Moving Toward The Market

Nonprofit Enterprise In a Changing World

by Jed Emerson

The basic strategies for addressing the problem of homelessness in the United States have progressed from emergency shelter to affordable housing to housing with support services to housing with services and access to jobs. While many of those involved in this work used to feel the answer to homelessness was simply "housing, housing, housing," it has become clear that any effort to help formerly homeless individuals move into the mainstream must rest upon what many of us have referred to as the "three legs of a stool," namely, housing, services, and jobs.

Adopting this approach, since 1990 a number of nonprofit organizations in the Greater San Francisco Bay Area have moved to create revenue-generating enterprises to expand employment opportunities for their program participants and tap into a source of funding independent of government or foundations. An in-depth look at these groups is presented in the book New Social Entrepreneurs: The Success, Challenge and Lessons of Non-Profit Enterprise Creation [see sidebar], from The Roberts Foundation. In general, the following four cases reflect the experience of the Bay-area nonprofits that have launched enterprises.

Rubicon Programs began its work in the mid-60s as a community mental health organization serving residents of Richmond, California. Over the years, as its client base evolved to include increasing numbers of homeless mentally ill, the organization developed services to meet their needs: expanding mental health care, creating affordable housing, and, during the late 80s, launching a number of small-scale enterprises. By 1989, these efforts included a greenhouse/light landscaping enterprise and two cafes serving city employees in public buildings. These enterprises had combined sales of just under $90,000 for 1989 and were receiving heavy subsidy from the organization, but were also successfully providing training and employment to a number of clients. In evaluating these operations, the agency decided to "go for it" and attempt to develop the enterprises on a "profitable" basis. With support from its funding partner, Rubicon hired an enterprise director to expand the landscaping enterprise and, at a later date, convert the cafes into a more effective food-services business. Initially making use of National Industries for the Severely Handicapped set-aside contracts, Rubicon began bidding on landscaping contracts at local military bases. That effort has met with success; the business has generated over $250,000 for the program, and in 1996 the enterprise will book $3.5 million in contracts and employ 71 individuals. The bakery, now managed by a new director, has shifted its focus from operating cafes toward producing high-end desserts. Rubicon Bakeries ("Baking A Difference") now sells its products primarily on a wholesale basis to Bay-area gourmet restaurants and shops. The bakery will continue operating in the red in 1996, but will book sales of over $400,000 and should enter the black in early 1997.

Oak St. House began in 1981 providing drop-in services to homeless people in San Francisco's Haight-Ashbury neighborhood. Founded as a temporary, emergency shelter service, by the late 80s the organization realized it needed to provide more significant, long-term support if it was to help program participants permanently leave the streets. While the organization was re-assessing its program design, a staff member decided to respond to the requests of participants and launch an "odd jobs" business. Making use of the guests' many skills in the areas of carpentry, landscaping, and painting, the enterprise operated on an individual contract basis for several months before it became apparent the effort was not adequate to meet the needs of participants or the organization. After a period of evaluation, Oak St. House decided, like many nonprofits before it, to produce custom-designed silk-screened T-shirts. The industry is a difficult one for nonprofits because, while having low barriers to entry, it is extremely competitive, with tight operating margins. Nevertheless, Ashbury Images has built sales from $24,000 in 1991 to over $260,000 in 1995, and it anticipates sales of over $325,000 for 1996. The enterprise has progressively closed its gap between sales and profitability, and it expects to enter the black for the first time in late 1996, following five years of subsidy. In late 1995, Oak St. House also opened The San Francisco City Store, a retail outlet near Fisherman's Wharf selling original San Francisco memorabilia. The City Store operated in the red for its first six months and entered the black in July 1996. During this five-year period, the organizational budget of Oak St. House's parent nonprofit grew from just under $200,000 to $1.2 million. This financial growth was accompanied by virtually no increase in administrative support for the executive director, who was overseeing the development of both enterprises.

Homeless Independence Project (HIP) in Petaluma, two hours north of San Francisco, was a community-based enterprise founded to provide employment opportunities for homeless individuals through a community garden project. Its goal was to provide transitional employment to program participants by growing organic produce to sell to area restaurants. A group of five individuals pooled their own money to launch this initial effort. HIP maintained a strong commitment to financial independence for both its organization and its employees. It received very limited foundation and virtually no government support. During the time it was in operation, the project employed over 75 homeless individuals earning between $69 and $1,096 per month. After proceeding through an assessment of what it would take to create a larger, self-sustaining garden enterprise, the group – which included a social worker, an area small-business person, several homeless people, and a housing specialist – concluded that funding levels might range as high as $200,000 over about two years. Such funds would be necessary to support the capital and program requirements needed to achieve self-sufficiency. But in September 1993, unable to secure adequate funding to underwrite its expansion and following a year of heavy rains that harmed crops, the group decided to close its doors and shut down the operation.

Youth Industry, based in San Francisco, was founded in 1993 to help youth in crisis move from situations of dependency and hopelessness toward self-sufficiency. The organization sought to create "training centers" wherein youth could work, earn a wage, and learn the fundamentals of keeping a job. Youth Industry operates a number of small ventures including a bicycle repair shop, a second-hand clothing store, a silk-screen shop and a donations solicitation project. Individual revenue from these enterprises ranges from $85,000 to $260,000. Over a 17-month period, these enterprises employed 45 youths. In 1996, these ventures will generate 85 percent of the organization's operating support. It is projected that total revenue for the enterprise will reach $1 million in 1997, allowing the organization to become fully self-supporting.

In these four stories, we see four different organizational experiences with enterprise creation. One organization has met with solid success. Another is achieving success, but slowly, over time, and with great effort. The third organization ended up not simply closing the business, but the sponsoring organization as well. And the fourth is a small, grassroots effort that promises to be self-supporting by the end of its fourth year. While nonprofit organizations that begin businesses meet with the same uneven success as their for-profit counterparts, an increasing number of nonprofits across the country are attempting to operate revenue generating ventures. Their key lessons and factors for success can help inform others thinking of heading down this rocky but promising road.

Why Nonprofit Organizations Choose To Do This

Nonprofits engage in enterprise creation for a variety of reasons, but three appear to be most significant. Many of the groups with which The Roberts Foundation has been involved are social service agencies working with homeless and formerly homeless individuals who encounter significant difficulties maintaining employment in the mainstream labor market or encounter significant barriers to receiving services from traditional programs. Organizations that might work with these individuals include education and training institutions, employers, job training and placement organizations, and nonprofit enterprises. Of these four types of organizations, only the nonprofit enterprise is adequately positioned to take individuals with no skills or work experience and provide them with the opportunities necessary to move from shelter to housing to support services and transitional employment. This process is not one of providing an individual with a 90-day training program and then referring her out to a job. It is a process of assisting individuals in reconstructing their lives and may take as long as two years, as participants stabilize their personal situations and develop greater capacity to maintain long-term employment.

A second reason organizations are increasingly working to create nonprofit enterprises has to do with efforts to generate operating support in a rapidly shifting environment marked by government cutbacks. In past decades, nonprofit managers have proven adept at responding to the "public market" made up of government grant support. While some organizations have successfully developed diversified bases of revenue to pay for their efforts, others remain tied to categorical and other funding streams directed by federal departments in Washington. It is unclear at this point what form the system will take in light of the new welfare "reform" legislation signed by the President, but what is certain is that – whether due to politics, the bankruptcy of Medicaid, or any number of other factors – many of the resources available in the past to support social-service groups will more than likely be decreased or eliminated in the next decade. Organizations with vision are anticipating those shifts and identifying strategies to generate the income necessary to fund their programs, while also maintaining training opportunities for program participants.

This leads to a third factor contributing to the number of organizations pursuing enterprise creation – the trend of nonprofit managers attempting to approach their work with the vision of an entrepreneur, as opposed to strictly that of a social services practitioner. The dominant approaches to nonprofit management and service delivery are entering a state of flux. In the past, it was sufficient for many managers to simply be effective grantwriters or political operatives able to direct resources to their organizations and communities of need. Nonprofit managers of the future, however, will have to complement these skills with those of the social entrepreneur, an individual who is continually looking for economic opportunities to create added value, and who is comfortable with defining value not by what a "great cause" one has, but by how the market views the relative worth of the organization's work. This ability, while perhaps not making an organization fully independent, decreases reliance on public funding, increases access to mainstream markets, and improves overall efficiencies. Many nonprofit managers who have worked in the housing field for years now see a need to adopt this new outlook. They are joined by those who come to the social justice arena from that of business and bring a new skill set, thereby increasing the number of nonprofit enterprises meeting with success.

Critical Factors For Success

If we have learned one thing about nonprofit business development in the past six years it is this: there is no model or checklist for successfully launching a nonprofit enterprise. Period. It is popular in both the nonprofit and foundation communities to speak in terms of replicability and models. As more individuals become interested in this work, there is a strong tendency to seek out franchise businesses, proven models, or "experts" to help minimize the risks. But those who would join the ranks of "the new social entrepreneur" must be realistic in terms of what is required of the organization and its members to successfully pursue true social enterprise creation. Organizations that have achieved significant success on a large scale, such as New Community Corporation in Newark, New Jersey, or Pioneer Human Services in Seattle, Washington, have done so after more than 25 years of effort. In The Roberts Foundation's development work over the past six years, each organization has responded to the particular dynamics of its market and the resources available to capture opportunities within it. It is impossible to boil that experience down to a few brief sound bites. Further, every social entrepreneur would no doubt create her own list of critical factors for success.

Recognizing these limitations, however, the following factors could be said to be important to most groups embarking on an enterprise-creation venture:

Organizational Capacity. If an organization is poorly managed, with little administrative structure and no vision, its effort to create viable, market-directed enterprises will be seriously limited. While most nonprofits, almost by definition, operate with some degree of constant stress, those that do not have adequate accounting and general management systems in place to control that stress will probably not be successful in planning, launching, and managing a nonprofit business. Smaller, low-budget organizations, such as Oak St. House and Youth Industry, are successful at enterprise development if they effectively deal with the added pressures placed on staff and organizational resources. At the same time, larger, big-budget organizations should not assume that simply because they have effectively managed large-scale housing or service initiatives, they have the capacity to operate a nonprofit enterprise. More than likely, they do not. While it is chic to say "housing is economic development," the simple truth is that the two are quite distinct. Staff of either a housing or social services organization require a completely different skill set to successfully manage a business venture. And the organization must be prepared to commit to either significantly upgrading the skills of current staff or investing in an enterprise director to guide the development process.

Entrepreneurial Drive. In some ways, nonprofit organizations represent the prime example of entrepreneurism, in that most were founded to address largely unmet needs of "consumers" in the community "market." And many groups meet those needs with limited resources and a variety of complicating factors, both internal and external. However, the entrepreneurial mindset is clearly different from that of the traditional nonprofit. The managerial attitude is different. And the skills needed to accurately evaluate, measure, and manage risk are certainly different. Those organizations most successful at enterprise creation are able to become, both as individual managers and as organizations, truly entrepreneurial. While entrepreneurs can be nurtured and developed, one must begin with the fundamental drive to create wealth and value by thinking outside the box. The most extreme manifestation of this "entrepreneurism" – relative to nonprofits – is the creation of social purpose businesses that function directly in the market while providing training and employment to the most hard to employ. Not all groups have this capability, but all nonprofits pursuing cause-related marketing opportunities, joint venture agreements, and other such strategies should assess their capacity to be entrepreneurial. This remains a significant step for many who, while skilled at identifying political and funding opportunities, are limited in the ability to capture related opportunities in the open market.

Openness To Change. When asked what "words of wisdom" he would give those interested in pursuing enterprise creation, one manager responded, "If you like the current make-up of your staff, board, and clients, don't do it, because they will all change." Nonprofit professionals and activists like to think of themselves as change agents, and human service workers like to think that change is a central part of who they are – after all, they help people change their lives. In reality, however, many nonprofit practitioners are extremely conservative, tending to hold to models and frameworks and understandings of what is "right." Indeed, many managers appear to be responding to the current shifts in the political and economic environment in reactionary, as opposed to radical, terms. Those pursuing enterprise creation must be open to both personal and organizational change on a large scale. Successfully working in this field means cultivating the ability to operate within the dynamic tension found between the mutual pursuit of both social and business goals. It means opening almost everything up for questioning and being able to examine answers one may not want to hear. It means allowing oneself to evolve. If you like who you are and what you do, you may not want to become a social entrepreneur. If you long for the "good old days" instead of plotting for the days to come, you may not have what it takes.

Commitment To In-Depth Planning

Being an entrepreneur and being open to change often conflict with one of the key factors for success: a commitment to planning. While there are certainly multi-million dollar corporations launched on the back of a napkin and a handshake, yours will not be one of them. The transition of a traditional nonprofit to that of a socially entrepreneurial organization is a tricky one, with many potential problems. Identifying a significant business opportunity and designing an appropriate attack strategy to keep program participants significantly involved while also operating in the black is a tough one. The only way most nonprofits will successfully move through these stages is by having adequate time to assess the issues involved and select the best options. While some of the enterprises with which The Roberts Foundation has been involved were simply one-shot opportunities people decided to pursue, the best ones have benefited from the strategic assessment and thought which comes with a serious planning effort.

Adequate Capitalization

The last concern for those considering enterprise creation should be that of capital. Most small businesses fail for one of two reasons: lack of managerial capacity and lack of capital. Most nonprofit enterprises, on the other hand, fail for one reason: lack of managerial capacity. Having said that, there come critical points in the development of a nonprofit enterprise when the injection of capital becomes key to the ability of the enterprise to expand or efficiently manage its ventures. Before attempting to launch an enterprise effort, the organization should have a committed source of funds to complement its own investment in the opportunity (you didn't think this would be free to your organization, did you?). This funding should be the equivalent of the nonprofit dream: multi-year and of a sufficiently large amount to make a difference. Clearly, such support may not be available to all, and some organizations without such financial backing have been able to achieve a great deal. However, an informed funding partner (that is to say, a funder with a solid grasp of and appreciation for the risk and reward of nonprofit enterprise) can be central to the success of any planning or start-up effort.

And You Thought Cutting Off Your Pony-tail Was Hard

It feels like virtually every new government cutback or "consolidation" is accompanied by rhetoric regarding the ability of the private sector to pick up the slack. Every day another article or book is published about the capacity of nonprofits to generate wealth and support themselves. It seems as if every nonprofit in the country is considering how launching an enterprise will solve its funding problems. But be assured of one thing: in launching a nonprofit business, you will in many ways simply be exchanging one set of problems for another. It is extremely difficult work, with many challenges and potential disappointments. But it is work well worth the effort.

Clearly, the future holds great risks for all nonprofit managers, enterprise and non-enterprise alike. However, the rewards of pursuing an entrepreneurial approach to social issues are great and, in many ways less risky than simply "staying the course," as some would have us do. To grow a venture that supports itself, creates jobs for people long considered "unemployable," and kicks off money to help cover program costs can be an incredible, empowering experience for all involved. Some organizations are not suited to this new world and will have to adapt in other ways, be supported through continued subsidy, or, quite simply, cease to exist. Those actors willing to transform their organizations into vehicles that will take our communities into the next century will have greater impact on the lives of the poor and homeless.

Copyright 1996


Jed Emerson is director of the Homeless Economic Development Fund of The Roberts Foundation.


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