Nonprofit Enterprise: Right for You?

Print Share on LinkedIn More

The nonprofit world is abuzz these days with a new vocabulary. The latest conferences, workshops and publications are touting the merits of social entrepreneurship, nonprofit enterprise, and entrepreneurial nonprofits. There is much discussion about how the distinctions between nonprofit and private sector practices are blurring. Cross-sector collaboration is informing methods, standards, and strategies. Nonprofits are encouraged to think and act like businesses, and many are actually exploring ways to generate revenue through nonprofit business ventures. All of this blending of the sectors is sexy and in vogue. But, what does this mean for the typical nonprofit organization trying to do its important work?

More and more nonprofits, faced with real and anticipated funding cuts and pressure from board members and grant-makers to be more entrepreneurial and resourceful, are exploring revenue generation as a panacea. They are looking to diversify their funding stream by creating businesses that produce a financial return from the sale of products and services.1 But nonprofit enterprise is a serious endeavor that requires a significant amount of research and planning. It usually requires a change or shift in attitude among board and staff, as well; many nonprofit managers lack the business skills required to launch or otherwise grow successful ventures. As further limitation, nonprofit organizations developing earned-income ventures have few opportunities to share their experiences or learn from others in the field.

Nonprofit enterprise is not for everybody and yet, despite these challenges, the movement toward income generation continues to build as an increasing number of nonprofits investigate and initiate business ventures. Some of these ventures succeed, yet many more fail to meet either their social or financial goals. Clearly, the field lacks well-defined criteria, standards, and strategies for achieving success in this area.

Recognizing a growing trend, The Pew Charitable Trusts commissioned a study to research and summarize the landscape of nonprofit business ventures, and test the feasibility of a business plan competition for nonprofit organizations as a way to provide guidance and resources to nonprofits most capable of launching and operating revenue-generating business ventures. The conceptual underpinning of the intervention was the belief that the sector should encourage and improve the quality of business venturing among nonprofit organizations, and discourage those ill-equipped from starting a venture and risking irrevocable damage to their organizations.

Taken in the aggregate, our research points to a number of trends that can begin to help us sort out the range of practice, identify success factors, and assess the conditions that should be in place before any serious exploration of earned income can begin.2

Our survey drew respondents from a wide spectrum of the nonprofit sector–519 organizations responded from human services agencies to public society and benefit associations, educational institutions and health organizations, arts and educational institutions as well as religious organizations. One in four respondents said they were already operating earned income businesses, while just over half said they had never operated a business venture. Five percent indicated they had operated a venture in the past, but had since shut it down. Our research indicates that these nonprofits are operating a full spectrum of activities, along what Gregory Dees has identified as the “Continuum of Options”–from the purely philanthropic through the hybrids to the purely commercial.3

In our survey, nearly three-quarters of nonprofit enterprises fall into the service-related arena; that is, they charge a fee for their services. Examples include at-home eldercare services and educational classes and workshops. Just under half are operating product-related enterprises and sell merchandise such as a catering or bakery business, thrift shops and museum stores. About a quarter are running real estate properties that throw off income such as parking garages and leasing buildings. About 15 percent are engaged in cause-related marketing with the private sector, such as licensing their logo for use in a joint marketing campaign.

Some of these businesses are “affirmative” in nature; in other words, the enterprise earns revenue and serves the nonprofit’s clients by providing jobs, competitive wages, career tracks and/or ownership opportunities to people who are mentally, physically, economically or educationally disadvantaged. At the other end of the spectrum are strictly commercial ventures that are launched without any social goals. Their sole purpose is to drive revenue back into the nonprofit organization.
If we can assume that the demographics of our survey respondents are representative of the nonprofits operating ventures at-large, our research suggests various thresholds. For example, the greater the budget size, the more likely the organization is to operate an earned-income venture. The number of employees also plays a role—the more employees staffed in an organization, the more likely it is to operate an earned income venture. Nonprofits operating ventures also tend to be older, and more experienced.

Not surprisingly, we also found that nonprofits that professed to be entrepreneurial were more likely to run business ventures than those that do not maintain an entrepreneurial culture. Nearly three in four of those operating ventures said they are entrepreneurial compared with just under half that are not operating enterprises. Our research suggests that this entrepreneurial spirit has indeed sparked interest in nonprofits’ desire to attain greater self-sufficiency.

Though financial return is the primary reason more than half of the nonprofits in our survey launched their earned income businesses, it is clearly not the only motivation. Nearly one in four said that their venture serves their clients by providing employment, training, and other therapeutic opportunities; a third said their venture generates positive community relations; and a quarter said it helps to revitalize the neighborhood and community. Indeed, a significant number said their ventures have had a “halo effect” on the parent organization such as improving the nonprofit’s reputation, allowing for better delivery of products and services, sharpening the nonprofit’s mission, and helping to build an entrepreneurial culture. (See sidebar chart with data.)

Mission fit is important as well. Our research suggests that the majority of organizations tie their ventures to the mission of the parent nonprofit. Furthermore, our findings indicate that the closer the connection of the venture to mission, the greater the financial success of the venture.

Though the financial results were self-reported in our survey and are subject to the usual biases, the data suggest that nonprofit enterprise can produce much-needed revenue. Our survey respondents said their enterprises generate 12 percent of their annual net revenue for the nonprofit. Many, however, still require a subsidy to keep their ventures going–through foundation grants, the nonprofits’ operating budget, board support, and government and corporate funding.

So, now you might be looking to see if your nonprofit organization matches these profiles and trends. Whether your answer is yes or no or somewhere in between, it is important to recognize that nonprofit business ventures can help you be more fit, but that only the fit are able to succeed. Jumping into an earned income strategy without thoughtful consideration and analysis is recipe for failure.

Here are a few important questions to explore before deciding that revenue generation is right for you. These require that you take a long, hard look at your organization–its mission, strengths, weaknesses, and financial wherewithal.

Is nonprofit enterprise compatible with your mission?  If you create an earned income venture, will you have the support of your staff, board, funders, members, clients, and others?

For many nonprofits, such as performing arts groups and educational institutions, fee-based product and service delivery is built into their mission. For others, it is a new activity. Because it will be important to you that your constituents support this endeavor, it is a good idea to know where they stand. For example, board and staff members who have a fundamental bias against income generation, because they feel it is “not what our nonprofit was created to do,” can adversely affect the success of your business venture. For your clients or members, it may be that they will have a hard time paying for products or services they once received either for free or at a lower rate. For your current or potential funders, you may find that they say you don’t really need their help because your business will bring more funds into the organization. Opening the lines of communication and airing these issues among your key constituents will benefit your venture and your nonprofit in the long run.

Will a business venture distract you from what you were founded to do?
Even if your venture is related closely to the mission of your organization, it is important to make certain that running it will not supersede the daily operations of your organization. Even if you haven’t yet decided on a specific business venture, part of your thinking should be about priorities, parameters, and boundaries, and how you will structure, position, and staff your venture in relation to your nonprofit organization to ensure that you meet the goals of each.

What is your current and projected financial status, and how will earned income help you?  Are you feeling desperate?

One area in which experts and practitioners are in clear agreement is that “the desperate need not apply.”  Designing and operating a nonprofit business venture is not a quick answer to filling a short-term gap in funding. Many ventures take a couple of years to become profitable, many never do, and still others are designed primarily to provide a social return to the organization. To be successful, nonprofit organizations should look at income generation as part of a long-term strategy that is based on a foundation of financial and organizational health.

What are the potential risks and returns in terms of your finances, organization, and reputation?  Are you risk-takers?
This is a good time to brainstorm a list of potential positive and negative “fall out” from operating a business venture. Surely, it is relatively easy to come up with items on the ‘return’ side of the ledger, but it is also critical to clarify the ‘risk’ side as well. That way, if you decide to proceed, you can find ways to mitigate possible damages and do some contingency planning as well.

Do you have a champion who will take responsibility for the work and move the business venture forward?  Are you prepared to invest the necessary time and money to do proper analysis, planning, and start-up to meet the demands of the marketplace?  And, is it worth it?

Another area in which exerts and practitioners agree is that the venture must have a champion and succession plan for the champion should s/he leave the organization. Planning for and implementing a nonprofit business requires an individual who has a passion for bringing the “idea” to fruition, strong leadership skills, and, frequently, specific industry expertise. The project champion must be able to summon the participation of key decision-making staff within the organization, and given the financial means, influence, and authority to move the venture forward.

Do you really have a product or service that people would be willing to pay for?

Most people involved in income generation would say that, ultimately, it all comes down to market demand. Nonprofit organizations are designed to think about the needs of their constituents, not the demands of potential customers. A good idea for a business–a good product or service–is only financially profitable if people are willing to pay for it. To legitimize moving forward with planning your venture, your organization should conduct adequate research to verify that there is demand for your product or service, a sufficient and growing number of customers, competition that is identifiable and manageable, and ample space in the market for a newcomer.

After you have answered all these questions and if you are ready to proceed, the experts agree that business planning is an invaluable exercise that can lead to success.4 Business planning can help you identify risks and check your thinking about the feasibility of the proposed venture; it can identify processes and systems that need adjusting before a venture is even possible; and it can help you attract investment. In fact, in our research, we found that when a business plan was written for the venture, there was a positive impact on the parent nonprofit as well. Those nonprofits with plans said they were able to deliver their services and programs and sharpen their mission to a significantly greater extent than those without written business plans.

Yet, alarmingly, we found that half of the nonprofit enterprises in our survey had not written business plans. Furthermore, two-thirds of the businesses that had ceased operation had not written a business plan. Clearly business planning is an arduous process that requires intense resources and attention. That’s why so many people resist doing it. But, to start a business venture without a plan is like trying to row upstream without a paddle.

It behooves us to make sure that those who do get involved in enterprise are doing so armed with the best resources, skills, and management expertise. The recently launched Yale School of Management–The Goldman Sachs Foundation Partnership on Nonprofit Ventures is one such resource. It educates nonprofits about nonprofit enterprise, serves as a mechanism for capitalizing promising profit-making ventures with financial support, and provides intellectual capital to build the practice of social entrepreneurship in the nonprofit sector at-large. 5

This initiative is grounded in the funders’ belief that superb business and management skills are a critical ingredient for leadership in every sector of the economy–private, public, and nonprofit. The Partnership’s signature event, the National Business Plan Competition for Nonprofit Organizations, was designed to send a strong message that outcomes matter, strategic planning is fundamental to all operations–whether generating revenue or not– and that any exploration of earned-income strategies must involve a careful examination of a nonprofit’s internal capacity to manage its functions. In fact, we have heard from a number of entrants who say that the exercise of putting pen to paper is invaluable–even if they don’t win the competition, or ultimately decide that a nonprofit enterprise just doesn’t fit their organization’s mission and culture.

Finally, let’s put all this talk about cross-sector blending into perspective. Nonprofits entering the commercial arena do not have to lose their “nonprofit-ness” to be in business. What we’re really talking about is the importance of paying attention to the fundamentals, making intelligent decisions, and optimizing an organization’s assets–all things good management in a nonprofit organization or private sector company should be concerned with.

Perhaps Rebecca Rimel, President of The Pew Charitable Trusts, put it best when she spoke at the launch event for The Partnership on Nonprofit Ventures:

“The truth is that well-run organizations succeed for exactly the same reasons regardless of their sector. They have strong leadership, they have a focused strategic vision and the means to reach it, their business plans are accountable and achievable, and they encourage and reward creativity, entrepreneurship, results and the most valuable resource of all–talented people.”

1. Nonprofit enterprise can comprise, for example, fees for service, manufacturing and product sales, rents and leases, and licensing and cause related marketing activities. An earned income venture can be either related to the mission of the nonprofit organization or not, include a social return on investment component or not, and be structured as a for-profit subsidiary, a nonprofit subsidiary, or a program of the nonprofit organization.
2. For highlights of our research, see Cynthia W. Massarsky and Samantha L. Beinhacker, “Enterprising Nonprofits: Revenue Generation in the Nonprofit Sector,” (www.ventures.yale.edu).
3. J. Gregory Dees, Jed Emerson, and Peter Economy. 2001. Enterprising Nonprofits: A Toolkit for Social Entrepreneurs. New York, NY: John Wiley and Sons, Inc.
4. In 1997, the Small Business Administration published a study of businesses that met the criteria for longevity, viability, and growth. Eighty percent of those successful small businesses reported that they had prepared a business plan. Cited in Jeanne Rooney’s chapter, “Planning for Social Enterprise” in Dees et al, Enterprising Nonprofits.
5. The Partnership on Nonprofit Ventures maintains a comprehensive online Resource Center with current research projects, papers and articles, an extensive resource bibliography, discussion boards, classes and conferences on the subject of nonprofit enterprise and social entrepreneurship, and links to related organizations. The Partnership’s virtual community allows visitors to search its membership directory of more than 2,000 nonprofit organizations, academics, technical assistance providers, and grant-makers to connect with others interested in building the field of social entrepreneurship. The Partnership’s Web site is: www.ventures.yale.edu.
About the Authors
Cynthia W. Massarsky and Samantha L. Beinhacker are co-deputy directors of the Yale School of Management-The Goldman Sachs Foundation Partnership on Nonprofit Ventures.  Cynthia is no stranger to nonprofit organizations and nonprofit enterprise.  She has worked with nonprofits for more than 25 years, and, during the last 12 years, has operated CWM Marketing Group, a management consulting firm specializing in marketing and new business development in the nonprofit sector.  Samantha comes to The Partnership with extensive background as a management consultant specializing in new business development, strategic planning, marketing and organizational capacity-building for both nonprofit organizations and corporate sector clients.