May 3, 2007 | Read Time: 8 minutes
Carl J. Schramm, the head of one of the nation’s biggest foundations, challenged the 600 charity and business leaders gathered here late last month to wrestle with what it means to approach tough social problems in an entrepreneurial fashion — but also to recognize that social entrepreneurship isn’t the right solution to all of the problems society faces.
The meeting, organized by the Social Enterprise Alliance, focused on ways in which nonprofit groups can diversify their sources of revenue by charging fees for the services they provide and starting businesses related to their charitable activities.
All business entrepreneurs — because they drive innovation, create jobs and wealth, and in many cases give some of that wealth away — are social entrepreneurs, said Mr. Schramm, chief executive officer of the Ewing Marion Kauffman Foundation, in Kansas City, Mo.
“They are the bedrock on which social welfare expands,” he said. “Now the question for us is whether or not every social entrepreneur can be an economic entrepreneur.”
The question of scale is the biggest difference between economic entrepreneurs and social entrepreneurs, according to Mr. Schramm.
Because of the capital markets they work in, entrepreneurs starting a for-profit business strive to grow quickly above all else. But, he said, he’s still waiting for “a true social entrepreneur” to come to his office.
Mr. Schramm imagined how the presentation might begin.
“She shows up and says, ‘I run a kitchen for hungry people in X city. Between you and me, I run my kitchen better, faster, cheaper. My food’s more nutritious. It is served hotter, in a cleaner environment. The people who eat it have a sense of higher dignity, and I do it at 83 cents a unit, while the average in my city is 179 cents a unit.’”
The hypothetical social entrepreneur would be at the foundation to ask for a grant to help the organization grow, or “go to scale,” he said.
“And to go to scale means I’m going to wipe out all these other deficient kitchens that are ‘my competitors,’” Mr. Schramm said, speaking as the charity official.
The next part of her plan, he said, would be to move to another city, and take advantage of economies of scale to further bring down the cost of providing meals for the hungry, providing an approach that could be spread across the country.
Mr. Schramm, however, said he doubted he’d be hearing any such proposals.
“And you know why,” he told the audience. “It wouldn’t be nice to compete. We don’t run by metrics; we run by good intentions.” If the city the social entrepreneur was working in had eight soup kitchens, he said, everyone would applaud the person who decided to start the ninth.
But there are real costs — both financial costs and lost opportunities — that nonprofit organizations pay because they don’t think in more businesslike ways, argued Mr. Schramm. And charities, he said, are facing increasing pressure to adopt entrepreneurial approaches to their mission work from donors who have started and run businesses.
At the same time, not every social problem can be solved through social entrepreneurship, said Mr. Schramm.
“The reason why there’s a charitable sector in the first place is because markets are imperfect, and there is such a thing as market failure,” he said. “There are wants and needs of the human community that markets cannot and will not solve.”
And because not every problem has a market-based solution, said Mr. Schramm, people in the nonprofit world should not try to use the language of the market to describe what are charitable activities.
“Not every gift is an investment,” he said. “This is, in a secular society, the most noble thing humans can do, and we should do nothing to diminish that pure gift by trying to analogize it to a business investment.”
At a time when more and more charities turn to business ventures as a way to fulfill their missions, and for-profit companies increasingly align themselves with social causes, experts are beginning to ask whether new legal structures are needed to accommodate — and promote — activities that blend commerce with social good.
“Some real significant gaps exist in what (c)(3)s [charities] can do in the commercial area, and what businesses can do in the social area,” Allen R. Bromberger, a New York lawyer who specializes in nonprofit law, told conference participants.
Because federal law prohibits nonprofit officials and others related to charities from receiving undue financial benefits, he explained, charities are limited in the types of deals they can make with companies, and usually can’t offer incentive-based compensation, stock options, and other types of profit sharing that are standard practice in the business world.
And, he said, because nonprofit organizations cannot sell shares to investors, it can be very difficult for them to attract capital to expand their businesses.
Companies that seek to achieve both business and social goals face challenges as well, said Mr. Bromberger.
Because businesses are formed to maximize returns to shareholders, he said, companies that incorporate nonfinancial factors into their decision making — such as the effect a decision could have on the environment or society — open themselves up to shareholder lawsuits. Any social-responsibility goals written into the companies’ mission statements or bylaws can be rewritten by their boards of directors, and corporations can claim tax deductions only on charitable donations up to 10 percent of their taxable income.
As a result, said Mr. Bromberger, social enterprise often takes place in intricate hybrid structures that combine both nonprofit and for-profit entities.
“There’s a fairly significant hidden cost of setting these things up and running them and managing them that doesn’t necessarily show up anywhere on paper,” said Mr. Bromberger. “You may have multiple boards, you may have multiple management systems. How you govern and manage these complex ventures becomes a real challenge.”
Several states, including Minnesota and North Carolina, are considering legislation that would create new corporate forms that would better meet the needs of social enterprises, and experts in the nonprofit world are thinking about new approaches that could be developed within the current legal framework.
The Aspen Institute’s Nonprofit Sector and Philanthropy Program has held several meetings on the subject. A new paper — “Mixing Mission and Business: Does Social Enterprise Need a New Legal Approach?” — highlights some of the new approaches that are being discussed, as well as the state legislative efforts.
Mr. Bromberger noted that much in the social-enterprise arena is still uncharted territory.
“The IRS has not caught up to this stuff at all,” he said. “What’s happening is that people are out there doing it. This is not for the faint of heart. You have to have a certain appetite for risk. You have to have a spirit of adventure if you’re doing this stuff in the first place.”
When nonprofit organizations are raising money to start or expand their business ventures, careful preparation and follow-up is key, conference speakers told participants.
Before a meeting with potential donors, Jan Cohen, a California charity executive, tries to find out as much as she can about the people she’s meeting with and the foundations or corporations for which they work, so she can tailor her presentation to their interests.
“If what matters to them is what I’m going to mention in minute 13, I’ve already lost them,” said Ms. Cohen, director of new business ventures at Hope Services, a nonprofit organization that provides services to people with developmental disabilities in the San Francisco Bay Area. The charity’s five businesses employ nearly 700 workers.
Rehearsing the presentation is also important, said Chandler Arnold, executive director of First Book Marketplace, a venture in Washington that negotiates bulk purchases of high-quality children’s books and then resells them to community groups that work with poor children.
“Don’t just practice with your office that already loves your social enterprise,” said Mr. Arnold. “I try to find the most negatively receptive person that I can.”
Sometimes there’s only so much information you can gather ahead of time, so it’s a good idea to start the meeting by asking donors or program officers about themselves, advised Bill Strathmann, chief executive officer of Network for Good, a Web site that allows donors to contribute to any charity in the country.
“You’ll immediately find that point of connection,” he said.
Mr. Strathmann also said it’s important to be prepared to give the person as much information about the organization as they want. He said he always takes one-page, five-page, and 25-page descriptions to meetings, as well as Network for Good’s business plan.
If a question comes up during the meeting that you don’t know how to answer, get back to them with the answer quickly, said Mr. Arnold of First Book Marketplace.
“A lot of people, after a first meeting, if it doesn’t go as well as they’d hoped, they drop the ball,” he said. “So many of our relationships have taken years and years to cultivate, so I think that follow-up is important.”
