Profit makes organizations auto-catalyzing

Autocatalytic reactions produce at least one of their own reactants so they tend to be much more robust than other reactions. Arguably life itself is one giant autocatalytic reaction. In the same way, profitable organizations produce the key ingredient for keeping an organization going: money. In effect, profitable organizations become their own money factory. Innovation orgs need a money factory. Autocatalytic organizations are more robust and ultimately have more leeway to take unconventional actions.

Funding operations directly from their output gives an organization as much control of its own fate as possible. A profitable business has many long-term survival moves at its disposal. It can build up cash reserves to hold it through down-markets; it can sell stock to raise cash; it can shift products to adjust to changing demand; it can grow or shrink depending on the need. All of these moves are possible with minimal regulatory restriction or third party permission. These moves can contribute to organizational longevity which in turn can enable an organization to take on long-term projects that would otherwise be off the table. In addition, larger profit margins translate to more slack in the system for unconventional actions. Low margin organizations (rationally) avoid rocking the boat because they can quickly become unprofitable while high margin organizations can afford failed experiments.

By contrast, if you are funding operations by purchasing debt, selling equity, or soliciting donations you’re obligated to one or more entities that care about something besides the organization’s output. Ideally, incentives are aligned even in this situation, but Reaper functions dominate other incentives and at the end of the day, equity investors care about their share prices going up, debtors care about being paid back, and donors care about feeling good.

The only way for an organization to become auto-catalyzing without being profitable would be to somehow amass a war-chest large enough to fund operations out of interest on its principal. Looking at a list of the longest lived organizations in the world, they’re overwhelmingly profitable companies that make and sell goods people want (usually food or alcohol) and universities. <ref: The data of long lived institutions>

On top of flexibility and long-term survivability, profit also creates an extremely tight feedback loop between an organization and the outside world.^1 Arguably, cold, hard cash is one of the only metrics that isn’t automatically subject to Goodhart's Law - if your organization’s goal is genuinely selling a product or service, profit is a hard metric to game short of literal fraud.

While it’s nowhere near as useful as actual profit, aiming for eventual profitability can still contribute to organizational longevity. Practically, it’s both easier and less organizationally risky to raise capital if you’re aiming to become (or better yet, are) profitable. People are much more open to parting with their money if they think of it as an investment instead of a donation. And obviously the less uncertain and closer to the present that profit is, the less you need to pay for that money. In the context of talking to people about riffing on ARPA I’ve gotten “can I invest?” Several times, but never “can I donate?” Of course, targeting eventual profitability can also backfire from an organizational longevity point of view.

The trick is threading the needle between organizational goals and what people will actually pay for. We tend to laud organizations that have pulled this off - they become household names like Apple, SpaceX, Zappos, etc. It’s pretty clear that they are better equipped to deliver delightful electronics, spaceflight, and internet shoes than a nonprofit with the same goals. Alignment is easy if your organizational goal is just ‘make as much money as possible’ but that is often not the case for organizations in the 21st century that are often started to fulfill some mission “and to make money while doing it” <Institutions have implicit, explicit, and perceived missions> and I’m guessing especially not the case for many people reading this. I suspect that an underlying point of disagreement between people who laud profit and those who denounce it is how feasible it is to align organizational goals and profitability. It’s easy to to get sucked to one end of the spectrum or the other - either that it’s possible to align profit and other goals in almost every situation or that profit inevitably distracts from other goals. Like most dichotomies in complex systems, I suspect the answer is “it depends.”

^1:Jason Crawford argues that cash-flow also creates the tightest possible feedback loop with the world outside the organization.

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