Nonprofit Business Ventures Often Must Overcome Obstacles

Starting a nonprofit business venture isn’t easy — even with $100,000 in seed capital

and expert consulting help.

That was the message that the more than 460 participants heard at the second National Business Plan Competition for Nonprofit Organizations, which concluded here this month and was sponsored by the Yale School of Management, Goldman Sachs Foundation, and Pew Charitable Trusts.

After the 20 finalists in this year’s competition — culled from a pool of 551 entrants — presented their business plans, representatives from the ventures that took top honors in 2003 shared their experiences and the lessons they learned over the past year.

The Guthrie Theater and the Children’s Theatre Company, both in Minneapolis, told participants that just because a decision makes good business sense doesn’t mean it will be an easy sell with employees.

The organizations had initially created a costume-rental business to cover what had been a significant cost for the two theaters: storing more than 17,000 costumes. But over the past year, the theaters sought to generate a profit from the venture, rather than just aim to break even.

When the theaters analyzed the prices that their service, CostumeRentals, was charging compared with its competitors, they found that the business’s rental fees were significantly lower than the going rate. So the theaters decided to raise them.

But, said Maribeth Hite, costume director at the Guthrie Theater, that decision didn’t go over well with some of the venture’s employees.

“Our staff feels very strongly about the customers they serve — the high schools, the colleges, the community colleges — and they want to offer this service at the best possible rate,” said Ms. Hite. “But if it doesn’t cover our costs, it’s not serving our mission.”

Focusing on the Mission

The El Puente Community Development Corporation, in El Paso, also faced tough decisions as it tried to stay focused on its business goals while balancing them with the organization’s social mission.

El Puente started Diseños Mayapán, a business that manufactures medical scrubs for Hispanic health-care workers, as a way to provide jobs for seamstresses who lost work as El Paso’s garment-manufacturing businesses moved out of the country.

But while the seamstresses have found jobs through the venture, an increasing amount of Diseños Mayapán’s sewing work has come from outside companies. The problem, say its leaders, is that such work may be short-lived, and if they accept too many outside contracts, the venture will not be able to put the needed time and resources into building up its scrubs business, which the venture’s leaders say carries the better potential for economic growth in the long run.

“The temptation to go with the easier buck can be very strong,” said Maria Picard-Ami, the organization’s social-enterprise director. “We don’t want to say no, but we don’t want to lose focus of what our major business-plan objectives were.”

Getting Repeat Sales

Encouraging repeat sales proved to be more challenging than the Rochester Rehabilitation Center expected.

Parrett Paper, the line of greeting cards that the organization bought in 2001 for $45,000, employs people with disabilities to produce animal notecards, gift tags, and other items. The bold, playful cards are generally an easy sell when the company is able to get them in front of new customers, said Lynn G. Barber, director of development and public relations at the Rochester Rehabilitation Center.

“But it’s also very easy to forget about those customers that have initially made a purchase, and to keep going on to new customers,” she explained. “We know that it’s much cheaper to maintain a current customer than it is to get a new customer.”

To remedy the problem, Parrett Paper has built a database that allows it to store information about the zoos, museums, and gift shops that purchase the cards, as well as how often and in what manner each customer wants to be contacted.

Parrett Paper is also looking at how it markets its products to new customers. So far, the business has relied primarily on trade shows. Ms. Barber said that while that strategy was important as it was trying to raise the profile of the greeting cards, the organization believes that relying more on sales representatives might be a more efficient way to reach new customers.

Dealing With Clients

Too many customers presented the biggest problem for CompuMentor, a technology organization in San Francisco. Its business, TechSoup Stock, is an online service that allows nonprofit groups to purchase donated software and hardware for a low fee.

“Our greatest challenges in the early days were to establish the corporate partnerships to secure the donations,” said Rebecca Masisak, director of TechSoup Stock. “This year, our challenge has been managing growth and making sure that we deliver on all the promises that we made in the first year.”

The high volume of telephone calls and e-mail messages from customers, she said, taxed the business’s small staff and the organization’s technology systems, which sometimes led to complaints about customer service. As a result, TechSoup Stock is investing more than $1-million to improve its phone and e-mail systems.

Reflecting on the time and energy that it takes to get a venture off the ground, Ms. Masisak questioned the wisdom of charities’ trying to run multiple businesses, a topic of discussion at several conference sessions.

“I have a little bit of a question mark about that, honestly,” said Ms. Masisak. “It takes so much when you invest in one of these things. You’re not done in Year 1, you’re not done in Year 2. There’s a long road there to really achieve success.”

She speculated that the tendency might be a byproduct of the way nonprofit groups obtain funds, in which it’s often easier to get money for new, rather than continuing, projects.

Pam Wallize, costume director at the Children’s Theatre Company, in Minneapolis, had a slightly different take on the subject.

One of the primary benefits of starting the costume-rental service was the entrepreneurial spirit it sparked throughout the organization. The theater has since embarked on a script-licensing business with the Seattle Children’s Theatre, and its gift shop has started talking with business people on the theater’s board for tips on merchandising and display.

Says Ms. Wallize: “The start of our business was a lightbulb for the organization as a whole.”