Social Enterprise: Profit Meets Not-for-Profit – Can They Live Together?

While the concept of raising money for a charitable cause is not foreign to not-for-profits, shifting from a not-for-profit mindset to a for-profit mindset often means taking an Executive Director into unfamiliar and uncomfortable territory. The move to a more advanced and sophisticated fundraising concept of for profit social enterprise can be fraught with philosophical and operational challenges, as well as some traps and obstacles.

Mark Olson, Managing Partner of Osborne Interim Management, has defined social enterprise as “a for-profit business that also carries a strong social mandate”. For many people those are two opposing philosophies: “for-profit business” and “social mandate”. How does an organization which has as its bottom line the delivery of a charitable service or educational programming, wrap its collective mind around delivery of a strictly financial bottom line? How can those two ideas match up and how does a NFP organization go about achieving a marriage of the two seemingly competing philosophies, and most important of all, how can an NFP be successful at it?

These questions have been debated by NFP Boards and managements quite a bit lately as the popularity of social enterprise businesses as a source of funds is increasing. Following are some tips on how to address the traps and obstacles, plus the inevitable start-up issues that all NFP Boards and Executive Directors must face in thinking about a social enterprise operation:

Board Versus Executive Director:
Issue: Most NFP Boards are drawn from the corporate or private sector. Usually the directors have a passion for the cause and perhaps even a personal connection. However, coming from the for-profit world means that directors will focus on the bottom line above all, and that can mean a clash with a service minded Executive Director. For example, ethics and integrity are usually higher in NFP’s as “must have” elements of a business plan than in for-profits.

Strategy: Before embarking on any planning or business model discussion, the first topic to be settled is that of Board and Executive Director agree on the balance between business practices and NFP philosophy. This will require some compromise by both parties so that one philosophy does not dominate over the other. Without that meeting of the minds, the enterprise will likely fail owing to one side or the other not buying into the business model.

Viability and Sustainability:
Issue: Success of the proposed business depends on there being a defined market and a minimizing of risk. Too many NFP’s believe that “if we build it, they will come”, and that is not a credible foundation for launching a business of any kind.

Strategy: Test it! A feasibility study to test the concept and the marketplace appetite is a necessary investment. While a Board or Executive Director may think a business concept is a sure thing, any enterprise needs a validation from some research and testing. Gut feel is helpful and can be emotionally supportive, but it is not a business strategy.

Compatibility with Core Beliefs and Mission:
Issue: The biggest trap for unwary NFP’s is that of choosing a potential enterprise based solely on what might make the most money without regard to its fit and compatibility with the NFP and the NFP’s constituency. To take an extreme example, an activist environmental organization would be foolish to get in to a car dealership.

Strategy: Identify possible enterprises, not only for their commercial potential, but for compatibility with the organization and its stakeholders.

Separate Board and Management:
Issue: It requires specialized expertise to create a master plan for a business of any kind, and especially for one that has the added sensitivity and uniqueness of a social enterprise. Because a Board or NFP management can successfully operate its NFP does not mean those skills are transferable to a social enterprise. Also, the fact that a Board may include successful business people from the corporate sector is no guarantee they can successfully transfer those skills to a social enterprise model.

Strategy: Create a separate management and governance structure that may share some resources with the core NFP, but which brings the required expertise to the enterprise. This may mean leasing the operation to a third party with a track record and expertise, but also with a commitment to the particular NFP. For example, restaurants and events catering can be and have been profitable enterprises for NFP’s, but this is a precarious industry that needs experienced and knowledgeable day-to-day managing and supervision.

Start-Up – Expense Versus Investment:
Issue: A not-for-profit might have identified a really good social enterprise opportunity that seems to align with the organization’s values and philosophies, but it hasn’t allowed for sufficient business planning and marketing costs, and is not sure it has enough funding to launch.

Strategy: Identifying and funding all true costs of a start-up are the greatest cause of business failure, whether in the private sector or in social enterprise. The first thing organizations cut if funds are short are marketing and business planning costs. The correct strategy to have is to see these as investments, not costs. Without marketing, financial planning and other expertise, any enterprise will be starting with an operating liability.

The issues above are some of the key areas to be addressed in looking at a social enterprise operation, and there are others. The essential ingredients to success are:

• Strategic, financial and marketing planning.
• Alignment with the organization’s core values and philosophy.
• Separate governance and management.
• Realistic expectations.

So, by all means pursue a business as a social enterprise and it could be an excellent source of revenue for your not-for-profit. However, if you build it, they will not necessarily come. You have to get them to want to come, and that means having a viable business plan, good marketing and a reason for people to support your enterprise other than supporting a worthy cause.

Blane Hogue
Principal