Does Philanthropy Really Want Entrepreneurs? Maybe Not

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September 29, 2011; Source: Reuters | Most nonprofits know that it is not in their best interests to fail publicly. It is not what donors, especially institutional donors, pay you to do. But does this cultural fact of life in the nonprofit sector actually tamp down its entrepreneurial potential? The findings of a recent Babson College study entitled Elements of the Entrepreneur Experience (PDF) suggests that if the investors in this sector do not welcome failure, they will get little in terms of entrepreneurial innovation.

The study looked in some depth at 250 startups in Boston, Austin, and San Francisco. The two elements of the findings that we thought were most interesting were:

  • Failure and iteration are a significant part of the entrepreneurial experience.
  • Place or “localness” is an important factor in entrepreneurialism in a number of ways.

Here is the report’s take on failure:

Entrepreneurs are literally surrounded by stories—it’s the universal language of entrepreneurship. Stories convey lessons learned and allow entrepreneurs to create and communicate the intangible, but many do not have the necessary storytelling or story decoding skills to avoid pitfalls and misdirection. All entrepreneurs hear stories about failure. Businesses will fail, and accepting this, and learning from others about that experience or steps to prevent it is a central component of being an entrepreneur. But the predominant use of the term “failure” is really framing another important aspect of entrepreneurship that’s little understood and discussed in entrepreneurship circles. The practice of entrepreneurship requires iteration and experimentation, but many are simply not wired for iteration.

And for more on the importance of place, check out this excerpt:

Despite the rise of social media and mobile technologies, entrepreneurship remains place-based. Many people start up and practice where they live, drawing from their local resources. Others choose location with intent, based on a place’s entrepreneurial reputation or its “feel.” All cite the need for face-to-face encounters. Places develop ecosystems over time—interactions of people, organizations, and infrastructure—which combine to heighten or diminish entrepreneurial activity. But ecosystems provide much more than resources. They define the entrepreneurial culture of a place. Places where this culture is local, visible, and accessible in the day-to-day interactions of entrepreneurs make it much easier for people to identify with the entrepreneurial path, but new ecosystems that merely copy risk the creation of an entrepreneurship monoculture.

We think these observations about the for-profit world resonate for nonprofits. And, in our humble opinion, they fly in the face of the attitudes and practices of many funders who supposedly support innovation and entrepreneurship in the sector. What do you think?—Ruth McCambridge

  • Kerry Anderson

    🙂 In such a fast changing world the NFP sector has to embrace entrepreneurship in order to keep up. Trialing a new idea negates the concept of failure (a word I refuse to use) and builds on experience and ultimately success.

  • Geri Stengel

    Right on! Failure is actually part of the learning process. Learning what doesn

  • JHoffman

    At the heart of the problem is the complete dearth of philanthropic risk capital. Entrepreneurship thrives in the private sector because VC’s are willing to manage portfolios with high risk variances: most VC investments fail, some do ok, but those one or two that are big hits offset the losses of the others. Most of philanthropy operate more like money market funds, grant-making in “sure things” where the social returns are assured across all grants in a portfolio. If I’m a nonprofit organization, and I want to ensure future funding, and my program officer has given me X dollars to produce X results, there is no reason for me to institute a new, risky program that may or may not hit those numbers. The result is an disincentive on nonprofits to innovate. Social entrepreneurship is helping to change this (mostly in the slow capital for-profit side of the house). There is still a great need for philanthropic risk capital in the nonprofit social enterprise space.

  • cindy cumfer

    Thanks, JH, I agree about the lack of risk capital. I think another piece of the problem is our attitude about nonprofit governance. Most business entrepreneurs are in control of their enterprises and can act on their ideas relatively easily. Organizational consultants and regulators in the public benefit sector of the nonprofit world are very focused on community control of boards and quite suspicious of founder control. This leads, among other things, to considerable regulation about conflicts of interest and disclosure requirements and something like hostility to founders in general.

    Although there are certainly some reasons for caution, the general attitude of suspicion directed toward founders is unfortunate. I’m an attorney who has worked with nonprofits for 33 years. In my experience, at least half of them are established as what I think of as “entrepreneurial nonprofits.” This means that a founder has an idea that he/she/they are very passionate about and the drive and energy to carry it out. Like a business entrepreneur, they want to control the direction of the organization and at times want to be employed by the organization since this is their life’s passion. But the conflicts rules, the standard of a “public” board and the founders’ own inability at times to distinguish private interests from public interests makes this more complicated than in the business world. Even with all that, I can think of a number of nonprofits in my city that were started, nurtured and flourished because of founders. Eventually, these organizations grew to a point where the founders had a more “public” board but even then continued to be successful because the board recognized and supported the importance of the founder to the flourishing of the organization.

    In my ideal world, the state would encourage these “entrepreneurial nonprofits” by having a special registration for them that would include more oversight and instruction so that founders could stay energized and get it right and the public would be protected. Or perhaps there are other ideas about how we can appreciate the many dedicated founders while still protecting the public?