Social Entrepreneurship can be another source of revenue for nonprofit organizations

Like it or not, nonprofits are part of the landscape of many communities. There are some that help members of some communities meet various needs. Even with the most-well funded organizations, funding can be challenging. Social enterprise can provide a way to diversify revenue, but it can exist on its own outside the confines of the nonprofit business.

The following is one of my first papers in graduate school about social enterprise.

Social entrepreneurs have more ways to accomplish their mission than traditional nonprofit organizations. However, it is unclear whether the various methods social entrepreneurs can use to accomplish their mission have more advantages than nonprofit organizations.

Social entrepreneurship started in the 1980 and was fueled by the work of Bill Drayton at Ashoka and Ed Skloot at New Ventures. Drayton’s organization funds social innovators and Skloot helps nonprofits explore new sources of income (Dees 24).  Drayton worked as an assistant administrator at the U.S. Environmental Protection Agency in the 1970s and 1980s and helped create the conditions necessary for legislative action to limit air pollution. He then set out to find other strong-willed individuals working to transform dysfunctional systems. Drayton went around the world looking for people recognized by their peers as problem solvers. In 1980, he established Ashoka: Innovators for the Public, a grantmaking organization that supports innovators and their pattern-breaking solutions.  Social entrepreneurs can be described as passionate and imaginative, people that are unwilling to wait for governments and corporations to act, and determined to realize their ideas despite all odds against them.  They become possessed by their vision (Davie 17, 18). According to Dees, social entrepreneurs no not see themselves as people that participate in charity. “They recognize its limits and weaknesses, as did the Enlightenment critics,” (Dees 27).

Social entrepreneurship represents another step in the continuing reinvention of the third sector over the past 150 years.  During this time a movement started that generated new organizations like religious charities with more scientific approaches, the creation of secular charitable institutions, professionally run philanthropic foundations, and the establishment of new helping professions, such as social work. The Salvation Army, YMCA, Boys and Girls Clubs and many other  third sector organizations and major foundations trace their roots to this era. (Dees 27).

Leading social entrepreneurs today are mostly described as pragmatists.  They are focused on achieving sustainable results and will use whatever tools are most likely to work. This could be a tax-exempt, nonprofit organization or a for-profit business. They embrace innovation, value effective management, and are open to a wide range of operational and business models (Dees 28). They are willing to adapt ideas and tools from business when these will help. They are even willing to use for profit forms of organization or hybrid structures that include for profit and nonprofit elements. When it is possible, social entrepreneurs will happily craft market-based solutions that rely only on self-interest, allowing scarce philanthropic or government resources to flow to areas that genuinely need subsidy.  According to Dees, “If they can find an overlooked market opportunity that also improves social conditions, they will gladly pursue it,” (28).

Social impact is difficult to measure in a reliable, timely, and cost-effective fashion—especially for the most ambitious social ventures. How and when do we know that someone has been moved out of poverty in a sustainable way or that a strategy will slow global warming? Signs, symptoms, and leading indicators often must be used to provide clues to whether an intervention is having its intended impact. Many innovations that sound logical and promising fail in practice or produce unintended harms. Even with microfinance, attempts to demonstrate its impact in a rigorous and systematic way have produced mixed and sometimes confusing results. The stories of impact on individuals and their families are plenty and powerful, but methods for systematic evaluation have been a subject of debate (Dees 29). Social entrepreneurship as it exists today appears to have no answer to the question of how collective action should figure in the fight to address today’s most pressing problems. Davie states:

“Granted, there are voices in the field that acknowledge the importance of social movements. Some of their writings offer a needed correction to the mainstream literature’s near deification of the social entrepreneur as a rare special type. Nonetheless, the field could go much farther, I believe, by explicitly encouraging collective as Scott Sherman has done in his bid to bring social entrepreneurship under the rubric of ‘transformative action,’”(21).

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            There are individuals who are social entrepreneurs and seek innovative solutions to the problems of the world. But individuals are not the only ones getting into social enterprise, nonprofit organizations have been looking at social businesses as a way to supplement traditional funding. Nonprofits are turning to the for-profit world to leverage or replace their traditional sources of funding. Nonprofit leaders are looking to commercial funding in the belief that market-based revenues can be easier to grow than philanthropic funding (Dees 55-56). The drive to become more businesslike, however, holds many dangers for nonprofits. In the best of times, nonprofits nonprofit organizations face operational and cultural challenges in the pursuit of commercial funding. In the worst of times, commercial operations can undercut an organization’s social mission (56).

            According to the Harvard Business Review, nonprofit organizations have traditionally operated in the social sector to solve or ameliorate such problems as hunger, homelessness, environmental pollution, drug abuse, and domestic violence. “They have provided basic social goods – such as education, the arts, and health care – that society believes the marketplace by itself will not adequately supply,” (Dees 56). Nonprofits have supplemented government activities, contributed ideas for new programs and other innovations. Although some nonprofits have relied heavily on fees, especially those in the fields of health care and education, government grants and private donations have also accounted for a considerable portion of the funding that many nonprofits receive (Dees 56).

Recently, many of nonprofits have been seeking additional revenues by behaving more like for profit organizations. Some are raising funds through auxiliary commercial enterprises. Such ventures are creative extensions of the old-fashioned bake sale or car wash. The organization gets the word out about its cause and, if successful, generates cash. A number of nonprofits are beginning to commercialize the core programs through which they accomplish their missions. They are looking for ways to make these programs rely less on donations and grants and more on fees and contracts. Some nonprofits are even launching business enterprises to serve the objectives of their missions (Dees 56).

            According to the Harvard Business Review, San Francisco's Delancy Street Restaurant, run by the Delancy Street Foundation, is staffed by ex-convicts and former substance abusers who participate in Delancy's intensive self-help program and work in the restaurant as part of their rehabilitation (Dees 56).

Many nonprofit leaders are looking to deliver social goods and services in ways that do not create dependency in their constituencies. Even many advocates for the poor or disadvantaged believe that institutional charity can undermine beneficiaries' self-esteem and create a sense of helplessness. As a result, some organizations are charging beneficiaries for at least a portion of the cost of services. Others seek to use business as a tool for helping people develop self-reliance and build marketable capabilities. One important study of nonprofit businesses that help the homeless and other disadvantaged groups become self-sufficient was recently published by Jed Emerson of the Roberts Foundation. The study documents a host of job-creating nonprofit businesses like bakeries, ice cream shops, and greeting card stores in the San Francisco area (Dees 56).

Nonprofit leaders are searching for the holy grail of financial sustainability. They view earned-income-generating activities as more reliable funding sources than donations and grants. Many of them now consider extensive dependency on donors as a sign of weakness and vulnerability. Self-funding is the new mantra. At a minimum, organizations seek a diversity of funding sources to provide a cushion in case one source declines or disappears. Commercial funding is particularly attractive because it is potentially unrestricted. Competition for philanthropic dollars is intense, but money is becoming available for operating on a more commercial basis.  Today few foundations want to provide ongoing funding, even to highly successful projects. Most choose to limit their funding to short periods in an effort to press grantees to become increasingly self-sufficient, like a business. At the same time, government agencies are shifting from providing services themselves to contracting with independent nonprofit and for-profit organizations (Dees 56-57, Farruggia 10). According to the Harvard Business Review, “Corporations are thinking more strategically about philanthropy. They are no longer deciding where their grant dollars will go solely on the merits of the programs they will fund but on the value they will derive from the relationship with a particular nonprofit,” (Dees 57). This push toward more commercial behavior for nonprofits started nearly 30 years ago, according to Farruggia:

“Additionally, the conservative political forces of the 1980s with their budgetary cuts and policy changes pushed the sector toward more commercial behaviors. This push has lead to a burgeoning ‘marketization’ of nonprofits to survive budget cuts by reducing services, operating more efficiently, finding support alternatives, adopting fee structures, and even conversion to for-profit status,” (7).

While market-based funding can play an important role for a nonprofit organization, however it can also be risky since it can cause an organization to drift from its mission. One example is the YMCA.  The association today generates substantial revenues by operating health and fitness facilities for middle-class families, but critics charge that the YMCA has lost sight of its mission to promote the "spiritual, mental, and social condition of young men." Similarly, a former board member of a major dance company resigned because he felt the company had neglected its artistic mission and had become too commercial by performing popular pieces to generate revenue (Dees 57).

Nonprofit leaders should also recognize that creating a sustainable and profitable business is not easy. Market discipline can be harsh. Some studies indicate that more than 70 percent of new businesses fail within eight years of their inception. Substantial profits, although not impossible to achieve, are hard to come by. In perfectly competitive markets, companies make only enough to cover costs and to compensate capital providers adequately. Running a profitable business requires skill, luck, and flexibility (Dees 58).

While nonprofits are now operating their own businesses, they do have an advantage over their for-profit counterparts. According to the Harvard Business Review, those advantages include their tax status and their ability to capitalize on volunteer labor, to attract in-kind donations and supplier discounts, and to use philanthropic money to help cover start-up costs and capital investments.  According to Farruggia, many nonprofit organizations’ primary source of income are from fees and service charges and not philanthropic donations (7). With all the advantages a nonprofit might have over a for-profit enterprise, it still won’t guarantee success with a business. Many nonprofits simply do not have the business-specific organizational skills, managerial capacity, and credibility to succeed in commercial markets. And building new organizational capabilities can be costly and difficult. Hiring people with business skills and market focus is not enough. An organization must be receptive to and supportive of new activities; it also must be able to integrate the skills and values of the new staff.  Dees states that many people with advanced business degrees who go to work in nonprofit organizations find themselves ostracized by their colleagues:

“One business school graduate and former brand manager at a major corporation, who now heads a division of a nonprofit devoted to environmental protection, spent several years overcoming the skepticism of core staff members. In that organization, scientific credentials and a demonstrated commitment to the environment were signs of prestige; business skills were suspect,” (58).

While navigating the social enterprise frontier can be difficult, it can help a nonprofit find the additional resources it might need. According to Farruggia, “The social enterprise trend is growing and nonprofits that wish to stay in business will need to join so they will not be left behind,” (12). Nonprofit leaders can benefit from finding effective ways to harness commercial forces for social good. But misguided efforts to reinvent nonprofits in the image of business can go wrong. Nonprofit managers are only beginning to learn what it means to search for new solutions to social problems and for more effective ways to deliver socially important goods. Strategic and structural innovation should focus on improving mission- related performance. “Caught up in the current wave of commercialization, nonprofits can possibly risk forgetting that the most important measure of success is the achievement of mission-related objectives, not the financial wealth or stability of the organization,” (Dees 67). The benefit of finding attractive sources of earned income lies more in the leverage this income provides than its sustainability (Dees 67).

But generating more funds for ineffective or inefficient programs is not a productive use of resources. True social-sector entrepreneurs are those who find not only additional sources of funds but also new methods to link funding to performance. More important, they develop more effective ways to improve conditions on this planet. To that end, social entrepreneurs shouldn't focus on commercial approaches alone but should explore all strategic options along the social enterprise spectrum, including their ability to use social causes to tap into philanthropic motivations (Dees 67).

Commercial operations should not drive out philanthropic, tax-exempt initiatives. Many worthwhile objectives cannot effectively be pursued by relying on market mechanisms alone. In any case, people tend to get something out of giving that they cannot get out of market transactions. People want to make contributions to the common good, or to their vision of it. The challenge is to harness these social impulses and marry them to the best aspects of business practice in order to create a social sector that is as effective as it can be (Dees 67). Social entrepreneurs use the entrepreneurial process with the primary goal of influencing social changes and bettering society. It is not limited to being practiced in a nonprofit organization. Mars and Rhoades state that the distinguishing factor between mainstream and social entrepreneurship is the purposefulness behind creating social value over economic value (439).  However, Farruggia sees the lines between nonprofits and for-profits staying blurry. This will make the general public question nonprofit organizations and certainly keep them under the watchful eye of governmental authorities (12).

Founders of social enterprises believe profits and social good can be produced in tandem and wish to form organizations that will pursue these dual missions. They will, however, encounter obstacles to articulating and enforcing such dual missions if they adopt either a traditional nonprofit or for-profit form of organization. Nonprofit forms bar profit distribution and for-profit forms will create practical, if not legal, pressure to favor profit maximization over social good when the two come into conflict. According to Reiser, social entrepreneurs believe social good can be produced along with a profits and desire hybrid forms of organizations to smooth an enterprise’s path to realizing both goals (591).

Before new hybrid organizational forms started, there were nonprofit organizations engaging in significant levels of commercial activity (Kelley 342). An example is Triangle Residential Options for Substance Abusers (TROSA) in Durham, N.C. TROSA is a long-term residential drug rehabilitation program that houses, feeds, trains, and provides counseling for several hundred recovering addicts at any given time. In spite of its ambitious charitable mission and its status as a tax-exempt nonprofit corporation, TROSA is largely financially self-sufficient, subsisting on revenues generated by various industries that it launches and sustains. For example, it has a highly successful moving business, a bricklaying business, a frame shop, and a used furniture showroom. TROSA’s recovering drug addicts, or “residents” as they are referred to, supply all of the labor and most of the expertise necessary to sustain the ventures, and while they are on the job they learn employment and life skills that help them in their recovery process. All profits from the industries go back to TROSA to cover operating expenses such as salaries for professional staff and food, clothing, shelter, medicine, and medical treatment for the residents (Kelley 342).

Google.org provides a recent example of a for-profit organization formed for largely social benefit purposes.  In 2005, the extremely successful Internet parent company Google, Inc. established a philanthropic entity, the Google Foundation, as a standard private grant-making foundation, endowing it with $90 million.  Nothing about the Google Foundation heralded an aggressive move by the parent, Google, Inc., into fourth-sector innovation. However, in 2006 Google, Inc. made a much larger philanthropic commitment, this time to a hybrid social venture called Google.org, established as a for-profit corporation and capitalized with an initial $1 billion worth of Google, Inc.’s stock plus a share of its future profits. Google.org’s mission is to improve the world by investing  in earth-friendly technologies. “As a for-profit, Google.org will be free to back social venture investment funds, finance the work of individual entrepreneurs, and invest in for-profit ventures that show promise for addressing pressing social needs,” (Kelley 344-345).

One new hybrid organizational form that social entrepreneurs have the option to use is the benefit corporation. Reiser states, “The new benefit corporation form offers potential gains in formally articulating a dual mission, an advantage as compared with traditional nonprofit and for-profit forms,” (592). What the hybrid organizational forms, like the benefit corporation, fail to offer are mechanisms to enforce dual goals. According to Reiser, this will undermine its ability to expand funding streams and create a strong brand for social enterprise as sustainable organizations (593).

Invention of new hybrid organizational forms started in the U.S. in 2008, when Vermont adopted the L3C. The L3C is a limited liability company formed to further the accomplishment of one or more charitable or educational purposes and for whom neither income production nor property appreciation may be a significant purpose. An L3C may have investor members who can receive unlimited disbursements during the L3C's existence or upon dissolution, and if the L3C ceases to pursue its educational and charitable purposes it transforms into an ordinary limited liability company (593).

The main purpose of the benefit corporation statutes is to require these entities pursue a purpose beyond making a profit.  A benefit corporation must be formed for the public’s benefit, and according to Reiser, this means the entity must have a positive impact on society and the environment. Some of the public benefits include providing underserved individuals with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs, preserving or improving the environment, improving human health, promoting the arts and sciences, and increasing the flow of capital to entities with a public benefit purpose (597-598).

The main difference between a benefit corporation and a more conventional business corporation is that only businesses pursuing a public benefit can qualify as benefit corporations. “The significant divergence between the corporate purposes and directorial obligations in business corporations and benefit corporations make it vital that shareholders and others can differentiate the two,” (Reiser 600).  Those that do not pursue a public benefit are excluded from this category.  A third party standard-setter makes the initial determination of whether a business is a benefit corporation. However, the laws governing benefit corporations provide a dearth of content for these standards (Reiser 601).

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The benefit corporation is different from traditional nonprofit, for-profit business forms, and other hybrid organizational structures. By retaining traditional business purposes and adding the requirement of pursuing general public benefit, the benefit corporation allows entities to pursue a dual mission of both profit and social good. This duality of mission contrasts sharply with traditional nonprofit and for-profit forms, but is consistent with all other hybrid forms (Reiser 606).

The benefit corporation form is effective in allowing social enterprises formally to articulate a dual mission. It clearly allows shareholders to take profits and requires a statement of purposes for the general public benefit. This is an improvement over other organizational forms, but it does not give the benefit corporation an advantage over existing hybrid organizatiuonal forms (Reiser 616-617).

The benefit corporation will not yet achieve all of the goals social enterprises desire from a hybrid form. Benefit corporation statutes have opened up a place for social enterprises to legally articulate their dual mission, and have guarded the ultimate exit from the hybrid form with significant shareholder voting requirements. Leaving all content to unregulated standard-setters and providing little guidance or enforcement apparatus for midstream decision making, however, does not do enough to ensure benefit corporations can enforce a dual mission over time (Reiser 624).  Thoughtful founders and leaders of social enterprises considering the benefit corporation form will consider whether investors, consumers, partners, and employees will find this balance and brand appealing. “Until a hybrid form is created that clearly and powerfully enforces dual mission, though, I believe access to expanded capital, effective branding, and sustainability will remain elusive,” (Reiser 625).

Regardless of the hybrid organizational form that is chosen, social entrepreneurs have a fear that the managers of these enterprises might sell these businesses to new owners that care only about generating profits (Kelley 359-360). “If this happens, and if consumers and investors, particularly private foundations and socially responsible investors, feel that they have been duped, the hybrid fourth sector as a whole - not just the individual social enterprise - will lose credibility and fail to achieve its transformational potential,” (Kelley 360). A well known example of this was when Ben and Jerry’s Ice Cream corporation was purchased by Unlilever, a company not known for being environmentally or socially conscious. While Ben and Jerry’s had been criticized for ineffective corporate philanthropy, the business had a good run as a favorite of the social enterprise movement (Kelley 360).

What the Unilever purchase did was cast doubt on the ice cream maker’s purported social mission and multiple bottom line philosophy and raised the possibility that the corporate goodwill that Ben and Jerry’s built up as a socially responsible entity would be converted entirely to private profit by Unilever (Kelley 360).

Although Unlilever assured the public that it would continue Ben and Jerry’s tradition of corporate social responsibility, outraged social enterprise movement supporters pointed out that no law would prevent the new corporate owner from abandoning these principles if they found them to inconvenient (Kelley 360).

According to Page and Katz, Unilever's acquisition of Ben & Jerry's included several unusual provisions, touted by some as unique.  Unilever chose to keep much of Ben & Jerry's operations separate.  More importantly, they committed to creating a board of directors composed primarily of the existing board's nominees. This board was intended to help manage the brand and provide leadership for the social mission (227).

Unilever presumably feels market pressure to preserve those qualities and activities that consumers support and are willing to subsidize. Unilever has kept Ben & Jerry's in a unique position within the company’s corporate structure. Ben & Jerry’s increased the number of ice cream consumers willing to pay a premium for ice cream made without bovine growth hormone, using dairy from family farms, made in ways that promote rainforest preservation, and that pays fairer wages to Third World suppliers of cocoa, vanilla, and coffee. Unilever has continued to operate within these parameters, even if it has discarded some of Ben & Jerry's social activities. The Ben & Jerry's website suggests that not only is it still pursuing the same social mission on a local and national level, but that with Unilever's acquisition, the social mission can be carried out on a global scale (Page and Katz 245-246).

According to Page and Katz, even if a for-profit company like Unilever, takes over a social enterprise like Ben & Jerry’s, the social enterprise can leave a legacy of progress. “Unilever, by expanding the market that Ben & Jerry's pioneered, may have created more social value than Ben & Jerry's could have done alone,” (250).

Social Entrepreneurship, having started in the 1980s is very much in its infancy and there is not a lot literature about the subject.  There is not a separate discipline as par of it lies within nonprofit management, business, and law. It has caught on in some areas of the country and is practically unheard of in others. One place it is very much a part of the landscape is New Orleans, where there are two organizations that help get new enterprises started. Because of one of these organizations, New Orleans has its firs food cooperative and another nonprofit that does nothing but replaces conventional light bulbs with those that are energy efficient. There is also a pizza place that sells pizza made with healthy ingredients. Also there is an annual event where New Orleans residents can pitch their own ideas about how to start a business that would help rid the city of one of its problems, like blight. However, this might be unheard of in another part of the country where social entrepreneurship is confined to a few minutes of an introductory course on nonprofit management and it only discusses how large corporations are donating a percentage of sales to a particular charity.  Social entrepreneurship is still not something that is well known across the country and this could possibly happen given time. Because of this, the for-profit, hybrid organizational forms that can be used to form a social enterprise might not have the clear regulation that is found in the nonprofit sector. These organizational forms, especially the benefit corporation and the L3C, are newer than the social enterprise movement and it will take time to see if these forms will be better than the tax-exempt organization for social entrepreneurs to use to accomplish their mission.

The change that needs to take place is for these new hybrid forms to be regulated by the government like nonprofit organizations so social entrepreneurs can have a clear sense their enterprise is meeting a public benefit and not just something used to generate a profit. Additional research needs to be done on how social entrepreneurs doing using the tax-exempt organization as its mechanism for accomplishing its mission. There are many examples about nonprofits starting their own businesses unrelated to their mission.

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