Strategically Responding to Disruption through Social Enterprise

For many nonprofits, financial sustainability is top of mind. This is especially the case in the midst of a global pandemic, when funders are shifting priorities to respond to the crisis and establishing new COVID-19 response funds. As funding becomes increasingly constrained, the urgent question becomes: Are there ways to pursue our work outside of traditional fundraising models? For these organizations, the possibility of social enterprise—or using market-driven strategies to address social problems—is appealing. However, approaching social enterprise efforts so that they are strategic and additive to the core business of the nonprofit (as opposed to a well-intended distraction) is easier said than done.

Consider the Cancer Support Community of Greater Ann Arbor (CSC), a well-established nonprofit organization that provides psychosocial support services to individuals and families affected by cancer. Like most nonprofits, the CSC relies on traditional nonprofit funding streams—including philanthropy, foundation grants, and events—to meet the needs of the community it serves. After five years of providing support services, the CSC launched a social enterprise called The Brides Project, with the primary goal of creating enhanced funding that would support significant cancer support program expansion.

The Brides Project is a social enterprise because it uses the profits of wedding dress sales (a market-driven strategy) to help support the day-to-day operations of the CSC (solving social problems). By advertising that 100 percent of the profits go directly to funding cancer-related support services, The Brides Project has had great success receiving donations of high-quality wedding dresses and selling them for competitive prices. Within three years of launching, The Brides Project was providing a quarter of the revenue the CSC needed to sustain its operating budget.

Social enterprise success stories, like The Brides Project, are often used by nonprofit leaders and advisory boards as rationales to launch market-based initiatives. However, such endeavors are not always the right solution. Indeed, if done poorly or as a “quick fix” solution in a shifting and complex environment, social enterprises might undermine the core mission of the organization. Furthermore, in times of constrained funding, as is the case today, we anticipate that nonprofits might move in a reactionary posture toward social enterprise, without thinking about whether and how they should enter into this space. This is not the right move for all nonprofits, nor is the timing always right for a given organization where there is a strategic fit.

What nonprofits need—and generally lack—are practical resources for thinking about the entrance into social enterprise as a strategic decision. The following framework presents a series of questions to help nonprofit leaders think clearly about whether social enterprise makes sense for their organization and, if so, how to pull it off effectively.

Question 1: Have we exhausted existing efforts to raise funds via our current model?

While cultivating new revenue streams is the primary motivation for launching a social enterprise, organizations should think about why the revenue stream itself is necessary. A social enterprise should not be a revenue “Band-Aid” for more serious operational problems. For example, a social enterprise should not be the solution to ineffective grant writing or other flawed fundraising strategies, nor should it be used as a springboard toward rapid growth without a plan to sustain services. In fact, efforts to launch a social enterprise can exacerbate existing problems within an organization or have other unintended consequences, so there needs to be a really good reason to justify pursuing such an endeavor—not just the hope for a quick fix.

Another important consideration regarding social enterprise is the burden that comes with diversification. Diversification is often touted in the nonprofit sector as an advantage, the argument being that relying on limited funding sources is risky. If an organization is too reliant on one source and that source dries up, the organization’s ability to survive is jeopardized. Yet the reality that nonprofits often discount is that diversifying fundraising methods often requires the development of additional systems to support them. For example, the systems put in place for work with major donors are fundamentally different from the systems, human resources, and expertise needed to write federal grant proposals. Adding a social enterprise can be looked at in the same way—needing its own unique resources, systems, and expertise—especially if the enterprise fundamentally differs from the mission services.

In the case of the CSC, the decision to establish a social enterprise was motivated by a desire to expand the organization’s work. To do this, it needed to cultivate a new revenue stream. Historically, the Cancer Support Community relied on traditional nonprofit methods of revenue generation (i.e., philanthropy, events, grants) and was successful in reaching or exceeding fundraising targets via these methods. However, after five years of operation, the organization set an ambitious goal to serve a larger percentage of community members impacted by cancer. This meant additional funds were necessary, but existing funding streams were maxed out due to certain limitations in the market. For example, because of the nature of CSC’s work, state and government dollars were not available, nor could the organization seek reimbursement for services from insurance or third-party payers. In addition, because of the overwhelming evidence of financial burden on cancer patients, the organization was committed to keeping services free for clients. These funding limitations led the Cancer Support Community to pursue social enterprise as a potential solution.

Question 2: What is our organizational capacity for a new enterprise?

Given that social enterprise invariably involves the mobilization of people and resources away from the existing service line, organizations must examine whether they have enough existing capacity to support these efforts. With every choice, there is a tradeoff. If an organization is having a hard time fundraising and delivering on its mission while 100 percent of its resources are dedicated to the mission, what is likely to happen if they take 20 percent of that capacity and allocate it elsewhere? This consideration becomes increasingly important in a complex environment such as we have seen with COVID-19, where nonprofits are stretching further to fill additional basic and fundamental community needs.

Given that resources will need to be shifted toward the enterprise, it becomes important to consider how to do this in a way that ensures the mission programs or services do not suffer. Table 1 outlines some of the key areas for consideration and questions nonprofit leaders may ask to evaluate the capacity of the organization. If capacity is lacking across multiple dimensions, it may be worth pausing the social enterprise effort, pursuing it in partnership with an organization that does have capacity, or looking for ways to cultivate capacity in advance of the rollout.

Table 1: Key Capacity Considerations

In the case of the Cancer Support Community, multiple aspects of its core organizational capacity were favorable for mission extension. The organization had a stable staff, board, and leadership volunteers, who had experience starting businesses or significantly expanding programs. The organization also had expertise around donor relations and saw an opportunity for this expertise to be transferred to the customer and stakeholder engagement activities needed in the new enterprise. In addition, core organizational capacity was demonstrated through stability of services, with program growth steadily and consistently exceeding targets over the prior five years. Finally, the organization held financial reserves that would allow it to allocate resources to the enterprise both directly (i.e., money spent developing The Brides Project) and indirectly (i.e., time spent establishing the enterprise instead of raising money in other ways).

It should be noted that a key consideration related to capacity is the organization’s capacity for, and relationship to, risk. Establishing a social enterprise is risky. In the United States, the number of start-ups that survive beyond four years hovers at just over 50 percent. When you look at the reason for the failure, much of it comes down to a lack of capacity (identified earlier), but it also occurs when the market on which that organization was counting doesn’t emerge. As such, this risk needs to be named and treated as a legitimate concern—in part so it can be evaluated and, if the enterprise is still warranted, mitigated, but also in order to consider the intellectual and emotional costs such risk can incur. If the mere risk of the enterprise taxes the nonprofit’s resources to the point where the traditional service line is jeopardized, the pursuit may not be warranted.

If, after all of these capacity and risk considerations, a nonprofit does decide to pursue social enterprise work, we suggest that leaders conduct both a resource assessment (described above) and a pre-mortem analysis. In a pre-mortem analysis, the organization’s leaders consider the question “If we were to fail, what would be the cause of the failure?” The purpose of the exercise is to actively identify risks that cannot be mitigated or (ideally) risks that can be addressed in advance.

Question 3: What are the possible unintended consequences?

When conducting a pre-mortem analysis, one of the things likely to emerge is a set of consequences of action, many of which were unintended. For a nonprofit, the unintended consequences of pursuing a social enterprise can affect a whole host of important organizational attributes—from the social enterprise itself, to the traditional or mission-driven service line, to the current funding and sources of revenue, to the funders’ and community’s perceptions of the organization.

This last area, potential impact on community perception, is often overlooked. Nonprofits must ask: Will the development of a social enterprise create confusion about our core mission? Will it impact the community perception of our need for continued philanthropic support? Will the community question our commitment to our core nonprofit mission services?

If the answer to any of these questions is “yes,” then the organization’s next step is to find ways to mitigate the negative consequences. For example, when considering community perception, messaging becomes critically important. It’s essential to highlight any alignment between your mission services and the work of the social enterprise. In some cases, this alignment will be clear, and the organization and the enterprise will appear to the public to be pursuing the same mission. For example, a nonprofit with a mission to provide job training may run an enterprise in which clients can work and practice newly acquired skills.

In other cases, the alignment may not be nearly as apparent. In these cases, the nonprofit and social enterprise may appear to the public to be pursuing different missions. This was the case with the Cancer Support Community and The Brides Project. In fact, even board members initially asked what wedding dresses had to do with cancer support. Ultimately, CSC decided not to shy away from the dual missions, but rather to find creative ways to connect them. For example, The Brides Project shop displays information about the services the CSC is able to provide to adults and kids with cancer thanks to customers’ dress purchases. Follow-up cards are sent to brides who purchase from The Brides Project to share stories of CSC clients whose lives have been touched by the services made possible from the gown purchases. In addition, a campaign for dress donations played on the phrase “I do” and invited brides to consider “I do(nate).”

Community perception may also be impacted by a belief that the nonprofit’s investment in the social enterprise represents a lack of commitment to the mission of the nonprofit, or a belief that community dollars should not be used for the development of the social enterprise. To avoid these types of perceptions, the Cancer Support Community capitalized on the strong relationships that have already been established with donors. The senior staff and board members met with key donors and stakeholders, educated them on the plan and vision, and in some cases even invited them to join in the project’s development.

Finally, it should be noted that unintended consequences are not necessarily negative. The establishment of The Brides Project has resulted in much more than just an added revenue stream. Through the Project, the Cancer Support Community has become known to a wider audience of people, which has drawn in new relationships, new donors, and new members for cancer support services. The social enterprise has also led the nonprofit’s senior management team and board to develop a depth of business acumen, which assisted in the expansion of CSC’s nonprofit mission services.

Conclusion

Given their level of complexity and potential organizational risk, social enterprises should not be casually considered. Indeed, there are an abundance of examples, some even in a similar wedding dress enterprise space, that have experienced significant problems. This caution to think strategically is of particular importance in a moment such as the one we live in now, where the pressure is high, the needs are great, and the options can seem limited. Indeed, viewing the development of a social enterprise as a quick solution to the strains of the current global pandemic will likely end in disappointment.

However, when approached carefully and strategically, these endeavors have the potential to fundamentally enhance the nonprofit sector. For the Cancer Support Community, the establishment of The Brides Project led to significant growth and the ability to provide critical cancer support services to many more people. It also reduced the organization’s dependency on individual donors, which offers a level of autonomy in making the best decisions for clients. By utilizing the strategies outlined in this paper, nonprofits can more strategically consider whether social enterprise is the right investment of their time and resources.