by Jeff Small
Social Entrepreneurism, or the concept of nonprofits self-funding their operations through revenue generating businesses, seems like a dream come true and has attracted considerable attention in the last 10 to 15 years.
In many cases organizations have achieved admirable programmatic results with this approach, of which any nonprofit would be proud. However, with almost no exceptions, these efforts have failed to generate sustainable businesses that could exist without the support of philanthropy.
Most success stories tend to be companies that can gain an advantage through utilizing donations of products to support their business model (i.e. Goodwill Industries) or lower skill services that benefit from the warm glow customers get from feeling like they are supporting a worthwhile cause with their spending (i.e. a storage and moving company that employs the disabled ).
In all of these cases, however, there is little evidence that such ventures themselves have become self-supporting or subsidize other programs operated by the nonprofit. Most are ultimately subsidized by donations.
The reality is that half of small businesses never generate profits and fail within a few years of being launched. A 2001 study published in the Harvard Business Review found that 71 percent of “social enterprises” lost money.
To make matters worse, the process of nonprofit led business ventures failing can actually be more drawn out and damaging. If a regular moving company closes, it is sad; while, if a moving company that employs the disabled closes, it makes the news.
Does this mean that nonprofits should never attempt such endeavors? Absolutely not. Countless lives have been changed by commercial ventures launched by nonprofits. Very few nonprofits, however, have found these ventures to be a goldmine of untapped revenue.
Fortunately nonprofits do have one area of competitive advantage over for profits that has proven to be a winning investment over time -- strategic investment in fundraising. Unlike for profits, nonprofits can provide a tax benefit to donors, something your local sandwich shop or moving company cannot.
We also know that when done wisely, investments in fundraising produce the type of returns that few business ventures can promise. I know if I was approached by someone promising a 300 percent return on a business investment, I would be fairly skeptical, but that would be well within the normal range of returns on good investments in fundraising.
So if your goal is to produce a social good that could partially pay for itself, social entrepreneurship may be just what the doctor ordered. If, however, your goal is to generate flexible revenue for your existing operations, you should strengthen your fundraising infrastructure.