Thanks to REDF (formerly Roberts Enterprise Development Fund) for contributing the FAQs. REDF is a philanthropic venture of the Roberts Foundation. More information is available on its website at www.redf.org or by contacting them at P.O. Box 29926, San Francisco, CA 94129-0266 or by phone at (415) 561-6677.
What is social entrepreneurism?
"I hear a lot of people use really similar phrases to describe what sound like the same things: venture development, community wealth creation, social ventures, social entrepreneurs, social entrepreneurship, not-for-profit enterprise, affirmative business, social purpose business, and microenterprise? What are the differences and similarities?"
Given that the emerging field of social entrepreneurism has grown out of a number of fields, including business, social welfare, community development, community service and international development, it is no wonder there are a variety of approaches and various terms to describe the work in which we are engaged!
At its core, people are talking about two things: individuals and organizations. Individuals in this field are often called social entrepreneurs. These people engage in their work in a variety of innovative ways: through for-profit companies which pursue socially responsible business practice; through not-for-profit organizations operating ventures which create economic opportunity for others; and through not-for-profit organizations which are founded as an innovative response to a particular social issue or cause. In all fairness, the people who plan, launch and manage all these types of organizations could be called Social Entrepreneurs. The key point here is that Social Entrepreneurs are people who attempt to take innovative approaches to social and other issues, most often with the use of traditional business skills applied in order to achieve some type of social goal.
From an organizational perspective, there are two forms of social entrepreneurship: not-for-profit and for-profit. In the for-profit arena, a corporation that pursues "enlightened capitalism" could be said to be a socially responsible business. The Social Venture Network and Business for Social Responsibility both work with such corporations and business people. The not-for-profit sector is itself, quite large and diverse (as are the resources available to them-- see for example, CompassPoint Nonprofit Services). Some not-for-profit organizations are focused on the goal of assisting individuals in launching their own small, for-profit businesses. The practice of assisting individuals who are members of "disadvantaged" communities to start their own businesses is referred to as microenterprise or self-employment. The Association for Enterprise Opportunity works to assist not-for-profit organizations in the United States that are pursuing self-employment strategies.
Terms such as a not-for-profit enterprise, social purpose venture, community wealth venture and affirmative business, all speak to the practice of not-for-profit organizations operating ventures to create economic value and/or create supported employment and training opportunities to those transitioning into the economic mainstream. In general, these efforts could be thought of as spanning a continuum ranging from those that engage in fee-for-service activities, to those that engage in a variety of corporate/not-for-profit partnerships (such as cause-related marketing or "cross-branding" efforts), to those which operate revenue generating ventures employing a particular client population. In discussing any given organization's efforts, it is obviously important to understand how they view themselves along that continuum. For example, the work of the Roberts Enterprise Development Fund focuses primarily upon supporting not-for-profit organizations engaged in enterprise creation as a way of providing transitional and permanent employment to homeless and very low-income individuals.
What is a Social Purpose Enterprise?
A social purpose enterprise is a revenue-generating venture founded by a not-for-profit to create jobs or training opportunities for very low-income individuals, while simultaneously operating with reference to the financial bottom-line.
Isn't it illegal for a not-for-profit to run a for-profit business?
Not necessarily. Not-for-profit organizations are clearly prohibited from engaging in ongoing commercial or other activities which profit an individual or outside interest; however, all not-for-profit organizations should be profitable, or you would be out of business and unable to pursue your charitable mission! In general, not-for-profit organizations may operate "business" ventures to the degree that those ventures are directly related to the pursuit of the social mission of the not-for-profit. They may even operate out and out for-profit ventures as subsidiary corporations-but need appropriate legal council every step of the way, since each situation is different and has different implications for the sponsoring organization. You should always be sure to secure solid legal advice if and when you are considering any of these types of ventures.
There is no single law book regarding this process. In general, the legal "code" for not-for-profit consists of existing regulations as well as a series of IRS private letter rulings over the course of the last 30 years. Each of these is specific to the original case and jurisdiction and is not pertinent to every other situation that might arise for a not-for-profit executing these strategies. However, they do give a general indication as to how the IRS views various types of not-for-profit business or job creation activities.
Many communities have not-for-profit resource centers that may have libraries with helpful guidance on this issue. For example, The National Economic Development and Law Center (510-251-2600) can provide you with advice and documentation regarding many of the legal ramifications of creating a business venture out of a not-for-profit. Other resources may be found on our "Friends of the Family" page. The key point to understand is that each organization is different with different conditions. Again, anyone considering engaging in community wealth creation and not-for-profit enterprise should be sure to consult informed legal counsel in order to best understand how to structure the effort and limit the liabilities to the sponsoring organization. Don't take the information on this Web Site or any other resource at face value. Talk to an attorney!
What are the reasons for creating not-for-profit enterprise?
Basically, there are two reasons an organization might pursue not-for-profit enterprise:
As a strategy to further its social mission, for example to create transitional and permanent job creation to benefit a targeted population
As a source of earned income as part of a strategy to diversify the revenue base.
What are the reasons for not attempting to launch a not-for-profit enterprise?
It should be understood that launching a not-for-profit enterprise is not going to solve your organization's problems-it will simply alter the type of challenges you have to deal with! It's important to understand that over the years many not-for-profit organizations have failed to successfully pursue this strategy, and not-for-profit enterprise creation should probably not be motivated by a simple desire to replace lost funding or increase income. These types of ventures are not easy, and there is no quick return for the investment of money, time and energy. However, if you are interested in providing employment and training opportunities to individuals who have experienced chronic unemployment or if you are seeking a way to diversify your revenue base, launching a not-for-profit enterprise may be for you.
How do I go about starting a not-for-profit enterprise?
There are a variety of ways to start this process, but it all boils down to knowing your organization's current capacity, understanding what "value" you may have in the market place and identifying what, if any, competitive advantage you may have, both as a not-for-profit and potentially as a for-profit entity.
You might begin by doing a self-assessment of your organization, identifying your current strengths and position as a not-for-profit.
At a minimum, ask yourself the following questions about your agency:
What is our core mission and reason for existence? What do our articles of incorporation say? What do our employees say? What do our clients or communities of interest say?
How do we currently deploy our resources in support of that mission?
Do we use our resources as effectively as we could to pursue our mission?
Are there activities that really don't relate to our mission and that we could transfer to another not-for-profit with greater capacity to deliver that service or program?
Are there other organizations in our area that could provide these services more effectively than our organization?
What are our total assets (financial, real estate, volunteer, professional, etc.)?
What are our significant liabilities and challenges? (carrying debt, no financial stability, etc.)?
Is it possible for us to develop earned income based on any of our current activities?
Can we modify something we currently provide for free into a product or service for which we could charge fees?
When considering enterprise activities, it might be helpful to think about those possibilities in the following order:
1. Those directly related to our mission
2. Those less related to our mission
3. Those not related to our mission
Start from the inside and work outward. The further away you get from your mission as a not-for-profit enterprise, the more likely you are to fail since you will have less expertise and may encounter increasing levels of risk. Historically, those enterprise activities with which a not-for-profit had no prior experience or expertise have seen a higher failure rate than those that were directly grounded in the experience or background of the sponsoring organization.
How do we educate ourselves on these issues?
This is not rocket science. The challenge is how to integrate business principles into the not-for-profit marketplace. Read our book, New Social Entrepreneurs and become familiar with other resources available to you.
Find information based in actual experience, not on theory or philosophy (And don't launch your enterprise based upon someone else's vision-base your expectations on others' direct experiences and your dreams on your own desires!) Conduct informational interviews with groups that are actually engaged in the type of work you are researching. While you will certainly put our own spin on your approach, many of the ventures you will consider will be in existing markets with existing not-for-profit and/or for-profit practitioners from whom you may learn.
The greatest challenge is how to reach people, obtain information and support.
How do we determine what kind of business to start?
Define goals and assess organization and community:
Why do we want to start a business venture? What are our goals? Prioritize goals.
How does creation of a business venture fit with our organization's mission?
What other organizational issues need to be addressed?
In what areas does our organization excel, what are our strengths?
What resources/facilities do we have that might be of use in a business venture?
What aspects of our community might affect a business venture?
Develop venture criteria:
What is the primary goal for the venture?
What are the employment impact goals for the venture?
What are the community impact goals for the venture?
What staffing goals do we have for this project?
What are our financial and timeline goals?
Eliminate bad business ideas (pre-feasability stage):
Products or services
The market and the competition
Product or service
Organization and Management
Critical Risks and Opportunities
You should also read books from your local library on small business development and contact your local office of the Small Business Administration.
What will be the impact of this on our organization? Should I anticipate board and staff changes?
"If you like your staff, board and clients the way they are, then don't do this because it will change everything." – REDF Portfolio Executive Director
Nothing is constant but change. The pursuit of not-for-profit enterprise will mean you yourself will change, as well as everything else. You will need new skills, your organization will need new resources and perhaps structures, and your clients will face new expectations. The whole point, however, is that at some level what you have pursued in the past will never be what you pursue in the future. not-for-profit enterprise creation provides you with an opportunity to reinvent your organization in anticipation of the challenges of the next century. Remember, this is not survival of the strongest or the biggest – it's survival of the fittest: Change or Die!
How much will it cost? How much do we need to have to launch our business?
It depends. How much time will you need to have to plan your venture? What are the costs associated with a solid planning effort? What are the specific capital requirements of your business idea? Staff and volunteers must be willing to make the time investment BEFORE you consider investing money in it. Without a doubt, whatever you do will probably cost more, take longer, and be more difficult to successfully execute than you may want to think. However, remember: While it's not for the faint of heart, staying the course will probably cost you and your organization more in the long run. If you manage your resources effectively and spend only what you should, you will find that while it may not be an inexpensive change, it may well be the most effective investment you have made in the pursuit of your mission.
How do I convince my board?
Every change effort evolves in different ways. Some are led by the board, some are led by staff and others are driven by the consumers of your program or service. In general, your idea should have a champion to engage others in a discussion of the idea. Not all questions need to be answered ahead of time, but as a rule, you must have an organizational willingness at least to pursue the questions openly. An important strategy is to include one or more representatives rom the "doubters" in the planning process. They need to have the opportunity to raise all the tough questions up front and, as the process evolves, could become your biggest supporters. Above all else, you should not try to stifle opposition during the planning stages. However, there comes a time in every organization when a decision must be made on the course and direction of the future. If you feel the boat is sinking and off course, you may find that it is time to change ships
What are the most critical success factors?
Existence of or the ability to create a strong entrepreneurial team
A comprehensive planning process
Identification of a compelling business opportunity
Understanding your unique, competitive edge
Finding a fit with your overall goals and needs
Existence of adequate financial controls and tools for planning and monitoring the effort
Access to long-term, adequate and appropriate financing
Should a businessperson or a not-for-profit person manage the business? Should she have an MBA or an MSW?
It's important to understand that many different skills and talents are called upon to create the successful venture. However, having said that, if you are engaging in any type of business development it is critical that your organization has managers with real, demonstrated business skills and experience. A fundamental skill set should include:
Comfort with numbers and an ability to use financial calculations to help keep the venture on track Understanding of market dynamics
Ability to manage time, people and priorities
Ability to operate in a constantly changing environment
Additionally, it is especially helpful if your manager knows the particular industry that is the focus of your business.
How do you draw these excellent people to your venture opportunity?
Every not-for-profit enterprise must confront a core truth: if you want a profitable, sustainable business, you must pay for managers who are able to create market-based value -- which in this case means money. If you want a former social worker to run your business like a program area, fine. What you will get is a new program area for your organization. If you want a venture that is economically successful, you will need managers able to deliver. They may come out of the not-for-profit sector, but they MUST have the appropriate skill set to bring you the success you deserve. In order to get that experience, you may find that you will have to pay a business manager more than a program manager. This can be a difficult issue for any not-for-profit to address, however it is also an important one for each organization to come to terms with. Ultimately, the goal of the social purpose enterprise is to get to a financial stage where it can pay market rate compensation to both managers and employees.
Can the not-for-profit sector really create jobs in the mainstream economy?
Yes and No! The marketplace creates employment opportunities with greater and lesser degrees of success. not-for-profit enterprise is not a panacea for poverty or a replacement for the operation of market forces. What not-for-profit organizations can do is create transitional jobs for those attempting to re-enter or join the economic mainstream. The not-for-profit sector is ideally positioned to fill that social need in a way that the for-profit sector will never be positioned to do. In the process of creating these transitional employment opportunities, the not-for-profit sector will certainly create some number of market-based, "permanent" jobs. However it would be foolish to think that not-for-profit organizations, with their social mission, increased costs of providing support services and other burdens, would ever be able to create more jobs than those for-profit businesses operating without community expectations and demands.
Should I bring in a consultant? How do I know when to do so?
There are some things to look for and be aware of when hiring consultants:
How much actual experience do they have in the same business you are doing? Ask for examples of their work and references for agencies where they've done the exact same thing. Do they have experience in the operational side of business, not just planning? Are they familiar with only large business or small business? A general rule of thumb is to remember that consultants should be used to improve your knowledge of how to successfully engage in this work – not replace your efforts or act as your proxy! Regardless of the specific task at hand, you should find a consultant who is committed to a process of "knowledge transfer" whereby you learn how to engage in the analysis yourself. Remember, when your venture opens its doors, you need to be the one who understands how to run it and how to overcome the challenges you confront – not your consultant!
Should I just get an MBA student to take care of this for me (to plan, give advice, etc.)?
MBA students and other interns can be a valuable resource to the not-for-profit organization engaging in enterprise creation. The contribution of these folks is greater than simply that of conducting a particular project or task. In our experience, the presence of MBA students can help provide an "outside perspective" on the work. By asking questions and appropriately challenging assumptions of the not-for-profit, student interns can provide a valuable contribution to the process of enterprise development and creation of an "entrepreneurial environment."
At the same time, it is also important for not-for-profit organizations to understand the limitations of student interns. They are not a source of cheap labor. If you are not willing to invest the time and energy in providing orientation and operational information to an intern, this source of support is not for you. Furthermore, student interns are often only available for short periods of time, perhaps 10 weeks or less. The agency's expectations should be realistic. Consider making use of an intern to manage a focused, time-specific project as opposed to being in charge of ongoing enterprise operations. Another consideration is the fact that when all is said and done, such folks are still students-they have other interests, courses and responsibilities and are not salaried staff of the organization. While they provide a significant, meaningful contribution to not-for-profit organizations, there are also challenges to integrating them into the organization in an appropriate way. How to best make use of interested students is an important issue to be managed by each not-for-profit.
What organizational capacity do you need to be successful?
There is a public misconception that only large, established not-for-profit organizations have the capacity to successfully plan, launch and manage a not-for-profit enterprise. In fact, large organizations, while having potential resources, also carry a greater institutional burden and culture that must be altered or abandoned in order to engage in successful not-for-profit enterprise. Smaller organizations have greater flexibility to approach their work and carry less of an institutional memory that needs to be shifted in order to pursue enterprise creation. In the REDF Portfolio, some of our organizations have been in existence for over 25 years and have multi-million dollar budgets, but many have existed less than 5 years and are already significantly self-sustaining based on their earned income and enterprise activities.
What kinds of industries are the best to create jobs?
The best industries are the ones in which you can find your own market niche in which to be successful! Understanding how to pursue successful economic development strategies comes from two "sides:" first, understanding the larger, economic sectors within which one moves, and, second, having the individual and organizational capacity to capture those opportunities present in those sectors. Successful enterprise activities are a blend of both. If you are a great manager with incredible vision and superb execution, but you are selling buggy whips, you will be less successful than if you are practicing your skills in another, growing sector. By the same token, if you are a poor manager, it doesn't matter what sector you are in - your results will still be poor.
Where can I get the money to do this?
The first step is for the not-for-profit itself to use volunteer and in-kind staff time to engage in the initial assessment of any enterprise opportunity. If you haven't invested your own resources in the effort, why should anyone else? Having done that, it may then be time to begin identifying potential funding partners to support the expanded planning effort and possible venture that might arise from it. These partners may include foundations, individual donors or governmental sources with which the organization already has funding relationships. It may also mean developing new, "investor" relationships with individuals and donors who share your vision of social entrepreneurship.