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Social Entrepreneurship
By Jerr Boschee
Past questions and answers from Jerr Boschee from live broadcasts aired by the Learning Institute for Nonprofit Organizations collaboration*
Other Q & A Topics:
Q1. If your agency assesses a program that is losing significant dollars and a decision is made to eliminate it but by doing that, United Way decides to pull 100% of the funding to the agency, then how can one encourage social entrepreneurship within this funding culture?
- Anonymous, CSU
A1. Remember: If you are the best or the only provider of a service that is critically needed in your community, you will probably decide to continue providing it regardless of your financial losses. If, on the other hand, there are other nonprofits capable of delivering the service to more people than you are able, at less cost, and with greater efficiency and effectiveness, then the United Way and other funders should applaud your decision. Unfortunately, many funders still do not understand or value the importance of capacity-building and self-sufficiency . . . or understand that by focusing your energies in areas where you can make the greatest difference you'll be able to serve even more people than you do today. With these types of funders, all
you can do is begin an educational process (and perhaps refer them to Peter Drucker's belief that the most important thing nonprofits can learn to do these days is how to kill programs).
Q2. My organization has an "EQ" of 3. Where do I begin? How can I find people with business or entrepreneurial experience to join or advise our board? Also should you enter a field where you won't be #1 or #2 (at least initially) even if it is your sole mission?
- Paul, Rockville, MD
A2. The best place to find people with entrepreneurial experience might be your local Chamber of Commerce. Actually, you only need to find ONE person . . . then let that person open his or her rolodex. As for entering a field where you won't be the leader (or at least number two), most organizations have been successful by creating a niche within the same field in which they CAN be the leader. The whole point is to identify an unfair competitive advantage . . . that's the secret of business. In any event, if you can't be #1 or #2, you might find yourself floundering. If the best you can do is #3 or worse and it's the ONLY way in which your mission can be carried out, then it behooves you to think long and hard about whether you should continue to exist as an independent entity or whether you should merge with #1 or #2 in order to stop duplicating community resources.
Q3. What advice could you provide in terms of a starting point for developing a social entrepreneurship model..a task force or board driven committee?
-Rita, Louisville
A3. First, make sure your executive director is ignited by the idea.
Second, recruit at least one member of the Board who likes the idea and will serve as its champion. Third, create an "enterprise" committee consisting of about a dozen people: Three can be from your Board, some from your senior management team, at least three or four should be outsiders who have experience as entrepreneurs, at least two should be outsiders who may not know anything about business, or even about your nonprofit, but are trusted implicitly by your executive director (we call them "wild cards," and their job is to ask all the "dumb" questions out loud, the questions none of the rest of you will ask because you are too close to the table. Fourth, put somebody in charge . . . don't expect everybody on staff to do a little bit of this . . . and don't expect the person you put in charge to do this in addition to his or her other job . . . carve out the time required and be sure to give the person the necessary clout and resources . . .
Q4. Using the mission/money matrix, are you suggesting programs that are well funded by grants but with no earned income should be dropped? And, do you consider government "fee for service contracts" as "earned income"? What about fee for service insurance or other 3rd party payment?
A4. It depends on whether the grants are secure, and for how long. Some nonprofits have made the determination that their ultimate goal is to be entirely self-sufficient from earned income (no grants at all); that usually takes years to accomplish. There's nothing wrong with continuing to operate programs that are well-funded by grants, but keep a weather eye open for the stability of those grants. Yes, fee for service contracts can be "earned income," but only if there is a quid pro quo relationship between something you do and how you get paid (subsidies don't count as earned income). Fee for service insurance and other third party payments also count, so long as the quid pro quo exists. But remember: You can have a lot of earned income and still not be entrepreneurial . . . and that could be a danger as well (just look at the trouble a lot of big American corporations have encountered in recent years).
Q5. How does the "reverse" management chart (from last month's seminar) empowering volunteers and staff, correspond with social
entrepreneurship?
- Carole, Janesville WI
A1. Entrepreneurial strategies and approaches don't have to come from the top -- and strategies that encourage risk-taking, failure, and entrepreneurial approaches need to be put in place for all employees. In fact, most good ideas for earned income activities come from the bottom up (after all, who on your staff is closest to the street and has the best sense of what's needed?)!
Q6. In a closed retirement community, how do you convince residents they should contribute to "profits"?
-Tom, San Antonio
A6. I don't really understand what you mean by "profits" (i.e., from
what?), but the best answer would probably be to appeal to their
self-interest . . . of course, you first have to know what the residents value. It's a classic Drucker Foundation question -- "What do our customers value?" - and it's the core of any marketing plan. Most probably, the residents will not value anything unless they can become personally involved or will personally benefit in some way.
Q7. Are there ways for social entrepreneurs to capture some of the enormous wealth that will pass to the generations of boomers in the near term for their ventures..like for-profit innovators utilize venture capitol?
-David, Louisville KY
A7. Absolutely! The concept of "venture philanthropy" is spreading
quickly through the grant-making and investment communities. If you go on-line to Share Our Strength, head for the Community Wealth Ventures section and click on the publications button, you'll find a report you can download that was done for the Morino Foundation that will give you an excellent overview of what's happening . . . and of ways in which boomer wealth is being redirected to social entrepreneurship.
Q8. Is there a difference in success rates between products and services?
-Kevin, AARP Washington D.C.
A8. Not really. Success with either a product or a service depends on many of the same things, most of which are idiosyncratic -- the market, the timing, the resources, the competition, and so on. Success is determined not necessarily by whether you're offering a product or a service but by whether you have a good idea, there's a market for the idea, you have the right management team, you can put together a sound business plan and you can attract sufficient financing.
Q9. Recently renovated a room at the library (conference/meeting room) and we hope to utilize it for incremental income. Do you have suggestions for the "pull" aspects you talked about?
- Mardi, Pittsburgh Penn
A9. Well, the first question is this: Does anybody in your community NEED a conference/meeting room? You may be committing the classic mistake of starting with your resource and then trying to push it into the market. On the other hand, if you do some market research and discover that people have a need for a conference/meeting room, you'll also be able to find out what they're willing to pay, when they need it, what amenities will be required, and so on. Often it's the little extras that cause people to choose your facility over somebody else's facility. There are probably lots of conference rooms around: What will make yours different (and compelling)?
Q10. Does it make a difference for the Executive Director or leader of a nonprofit to have one skill set (innovator, entrepreneurs or professional manager) more than another?
- Paul, Tompkins County, New York
A10. Not necessarily. Most of the advances in the nonprofit sector
during the past 15 or 20 years have been made by executive directors who were innovators. It's time now for entrepreneurs to become more prominent . . . but that doesn't mean the innovator has to disappear. Frequently, an innovative CEO (executive director) will create a position called a Chief Operating Officer (or deputy executive director) and fill it with an entrepreneur. When they do, of course, they also have to be sure to get out of that person's way and let him or her DO the entrepreneurial thing.
Q11. Our organization's board wants to increase grant writing and fundraising activities so we can eliminate the need to charge our clients. Do you have any advice on how to convince them towards social entrepreneurship? Is social entrepreneurship the trend for the future success of not-for-profit organizations?
-Dawn, Madison WI
A11. The desire to eliminate the need for charging clients is
understandable, but there is a lot of recent research that says it's a
misguided desire. Your clients WANT to pay something for what they receive, even if it's only a dollar . . . paying your own way lends dignity to the process. Too often, we view the people we serve as coming to us filled with debits . . . recently, many people in the sector have started to recognize that these people have assets . . . and, more importantly, they are building their programs around those assets. And, yes, I believe social entrepreneurship will be a major trend affecting the future success of not-for-profit organizations: Costs are rising, traditional resources are declining, there are more nonprofits fighting over the available funds, the number of people in need is escalating every day, and the demands for accountability on the part of donors and others are becoming more strident with each passing month (not to mention the pressure for nonprofits to merge).
Q12. Our organization is a tropical demonstration farm that prepares people for overseas community development in agriculture. We give free tours which produces possible donors. Should we charge for this? We have not charged for 18 years and give tours to about 7,000 - 10,000 people per year?
- Barbara
A12. I guess the key question is this: How many of the 7,000 to 10,000 people per year have become donors? Do you have any way of knowing? If it's working, then the tours should probably remain free and be considered a loss leader. If they are NOT creating donors, then you still may want to keep them free and chalk it up to the educational arm of your mission. But there may well be things you can charge them for, if not the tour: My goodness, you have a captive market of 7,000 to 10,000 people coming through your site every year, and there must be something you can sell that would pique their interest. I'd love to talk with you about it.
Q13. Please review the tax responsibility when a non-profit begins to focus on earned income?
- Barbara
A13. As long as your earned income is generated by programs that carry out your exempt mission, you can have as much earned income as you want (including making a profit and returning those profits to the program) .. . you just can't have any personal inurement (that is, the people who work for you can't take the money and run). If, however, you are generating earned income from unrelated business activities, you will start putting your nonprofit status in jeopardy once that income represents about 30 to 35 per cent of your total revenue. One way to avoid that problem is to establish your activity as a for-profit subsidiary and pay taxes (you probably won't have to pay any taxes for a number of years anyway because you'll undoubtedly have a lot of initial
losses and depreciated expenses to carry forward on your returns).
Q14. We don’t have any discretionary funds to invest in change. What can we do?
Changing the culture of your organization will cost you time, money and psychic energy, and if you begin the process with a "cost" mentality you will probably wind up frustrated and upset. The truth is, you will not be able to recoup your expenditures in a year or even two or three years…but over time the financial and social returns could be substantial.
The best approach is therefore to adopt an "investment" mentality and stop trying to recover your expenditures immediately. And if you’re still asking yourself where the time, dollars and energy will come from, remember this: If you’re genuinely entrepreneurial, you will find the resources you need…and if you’re not, you won’t. That may sound blunt, but the truth is that one of the hallmarks of an entrepreneur…or of an entrepreneurial organization…is the ability to find the resources that are needed. It’s almost a sine qua non of entrepreneurship.
Q15. Many of our Board and staff members are fundamentally opposed to making money. They think we should serve everybody who comes to us for help and that we should never charge them for our services. How do I respond?
Maintaining a balance between mission and money is not easy: Temptations abound. But there is nothing inherently evil about making money. It’s a means to an end, not the end itself. As a Fortune 100 CEO once said, "earning money is no more the purpose of a business than breathing is the purpose of life…but they are both necessary!" Emphasize to your Board and staff members that the money you make through earned income will enable you to do more mission—that it will be plowed back into the organization, not pocketed by individuals. And help them understand that you are still committed to serving those who cannot pay…but that many recent studies have shown that most people prefer to pay something for the services they receive (even if it’s only a dollar or two) because it lends dignity to the process.
Q16. What about unrelated income? If we have too much of it, won’t we lose our nonprofit status?
Yes, you might. But so long as you develop products and services that are directly tied to your mission, you won’t have any problems in this regard. In any event, you need to be extra careful if you’re thinking about starting an unrelated business activity, because nonprofits attempting to do so are hit with a double whammy: Not only are they trying to start a business (which is usually something quite new to them), but they are also trying to do it in an arena they know nothing about. It’s usually better to stick to your core programs and core competencies—and, if you do, you need not fear losing your tax status.
Q17. What if we make a lot of money? Won’t we have to pay taxes?
Yes, you might. But what’s so awful about that? You should have such problems. Anyway, it will be years before any start-up business venture incurs tax liabilities…and if you should reach the point where you are that profitable, wouldn’t it be a nice problem to have? (Please see Letter to the Editor, Nonprofit World, Vol. 17, No. 1, page 4 for a more detailed discussion by Peter Brinckerhoff.)
Q18. Many of my Board and staff members are uncomfortable looking at our peers in other nonprofits as competitors. How can we resist doing so?
Short answer: You can’t. Competition is here to stay, since it works well for not only the funders but the recipients of direct services. There is no doubt that the transition from non-threatening peer to competitor is a tough one, and it is one that thousands of not-for-profit execs are wrestling with right now, but it is an essential change to make if you are going to continue to be around and capable of doing more mission. But here’s the good news: Strategic alliances are an attractive route to earned income. Competitors can also collaborate, whether it be on joint ventures, joint marketing campaigns, supplier/distributor relationships, licensing fees, brokering arrangements, or any number of other types of partnerships. Take another look at that "competitor" to see how you can develop a win-win scenario.
Q19. How do I tell a good earned income idea from a bad one?
Only by asking a series of key questions: What are the critical success factors for this type of business? What environmental forces will have an impact? Who are the most dangerous competitors—and how do we compare with them? Is the market for this product or service growing, remaining flat or declining? What’s our break-even point?
How much market share can we capture, and when? Only by thoroughly investigating your idea can you tell if it’s a good one or not.
Q20. Taking risks is just not a part of our culture. How can I convince our Board and staff that we need to do so?
There are few bodies more risk averse than a nonprofit Board of Directors…and to a certain extent, that is as it should be, because one of the responsibilities of a nonprofit board is to be a responsible steward of the organization’s resources. But there is a myth out there that entrepreneurs enjoy taking risks. They don’t. What makes them entrepreneurs, however, is that they will take reasonable risks. They realize that in today’s environment, if you are not willing to take risks, you are really not in the game…and you may not be around to be part of the conversation five or ten years from now.
Unfortunately, most people in the nonprofit sector hold a different view: They believe they should not start a new program or make a significant change in an existing program until they are certain that what they are attempting will succeed. And they fail to recognize that not taking a risk may be the biggest risk of all.
Q21. Isn’t this a zero sum game? Won’t our traditional funders desert us if we become too successful at earning revenue?
Most of the evidence thus far indicates just the opposite. Funders are like everyone else: They like to bet on winners. If your organization can demonstrate increased capacity, efficiency and effectiveness, funders will flock to your doorway.
Q22. Some of our Board and staff members have a false sense of security. They believe things will get better—or at least that they won’t get worse. How can I convince them otherwise?
You’re not alone…but the pressures impinging on nonprofits are becoming increasingly hard to ignore, whether it be diminishing resources, escalating costs, increasing numbers of people in need, heightened competition for available dollars, and so on. Share some of the data about these pressures with your Board and staff members, and make the point that ignoring them will not only harm your organization but will also damage the people you are intending to serve. As a leading nonprofit executive put it a few years ago: "Far-thinking nonprofit leaders are today coming to realize that profit-making expertise is a legitimate and necessary way of sustaining a nonprofit organization in the execution of its fundamental service role…. today’s nonprofits leaders owe it to their constituencies to survive and to continue to serve. (But) they cannot continue to rely on charity…"
Q23. We have so much on our plate, so many competing priorities. How can we start something new when we’re already so busy?
Do you believe that changing your culture in order to become more entrepreneurial is essential? If you do, there will not be any competing priorities…changing your culture will be the most important thing you do, and you will find ways to cope with all of the other demands on your time and energy. By the way, the fact that you are "already so busy" does not necessarily mean you should be…it may actually mean that you are a prime candidate for "organized abandonment" and that entrepreneurship is even more essential for you than it might be for many other nonprofits.
Q24. We don’t have any of the marketing, finance and other skills necessary to adopt entrepreneurial strategies. Where can we find them?
Ask for help from your local small business and financial communities. Turn to proven entrepreneurs as your mentors, people who have already built small businesses from the ground up. Not only will they bring you the type of assistance you need, they will also provide an incredible reality check to keep you from making too many mistakes along the way. One of the secrets of successful entrepreneurship is learning from the mistakes of others (after all, you can’t possibly live long enough to make them all yourself!).
Q25. Would you please list the names, addresses and phone numbers of the people in the video interviews that we could contact for more information?
- Lisa, Owatonna, MN
Ask and you shall receive...Contact Information for the Video Interviews that were captured at the Community Wealth Conference in Colorado Springs, November 1998:
Kenneth H. Cowdery, President
The Clarkson Center
310 Delaware Ave.
Buffalo, NY 14202
Tel.: (716)819-4530
E-mail: KenCowboy@aolcom
Web: http://www.Clarkson.org
William Sandonato, Jr., President
Abilities Inc., of Florida
2735 Whitney Road
P.O. Box 4010
Clearwater, FL 33758
Tel.: (727)538-7391
E-mail: wsandonato@abilities.org
Web: http://www.abilitiesofflorida.com
Roy Soards, CEO
St. Vincent dePaul Rehabilitation Service, Inc.
4867 NE martin Luther King Jr., Blvd.
Portland, OR 97211
Tel.: (503)281-1289
E-mail: rsoards@europa.com
Web: http://www.stvincentdepaul.org
Mary Foehr, Executive Director
Family Services of the Mid-South
2400 Poplar Ave., Suite 500
Memphis, TN 38112
Tel.: (901)324-3637
E-mail: Mfoehr5891@aol.com
Michael P. McDowell, General Manager
BOSS Enterprise
2201 4th Street
Berkeley, CA 94710
Tel.: (510)841-9675
E-mail: MPMatBOSS@aol.com
Charles King, Co-Executive Director
Housing Works, Inc.
594 Broadway, Suite 700
New York, NY 10012
Tel.: (212)966-0466
John DuRand, Founder
Minnesota Diversified Industries
670 Pelham Boulevard
St. Paul, MN 55114
Tel.: (651)646-4215
Randy Newscomb, Executive Director
Golden Gate Community, Inc.
1387 Oak Street
San Fransisco, CA 94117
Tel.: (415)552-1700, ext. 302
E-mail: newcomb@juno.com
Q26. Is there a required "percentage split" (from the IRS or anyone else) regarding income source. I have been told that a certain percentage of our non-profit's budget must come from a source generated directly by members as opposed to grants, donations etc. Is there a written source that I may copy/quote for the benefit of my Board and Director?
-Peggy, Sheridan, Wyoming
oplife@wavecom.net
The “percentage split” depends on your IRS status. Membership organizations have different rules than 501(c)(3) organizations, and every circumstance is different. It would be best if you consulted an attorney and a CPA who specialize in nonprofits. One thing to keep in mind, however, is that the IRS does specify that only a certain percentage of a nonprofit’s revenues may come from “unrelated” sources-- unrelated, that is, to the mission of the nonprofit. However, you can generate as much earned income as you like (even more than your expenses), so long as the work you do IS related to your mission . . .and if the “profits” are poured back into the organization to support the mission in some way.
Q27. Please relate or speak to single program organizations
-Michael, Bend, Oregon
Single program organizations frequently have an advantage over larger organizations in terms of entrepreneurship. Because you are smaller and more focused, you can typically move more quickly to take advantage of market opportunities . . . and there will usually be fewer internal turf battles. On the other hand, single program organizations are often quite small and are lacking in the resources necessary to capitalize on opportunities . . . the best approach here might be to form some type of business alliance with one or more additional organizations in order to leverage your resources. Fundamentally, however, the key point is that social entrepreneurship is not dependent on budget size or the number of programs you operate . . . it’s based on a willingness to take some
reasonable risks, to open up your control systems (and even single program organizations are often inordinately hierarchical), to make some tough choices about your staff -- in short, all of the critical success factors we discussed during the program.
Q28. What advice would you give to organizations who rely on partnerships and collaborations when considering how to view who their competitors are, particularly when one or more of their collaborators are also partners?
-Bill, Madison, Wisconsin
The concept of competitors actually collaborating is not a new one. For-profit companies do it all the time: They form joint ventures, do collaborative advertising, lobby Congress together, and so on. What you may be reflecting in your question is the worry that a lot of nonprofits have about the charge of “unfair competition” that is leveled at them by for-profit companies: As I indicated during the program, I think this is a bogus issue. The whole point of business is to FIND an “unfair”
competitive advantage -- and, anyway, how can the for-profits complain when most of them are simply pursuing a single bottom line while you’re trying to pursue a double bottom line? Less stridently (I hope), I’d suggest that you convert your fundraising partnerships and collaborations into BUSINESS partnerships and collaborations where BOTH of you win (rather than having your partners standing at one end of the pipeline and you at the other). If you’d like more information about cause-related marketing, why not call Bill Shore or Gary Mulhair at
Community Wealth Ventures, Inc., in Washington, D.C.? They can be reached at 202-393-2925 or at “http://www.sos.org.”
Q29. When looking for "support" (Donations, in-kind gifts) toward programs from the community businesses - Is it better to state your organizational mission rather than approach possible donors with the line "We are a non-profit group (In other words - We need your help because we can't do this ourselves!)? How much emphasis should be placed on this?
-Sharon, Moon Township
I am in complete agreement with what Peter Brinckerhoff said last month: “‘Show me your mission statement!’ Nobody will give you a dime for being a nonprofit. There are over one million nonprofit organizations in this country alone. People will give to nonprofits that have a mission that they can support and that they are able to clearly communicate.” In addition, I believe there are a lot of community businesses (and individuals) who will get turned on if you come to them proposing that they help you start a BUSINESS rather than just looking for another handout. Try to convert them into longitudinal supporters of your earned income activities, helping in different ways at different stages. They will like the idea that you’re pursuing self-sufficiency and will often feel that their time and money is better spent helping you do that than in giving you a one-time donation of time or money that is an end in itself.
Q30. How do we integrate earned income strategies and "funders of last resort?"?
-Dennis, Milwaukee
If you are the best or the only provider of a program that is critically needed in your community, then you will probably choose to continue providing it even if there is NO opportunity for earned income-- that’s your mission as a nonprofit. The “integration” occurs if you can find earned income opportunities somewhere else to help support the program or programs that require substantial subsidies. But don’t forget what John McKnight and others have been telling us for some time
now: Even the poorest of the poor would like to pay SOMEthing, if only a dollar an hour, in order to retain some level of dignity.
Q31. We are "re-starting" the Alzheimer's Association in Memphis. New staff, new board, new day. I have tried to incorporate much of the SE principles into our start-up phase so that we don't have to un-learn bad habits. The board is open to building an SE program. I just need to know where to start. Yesterday, much time was spent evaluating readiness. Much of this evaluation was based on solidness of current programs. Because we've only been in business since June 1, nothing is solid. Still, I feel now is the time. Any thoughts?
Sarah, Memphis, Tennessee
We have been working with a number of nonprofits in the Memphis area to help them develop earned income strategies and/or social purpose business ventures. I’m sure the people in those organizations would be willing to sit down with you and give you the benefit of their counsel (especially if you buy them lunch!). If you’d like their names, please call The National Center for Social Entrepreneurs at 1-800-696-4066.
Q32. What are some of the services that the businesses are involved in that made them successful social entrepreneurs?
-Linda, Eau Claire, WI
&
What kinds of "mission related" things are the organizations "selling"? What are some specific examples? People who are poor cannot afford to pay for counseling just because now my organization needs to earn revenue?
-Jan, Cuyahoga
Please refer to the web-site operated by The National Center for Social Entrepreneurs (“www.socialentrepreneurs.org”) and click on the section that contains profiles of some of our most successful clients.
Q33. Since traditional recipients of programs are often ill-equipped financially to pay, can services be adjusted slightly to meet a more affluent clientele?
-Jeff, Pittsburgh
You are putting your finger on a very important strategy. Charles King who you heard from early in the program, has an organization that has opened "thrift stores" near up-scale shopping areas. They have been so successful that they have now opened a used book store and café for an upscale audience. Essentially you are looking for new markets for the services that you provide right now. But there are also people that you are currently serving that want to pay something because it lends some dignity to the process and you can't overlook that aspect.
Q34. My board is fiscally conservative. We are looking into a new venture that is risky, new, and outside our mission, but the pay-off will secure us financially for years. Would the development of a business plan help take the leap over the edge? Business plans are often designed for for-profit groups…do tools such as this exist for not-for-profits?
-James, Washington D.C.
Absolutely, a business plan is necessary in developing any kind of business whether it is in the nonprofit or for-profit world. And don't be seduced by the notion that if you develop a plan it simply goes on the shelf some where. The plan is a living document and the most important part of the plan is the risk assessment that goes into your analysis of the business. And yes those tools do exist in the nonprofit sector but I really couldn't recommend one over the other.
Q35. How do you eliminate the service in the "don't" box when it is part of the core services provided through a major funding source?
Debbie, Chicago, Ill
You may not be able to "unbundle" those services which are funded. It may take you 3-5 years to educate that funder that they are damaging their own self interest in forcing you to provide those services. Make the funders a partner in those decisions.
Q36. As you evaluate your services in light of the mission/money matrix, isn't it tempting to serve only those with less significant needs and at less cost over those with greater needs? Who will serve those with the greatest needs at significant cost?
-Doug, Madison, WI
That goes right back to the issue of core values. Everything in this process is driven by those 3-4 core values that will allow you to resist those temptations in the market place. The matrix is not designed only to help you find things to make money. It is designed to give you rational reasons to make decisions. If you decide to lose money on a project for other reasons, that's fine as long as you have the data to support that decisions.
*Responses were transcribed by Prof. Andrew Lewis from the live broadcasts produced by the Learning Institute for Nonprofit Organizations collaboration.
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