Foundation Shares Lessons About Developing Small Businesses

Even economically depressed cities and towns have a wealth of resources — whether they be forests, land, or cultural heritage — that can serve as the basis of community-development projects. But translating those efforts into successful businesses can be difficult and time-consuming, according to a new report from the Hitachi Foundation, a nonprofit organization in Washington established by the Hitachi technology company.

“Resource Use in Community Development” profiles 11 development projects, supported by the Hitachi Foundation from 1997 to 2000, that sought to identify and build upon the existing strengths of regions that didn’t benefit from the economic prosperity of the late 1990s. In addition to detailing the community-development and enterprise-development lessons from the projects, the report also discusses what the foundation learned about its own grant making.

Some of the organizations used their grants to start businesses.

The Community Economic Development Center of Southeastern Massachusetts, in New Bedford, started an aquaculture-hydroponics business to raise fish and vegetables together in greenhouses and to provide jobs to displaced fishermen. The center scaled back and eventually closed the operation after running into problems with its collaborators and encountering trouble getting financing.

Other charities helped individuals and community groups start their own small-business ventures.

The Appalachian Center for Economic Networks, in Athens, Ohio, encouraged the growth of a local specialty-foods industry by providing a test kitchen, marketing assistance, and low-cost financing. More than 100 specialty-food businesses — selling products such as spinach pasta, blackberry jam, and fiery salsas — now exist in a region that had fewer than a dozen such businesses five years ago.

Traditional economic-development efforts have paid little attention to developing very small businesses because they do not produce large numbers of full-time jobs. But in the report, the foundation argues that such ventures can make a real difference in people’s lives.

“Supplemental earnings from a microenterprise can mean the difference between remaining in one’s own community or being forced to move elsewhere to seek employment,” says the report. “Such earnings may furnish a family with the extra money needed to pay for day care, allowing one or both parents to work outside the home, or to pay property taxes on land holdings, such as a family farm.”

Challenges for Charities

Nine of the 11 projects were located in rural areas, and many of the organizations’ business plans depended on selling products and services in more-affluent markets in distant areas, often in big cities. Finding and understanding those urban markets proved to be a challenge for some of the charities.

Two organizations that the foundation worked with, the Newton County Resource Council, in Jasper, Ark., and the Wai’anae Coast Coalition, on the island of Oahu in Hawaii, started community-based tourism efforts, and both have struggled to figure out how to attract travelers.

While many of the business ventures were successful in furthering the organizations’ missions, very few generated profits that could be used to subsidize their traditional programs, despite the groups’ initial expectations, says Mark Popovich, senior program officer at the foundation.

In fact, he says, building a business can sometimes be hazardous to a charity’s health.

“Sometimes there can be a temptation with the nonprofit that is facing fiscal difficulties to look for a Hail Mary-pass solution of starting a business,” says Mr. Popovich. “Adding the tension and stress of starting a social venture or working very closely with businesses that face the risk of failure can really add to the stress and difficulty of managing the nonprofit organization, and in some cases can threaten the existence of that organization.”

Evaluating Proposals

For its part, the Hitachi Foundation learned that evaluating proposals for business ventures, particularly small, local enterprises, requires a different approach than assessing traditional grant requests.

“When you’re funding service providers, they have a pretty clear track record of managing their finances and delivering services,” says Mr. Popovich. “But in the case of social ventures, they’re doing something new where there’s not a straight-line connection to a track record of that organization in the past.”

The report is available on the Hitachi Foundation’s Web site at http://www.hitachi.org/news/reports/resource_use.html. Print copies can be obtained by contacting the Hitachi Foundation at 1509 22nd Street, N.W., Washington, D.C. 20037-1073; (202) 457-0588.