Choosing the Right People Essential to Success of a Business, Say Experts

Starting a money-making operation can be intimidating for many nonprofit organizations.

Following are steps that novices can take to improve their chances of success.

Start small. Charities’ income-producing ventures range from charging a fee for a service they provide to running large, complex commercial enterprises, says Jim McClurg, interim president of the Social Enterprise Alliance, in Seattle, an organization that helps charities develop money-making activities. He says organizations should get started by looking at what they already do to see whether they could offer an additional service that would be valuable enough that clients would be willing to pay for it. Small, incremental steps toward producing revenue may evolve naturally into more-sophisticated business activities.

“You begin by working with both services and activities that you’re most familiar with and the customers you’re most familiar with,” says Mr. McClurg. “But, ironically, when nonprofits first start thinking about getting into earned income, they start at the pinnacle of risk, things we don’t know, with people we don’t know.”

Charging fees, even if they don’t cover the full costs of providing a service, can have the added benefit of changing the dynamic of a client’s relationship with the charity, says Warren Tranquada, chief executive officer of Aperio, a social-enterprise consulting company in East Orange, N.J. “The recipient of aid is worried about losing that aid, and may have an incentive to please the organization that’s doing them the favor,” he says. “When they become a customer it’s no longer about a favor. It turns the tables around completely.”

Set clear goals. When a nonprofit organization decides that it’s ready to start a business venture, the group needs to be very clear about the ultimate purpose of the enterprise, says Mr. Tranquada. Balancing an enterprise’s social and financial goals will require tradeoffs, and the group needs to know what will be the deciding factor.

“If your goal is to train people and transition them into the traditional marketplace, you may deliberately decide to turn people loose just as they start to get productive for you,” he says, “which is a bad business decision but a way to train more people.”

The ultimate objective for the enterprise will probably influence the type of venture an organization decides to start. Golden Gate Community, a San Francisco group that provides job training for young people from troubled backgrounds, will consider only ventures that could offer meaningful employment to at least 20 young people each year.

Evaluate demand. When considering what type of business to start, Mr. Tranquada cautions, charities should not confuse the needs of society with what customers demand. Thinking that people should like organic produce, he says, is not the same thing as having customers say they want organic produce and are willing to pay for it.

Do the homework. Charities that are conducting research about different types of business shouldn’t rely just on resources about social enterprise, but should also review information about for-profit businesses, says Caroline Pappajohn, enterprise director at Golden Gate Community.

Trade organizations can be a wealth of information, she says, as are people who have actually run the type of business a charity is thinking about starting.

“Every business you can think of has been done before, so it’s all about execution,” says Ms. Pappajohn. “There’s something that drives every business, and there are millions of people out there who can tell you what those things are.”

Make a plan. After a nonprofit group has selected the type of business it wants to start, the next step is developing a business plan. A strong plan isn’t a guarantee of success, but the time an organization spends thinking about its product, pricing, and the market will be well spent, says Alfred Wise, president of Community Wealth Ventures, a consulting company in Washington.

“As soon as you go to market, the market’s different than what it was three months ago when you did the plan,” he says. “But by going through a decision-making process and the planning, it makes you able to adapt to the market.”

Raise needed capital. Figuring out how much money an organization will need to start the business and cover operating expenses until it breaks even — and then raising the necessary capital — is critical to the success of a new business, says Mr. Wise. “Nothing stops a promising venture more quickly than a cash crunch,” he says.

Find the right leaders. To be successful, a new social enterprise needs a champion within the organization, says Rolfe Larson, who runs a social-enterprise consulting company in Denver. If responsibility for the venture is divided among 10 people, he says, the business will fall through the cracks.

“It’s leadership that creates successful businesses,” says Mr. Larson. “I’d take a strong leader implementing a middle-of-the-road business plan before I would take a really strong business plan with a weak leader.”