March 3, 2005 | Read Time: 6 minutes
The scholarly attack on nonprofit business ventures has grown increasingly sharp in recent weeks. The Harvard Business Review’s February issue warns that nonprofit groups “should not be encouraged to search for a holy grail of earned income in the marketplace,” arguing that “sending social-service agencies down that path jeopardizes those who benefit from their programs — and it harms society itself, which depends for its well-being on a vibrant and mission-driven nonprofit sector.”
And in the winter issue of the Stanford Social Innovation Review, Burton A. Weisbrod, a professor of economics at Northwestern University, suggests that the potential for ethical trouble is so great that Congress should reduce incentives for nonprofit groups to run for-profit ventures and at the same time increase tax incentives for donors to donate money to charities so that fewer organizations would be tempted to run commercial enterprises.
Focusing on whether charities should or should not run businesses is the wrong question, and leads to a tired, unproductive academic debate. Suggesting that charities shun all commercial ventures is like telling all nonprofit groups they should drop their direct-mail campaigns. To be sure, some groups might be better off getting rid of their mailings or their businesses, but, like direct mail, commercial ventures are a proven strategy. The more appropriate and meaningful questions to ask are “which nonprofit groups have the assets and capacity to succeed at commercial ventures?” and “how do we spread proven, successful strategies?”
The scholarly attempts to dampen the enthusiasm of boards, donors, and government officials for business ventures are potentially very damaging. Given the financial challenges facing charities today — with foundation and government money getting tight and competition for donations increasing — why rule out commercial activities and business ventures that are today producing $300-billion annually in revenue for the nonprofit sector? Blanket suggestions to stop this activity ignore the reality of how important this revenue is to charities and the work of nonprofit leaders who are focusing on the best ways to make these business ventures work.
Nonprofit groups have run businesses for nearly 100 years. Goodwill thrift shops and museum gift stores have been part of the nonprofit landscape for decades. In virtually every city, job-training groups offset their program costs by running businesses, such as Ben & Jerry’s ice-cream shops, that provide their clients with an opportunity to gain real-world job skills.
Other groups use a market approach to carry out their missions. For instance, Mass Energy, a heating-oil buyer’s group in Massachusetts, purchases heating oil in bulk and distributes it at a discount to its members. Even with the discount, the group makes money selling the oil and then uses it to help poor people pay their heating costs.
In some cases, nonprofit groups have simple goals for their ventures. A job-training group might simply want its business to pay the costs of recruiting and training its clients so that it does not have to spend energy on fund-raising activities. In other instances, the goal of the business is to make money that will support an array of charitable programs.
While some charities have been operating businesses for a long time, commercial enterprises are still a very new area for most of the nonprofit world. Only in the past few years have nonprofit entrepreneurs begun to share what they have learned with others and figure out what the best approaches are to running businesses. Many organizations are not even able to define accurately, much less measure, their profit margin.
Like their for-profit counterparts, many nonprofit groups try to start successful businesses but barely break even, or fail.
Unlike the business world, however, nonprofit groups do not have easy access to adequate capital, skilled workers, or experience in dealing with the marketplace.
It takes time to recast the culture of the nonprofit world to develop the skills, resources, infrastructure, and accountability mechanisms to promote efficiently run business ventures.
Measuring short-term profits is not enough to determine whether a business venture is good for a charity’s long-term health. It is especially inappropriate when the organization is engaged in this commercial activity not to make a profit but merely to offset the operating costs of its charitable programs — programs that would otherwise need large philanthropic support.
Perhaps the most disturbing aspect of the attacks in the Harvard and Stanford journals is that both of them assert that running a business overly distracts charities from carrying out their social missions.
Those concerns ignore three key facts:
- Traditional fund raising is a distraction from an organization’s mission. Is there anything more distracting from a focus on a charity’s programs than massive cold-calling efforts, golf tournaments, or rubber-chicken dinners? Nonprofit groups need to evaluate all the ways in which they generate revenue and choose those that are most appropriate to their missions and that produce a solid financial return.
- Most nonprofit businesses are connected to the organization’s charitable mission.
- The strategies and disciplines required to run a business venture can improve the overall management of a nonprofit group.
In the Community Wealth Ventures survey, more than half of the charities that responded say their business venture has helped introduce business planning processes, performance metrics, and other accountability measures throughout their organizations.
Young nonprofit groups say that donors tend to keep giving to the group because they are impressed by the organization’s business activities; larger nonprofit groups say the creation of a business helps them create an entrepreneurial culture within the organization. Those additional benefits must be factored into the return on investment of pursuing a venture.
It is unclear why business activities continue to face such skepticism in the nonprofit world. Perhaps part of the problem is that this is one of the few areas where nonprofit groups can measure results, so it is easier to criticize results that aren’t glowing. Still, the amount of money dedicated to helping nonprofit groups run businesses is minuscule compared with the amount they spend on strategic planning or so many other areas, so the criticism seems disproportionate to the amount of resources involved.
Running a business is certainly not an easy way to make money, and even the strongest proponents of charity ventures know that it is inappropriate for many organizations. But the gap between the amount of money needed to solve our country’s social problems and the limits of government and philanthropic resources is growing quickly, so now is the wrong time to tell charities to stop being entrepreneurial.
Evan Hochberg and Alfred Wise are managing directors of Community Wealth Ventures, an organization that helps charities design and run businesses. It is a for-profit subsidiary of Share Our Strength, an antihunger nonprofit group in Washington.
