March 27, 2018; Pro Bono Australia
About half of all new establishments survive five years or more and about one-third survive 10 years or more. As one would expect, the probability of survival increases with a firm’s age. Survival rates have changed little over time.
—Source: US Bureau of Labor Statistics, BED
We remember the years when nonprofits enthusiastically embraced the dream that they should establish businesses to serve as cash cows for their real mission-based work. Things have calmed down a bit since, with many finally accepting that:
- A new business is at least as likely to fail as to succeed, and if it doesl, they are likely to take invested resources to the grave with them.
- Such failures can lead to loss of money you cannot necessarily afford to lose. Even if the business does succeed, it may take from five to ten years to see that success.
- Capital that keeps you protected from such failures is hard to come by.
Still, the United States is not Australia, where many nonprofit leaders are apparently still entertaining the notion that a cash cow could save them.
CommBank’s Not-for-Profit Insights Report surveyed 2,473 business owners including 413 nonprofits. The good, but not surprising, news is that the nonprofits outperformed the for-profit leaders in “entrepreneurial behaviors and the management capabilities that drive innovation.” But that’s followed by the blood-chilling finding that one in three nonprofit organizations “planned to establish a social enterprise over the next 12 months, in order to combat the changing funding landscape affecting the sector.”
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Twenty-two per cent of the not-for-profit organizations we surveyed said they had established a social enterprise, and these organizations scored significantly higher on the Innovation Index (at 51.5) than those planning to establish a social enterprise within the next 12 months (39.7) and those that have no plans to do so (32.0).
The fact that the report treats social enterprise as the far end of the innovation scale strikes us as a little disconcerting, since innovation doesn’t always mean a flying leap into the unknown. But in light of some of the questions they were asked to determine their levels of innovation, which included queries about whether they were “willing to take financial risks” and “invest time and capital in uncertain capital ventures,” this may not be so surprising.
We might urge our nonprofit brethren in Australia to look harder at the failure rates of businesses in general and at the damage a nonprofit can sustain when it takes too much risk with nonprofit money, time, and focus.
This is not to say that nonprofits should never run a social enterprise, because many have done so successfully for decades. However, they work best when
- they are well integrated into your mission and support it,
- they are well capitalized and do not drain unplanned capital—human or cash—from your nonprofit organization, and
- when you have done all of your homework including benchmarking and weighed risks against rewards.
More generally, we recommend decoupling the celebration of innovation from earned income social enterprise. Innovation need not go there at all to be effective, as the rest of this report clearly indicates.—Ruth McCambridge