February 17, 2005 | Read Time: 2 minutes
Too many nonprofit groups make the mistake of trying to start profit-making businesses, according to an article in the Harvard Business Review. The article, in the February issue, was written by Jeffrey Bradach and William Foster, who are both top officials at the Bridgespan Group, an organization that provides strategic-planning advice to charities.
Pressure from board members, donors, and others has led many charities to start businesses in the hopes that doing so will provide a way to become less dependent on charitable gifts and government aid, the authors say.
While it might make sense for some groups to pursue businesses, “a closer look reveals reasons for skepticism,” they write.
“Despite the hype, earned income accounts for only a small share of funding in most nonprofit domains, and few of the ventures that have been launched actually make money,” they note. Saying much of the optimism about such ventures was unwarranted, they say, “the potential financial returns are often exaggerated, and the challenges of running a successful business are routinely discounted.
“Most important,” they add, “commercial ventures can distract nonprofits’ managers from their core social missions, and in some cases, even subvert those missions. Unrealistic expectations are distorting managers’ decisions, ultimately wasting precious resources and leaving important social needs unmet.”
The reasons charities have trouble making a go of a business venture are many, the authors say.
Noting that half of all small businesses fail in the first five years, they say the “odds are stacked even higher against nonprofits.” Among their reasons:
- Conflicting priorities. Nonprofit groups have both financial and nonfinancial considerations, they say. For instance, the nonprofit group might want to pay all the workers in their business a “living wage,” or make their products easily affordable to the poor — things that might put a charity business at a commercial disadvantage.
- Lack of business perspective. “Because philanthropic contributions typically do not have significant operation costs associated with them, nonprofits can easily misjudge the actual financial contribution that a venture will deliver.”
- Complex revenue models. In many cases, the intended users of a charity’s product or services are people who can’t afford to buy them. That means charities have to look for others to pay the costs, such as government or corporations.
The article is available for a fee at http://harvardbusinessonline.hbsp.harvard.edu.
