Nonprofits in Social Enterprise: A Thoughtful Debunking

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The New York City-based workforce development intermediary and think tank, SEEDCO (don’t ask what it stands for) has just issued one of those reports that makes you say, “Of course, that makes sense!” SEEDCO looked at its own experience in running a social enterprise—a child care initiative selling child care services to employers who would hire welfare-to-work parents—and learned some valuable lessons that it has published in a report entitled The Limits of Social Enterprise: A Field & Case Analysis.

SEEDCO’s valiant effort ended up doing poorly, though not for want of effort or skill. In the workforce development arena, and among intermediaries in general, SEEDCO doesn’t take on initiatives lightly or without preparation. And despite SEEDCO’s less-than-desired impact on its child care initiative, the report is judicious, offering lessons learned for nonprofits who think that starting a for-profit subsidiary will add to their program delivery or yield extra income.

While recognizing the high-profile social enterprise successes of Delancey Street Foundation in San Francisco and the Greyston Bakery in Yonkers, the SEEDCO report’s authors reached the following conclusion:

In researching this report we found that nonprofits driven to meet a “double bottom” line for customers and clients have far more typically led to frustration and failure, drawing attention and resources away from the organization’s core work—and that even the oft-cited success stories are less cut-and-dried than they appear. We have also found a collective tendency within the field to gloss over the difficulties and limitations of social purpose businesses.

The question that the report doesn’t ask—and one that someone should ask eventually—is how did the field get so snookered by social enterprise as to think that the for-profit model works in so many nonprofit contexts and without significant subsidy? The data has been out there for a while: the failure rates of small businesses in general; the unlikely proposition that nonprofit-run businesses will do better than their for-profit peers; the evidence that few nonprofit business ventures turn a profit (and many do so only by undercounting overhead costs absorbed by a nonprofit parent).

The SEEDCO study cites several nonprofit leaders emphasizing these points adds analysis of the often typical dynamic of a nonprofit’s business affiliates’ absorbing disproportionate attention and diverting energies from a nonprofit’s core missionBut it doesn’t dig for a deeper, ideological reason for this dynamic—and there is one, or perhaps a suite of reasons. In the nonprofit sector and in philanthropy, there is a persistent belief that there is power, efficiency, and innovation inherent in the business sector that the nonprofit model can’t approximate. There is a belief that the solutions to American social and economic problems will not come from solutions like the War on Poverty but from aggregated entrepreneurial efforts. Everyone knows that describing a nonprofit as “entrepreneurial” has become the new common linguistic currency of philanthropy. That trend is only bolstered by the desire of funders to reduce the nonprofit demand for their resources, where the implication is that earned income can replace the need for government and foundation grants. Until recently in Washington, D.C., there was a funding and technical assistance   program associated with the Fannie Mae Foundation, where the sine qua non for eligibility was the commitment to generate for-profit income streams. In an environment of resource shortages, nonprofits lined up pledging dedication to for-profit business ventures. But, as with most ideologies, facts can get twisted to fit the belief structure. I remember a national think tank promoting the fiction that inner-city revitalization was most successful when it occurred without government involvement. I looked at the cases it cited and, as a former city government administrator, easily discerned the government-assisted land assemblages, the negotiated tax abatements, the government payments for on- and off-site infrastructure.

So what’s the moral of this story? Watch out for snake-oil salespeople. This   sector is besieged by waves of fads and fashions. For many nonprofits, using social enterprise to fund instability has been just one more wave.