”

    Both for-profits and non-profits often rely on early individual investments. Berkeleyside secured funding from an angel investor who still maintains a stake in the corporation (its three co-founders plus an early employee control the majority of voting shares).

    Bridge got a major early boost from The Center for Michigan’s founder and chairman, whose family continues to provide significant annual support. Bebow recognizes his good fortune.

    “If you have an angel funder it certainly helps you initially,” he said. “In Michigan we are also blessed with a very healthy and generous foundation community.”

    That’s an important asset for non-profits, which typically reach out to foundations for early financial support. “If you have a local community foundation that’s willing to put up seed funding for the first two years of your operation, that’s a great incentive to consider the non-profit model,” DeRienzo said.

    But securing foundation support can be difficult. National foundations rarely give operational funding to local outlets. Murray, the Center for Cooperative Media director, said in New Jersey there aren’t many foundations that support local news. But she is optimistic that will change.

    “I think we’re going to start to see a sea change over the next two to three years that we will see more local, place-based family and community foundations that will support more media outlets through creative ways,” Murray said.

    Allred said if the Richland Source launched now as opposed to five years ago, he would give serious consideration to going the non-profit route. “There’s so much more awareness now of what a vibrant local news ecosystem means to a community,” he said. “In 2013 you had to make that case. Now people at the local foundation level understand the value of local news.”

    Added DeRienzo: “There is potential for more place-based foundation support of journalism. Those foundations recognize that local journalism is key to fulfilling their other charitable goals.”

    Steve Beatty, a LION consultant and former publisher and chief executive officer of The Lens, a New Orleans-based non-profit outlet, said foundation funding is always precarious for non-profits with an investigative bent.

    “Local foundations usually are led by people in the local power structure, and people in the local power structure are the ones who get written about by a watchdog organization,” Beatty said. “Eventually you’re going to burn all of your foundation contacts one way or another.”

    That’s less of an issue for small donors and members — key revenue sources for local news outlets. Non-profit news outlets, in particular, have benefitted from News Match, a campaign to encourage individual donations to newsrooms.

    Sensing increased fundraising opportunities in their communities, some for-profits have switched — or considered a move — to non-profit status. “That has happened in some cases where for-profits have converted into non-profits because the community has stepped up and said we want to make sure you continue and we are going to provide some funding,” Cross said.

    “The Lines Are Blurred”

    But converting may not be necessary for news outlets to achieve their financial objectives. DeRienzo said many for-profits in recent years are “pushing heavily into non-profit-like endeavors” such as voluntary paid memberships.

    Berkeleyside, for instance, has roughly 1,200 paid members who give at least $5 a month. It has also raised $850,000 through a direct public offering that allows readers to become investors. Knobel said that while the direct public offering requires a larger individual investment and may not be viable in every community, the membership model is replicable.

    Non-profits are also tapping into “for-profit-type revenue streams,” DeRienzo said. This includes advertising, events and services.

    “Increasingly, the lines are blurred in terms of activities,” DeRienzo said. “People assume that non-profit is more restrictive than it actually is in terms of revenue streams.”

    Added Cross: “There aren’t a whole lot of firm barriers to revenue streams for non-profits.”

    A non-profit can obtain only limited revenue from activities that are unrelated to its exempt function, such as advertising appearing on the organization’s website and the sale of merchandise. Taxes must be paid on any such income. And according to IRS guidelines, 501(c)(3) tax-exempt organizations can’t “attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”

    Non-profits can start raising money before they are recognized as tax-exempt by the IRS. One arrangement is fiscal sponsorship, in which a non-profit organization serves as the “home” for the news outlet, helping in ways such as administering charitable contributions and providing financial oversight.

    “Fiscal sponsorship is increasingly common,” Cross said. “It’s a really efficient way for businesses to get started in a non-profit model.”

    Cross and DeRienzo said they are increasingly hearing interest in hybrid models in which a for-profit entity owns a non-profit, or vise versa. But these remain rare in the news industry.

    “It’s new, so most organizations if they are small, I encourage them not to do that,” Cross said. “With all the structures and requirements, it’s like having two business models, which increases the workload.”

    Added DeRienzo: “I think most people are exploring the hybrid model not for the question of what do we do with profits but more the question of how do we have the freedom of a for-profit while being able to accept grant money or tax-exempt donations. It’s more about the money coming in than the money going out.”

    Another option available to for-profits in some states is becoming a low-profit limited liability company (L3C), which makes it easier for socially oriented business to receive funding from charitable organizations and private investors.

    The number of options for entrepreneurs is growing. Knobel’s advice: “I wouldn’t get too caught up in ‘Am I a Mac or a PC…’ There’s no single right solution. The burgeoning of non-profit news sites is a fantastic thing. I think the burgeoning of for-profit news sites is a fantastic thing. We need all of them.”

    Elia Powers, Ph.D., is an assistant professor of journalism and new media at Towson University. He writes regularly about news literacy, audience engagement and nonprofit journalism.

    Tagged: business models for-profit foundations hyperlocal individual donors local journalism new nonprofits

    Comments are closed.

  • Who We Are

    MediaShift is the premier destination for insight and analysis at the intersection of media and technology. The MediaShift network includes MediaShift, EducationShift, MetricShift and Idea Lab, as well as workshops and weekend hackathons, email newsletters, a weekly podcast and a series of DigitalEd online trainings.

    About MediaShift »
    Contact us »
    Sponsor MediaShift »
    MediaShift Newsletters »

    Follow us on Social Media