‘Harvard Business Review’: Entrepreneurial Pitfalls

Many pitfalls await the growing number of non-profit organizations now seeking commercial revenue, warns an article in the Harvard Business Review (January-February).

Rising costs and increased competition for philanthropic support are prompting many such groups to behave more like for-profit businesses. Save the Children now sells neckties to raise money; the Delancy Street Foundation in San Francisco runs a restaurant to employ ex-convicts and former substance abusers; universities are forming partnerships to capitalize on promising research results; and hospitals are converting to for-profit status.

“Like the proverbial tail wagging the dog, new sources of revenue can pull an organization away from its original social mission,” observes J. Gregory Dees, an associate professor at Harvard Business School. For example, critics of the Y.M.C.A. contend that the organization, by operating lucrative health-and-fitness facilities for middle-class families, has neglected its mission of promoting the “spiritual, mental, and social condition of young men.”

What’s more, the market can impose a harsh discipline on non-profit groups that lack the organizational culture and managerial skills needed to create and sustain a business venture. Non-profit tax status and a volunteer labor force do not automatically insure success — particularly since many non-profit workers retain a bias against the values of the marketplace. Volunteers may be less willing to donate their time to commercial ventures. And other commercial businesses may resist what they see as unfair competition.

Mr. Dees advises non-profit groups interested in pursuing business ventures to identify all potential commercial revenue sources and determine which ones might be most appropriate for their organizations. They should then set clear, realistic financial objectives. Seeking business training and advice is a useful step for many managers grappling with unfamiliar issues. And an organization should consider carefully whether to structure its business activities as a separate subsidiary or as an integral part of the non-profit group itself.

Mr. Dees writes: “Non-profits 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.”