January 26, 2011 | Read Time: 3 minutes
A growing number of nonprofits are starting businesses with the goal of solving social problems or producing revenue for charitable programs—or both.
While every entity is different, certain characteristics distinguish those that achieve their goals from those that either limp along or outright fail. Successful enterprises I’ve seen typically incorporate the following principles into their planning, while those that ignore or play down these essential ingredients do so at their peril.
Hiring experts. Well-run health clinics, schools, theaters, and other nonprofits are usually led by teams with years of relevant experience; social enterprises require the same depth of management expertise. But many nonprofits are reluctant to spend the money that an experienced management team costs, especially because such business veterans sometimes expect salaries similar to what the private sector offers.
In the long run, however, spending more money on talent will save money. Hands-on expertise with the business dynamics, supply chain, industry trends, competitors, and revenue cycles involved in a nonprofit’s business are critical. It is more cost-efficient to pay more for managers who have already learned from their mistakes than to pay less for someone who will use your business (and resources) to learn on the job.
Raising adequate and appropriate capital. Many social enterprises are started with too little capital, in part because organizations underestimate the enterprise’s capital needs or can’t figure out how to find the required resources.
Nonprofits are so accustomed to providing services on a shoestring and operating without adequate infrastructure that when they plan for a social enterprise, they often consider marketing, sales teams, or finance and accounting resources as luxuries they can’t afford. Ultimately they underestimate the cost of running the social enterprise and do not include these expenses when they seek money to start an enterprise.
Nonprofits also overlook the need to raise enough money to provide a cushion to experiment and to make mistakes. Sometimes the organization will need that extra money if early sales are slow, if an advertising campaign doesn’t yield results, or if the cost of materials increases.
Other nonprofits might have a good sense of what it will take to finance a social enterprise; however, they are unable to raise the capital. Many proceed anyway, ultimately finding themselves short of capital and unable to reach their potential. In some cases, organizations in these situations fill the capital need with too much debt (which can be quicker to raise than seeking grants) and are not able to keep up with debt payments. When properly deployed, debt is an effective tool, but too much debt can sink the whole enterprise. Without the right kind of capital, organizations will face limits on their ability to maneuver and respond nimbly—and that can cause an enterprise to fail.
Collecting benchmarking data. Very few businesses unfold as originally planned; nevertheless, devising business plans with benchmarks (production or service levels, revenue dollars, sales targets, etc.) makes it easier to see when and where things may be going off course. Without data, organizations often can’t respond in a timely way or don’t have good information about what they need to fix. Organizations that can make quick course corrections save time and money.
In your experience with a social enterprise, are these the most essential ingredients of success? Have you encountered other stumbling blocks your peers can learn from? We’d like to hear about your experiences, so please click on the comments box below.
