Entrepreneurial nonprofits face risks, rewards, experts say.
By Todd Cohen
RALEIGH, N.C. – As more nonprofits undertake commercial activities to support their social mission, they face big challenges in acquiring the financial and management skills to be effective entrepreneurs, a leading advocate of “social enterprise” says.
“Nonprofits have more to worry about than business when they enter the marketplace with social ventures,” Dennis Young, professor of nonprofit management and economics at Case Western Reserve University, told roughly 120 nonprofit leaders at a forum sponsored by the Institute for Nonprofits at N.C. State University.
Yet nonprofits “are also frequently less prepared with the skills and knowledge to assess these circumstances,” said Young, who also is CEO of the National Center on Nonprofit Enterprise in Arlington, Va.
While the development of the nonprofit sector in the U.S. is rooted in the work of enterprising individuals who created charitable programs and organizations to address unmet needs, Young said, entrepreneurial nonprofits have faced continuing tensions between fulfilling their social mission and generating income from social-enterprise initiatives created to support that mission.
Unlike the business world, in which most new ventures fail and the risks are financial only, Young said, risks for nonprofits are more complicated and not limited to financial issues.
Nonprofits that take on commercial activities risk missing revenue targets and also hurting donations because of “losses of trust and reputation” that can result from their pursuit of social-enterprise ventures, he said.
Succeeding in those ventures requires business skills and a focus on mission, he said.
Beth Anderson, a lecturer and managing director at the Center for the Advancement of Social Entrepreneurship at Duke University, said during a panel discussion following Young’s speech that entrepreneurial nonprofits can focus too much on their financial bottom line and not pay enough attention to their social mission.
The impact a social-enterprise initiative has on a nonprofit’s mission is the ultimate bottom line, Anderson said, so nonprofits should recruit employees based on the skills they have related to the organization’s mission, not on their business skills.
“You can learn business skills,” she said. “You can’t learn passion about mission.”
And in addressing the bottom line, she said, nonprofit typically can fail to accurately account for direct and in-direct costs of entrepreneurial activities, and to recognize the need to reinvest revenue from entrepreneurial activities.
John Parker, executive director of Good Work Inc. in Durham and a member of the panel, said social-enterprise work might be better handled by a new organization, and requires strong financial skills and patience.
“It takes time for an organization to start making money,” he said. “It can’t be a quick fix.”
Social enterprise also can involve a “big culture shift,” for nonprofits, and larger nonprofits’ bureaucracy and size can keep them from being entrepreneurial, he said.
“Social enterprise is not for people who get nervous,” he said.
Young said social enterprise can “tilt” an organization, leading it to create a compensation system that rewards employees working on commercial activities more than it does those working on programs.
In an interview, he said nonprofits can be reluctant to take risks, either because they want to be careful in using donors’ money, or because they, and particularly their boards, simply are too cautious.
“Nonprofits need to understand risk better, and the degree to which they should take risks, because without risk, you don’t get change,” he said.
Creating and conducting social-enterprise initiatives effectively depends on better equipping nonprofit staffs with stronger management and financial skills, Young said, yet government and foundations generally do not make grants to support the development of those skills.
“Government and foundations tend to want to just pay for programs and services and not invest in organizations,” he said.
Funders also should encourage an organizational culture in nonprofits that fosters social enterprise, he said.
“You want to find ways to reward people for taking risks,” he said,” not punishing them for failing.”