Balancing the Mission Checkbook

This guest post was written by Judy Alnes, Executive Director of MAP for Nonprofits.

I was glad to be asked to fill Kate Barr’s blog shoes while she is on sabbatical. I often write pithy blogs, if only in my mind. This assignment forced me to round up some of those loose ideas and put pen to paper; or rather, fingers to keys.

It’s Time to Innovate

Social innovation is on the tip of a lot of tongues these days. Most of us in the nonprofit sector are facing the fact that financial resources will remain tight for several years. Many of us have tried to do “more with less.” We’re now awakening to the fact that it is time to do things differently. In other words, it is time to innovate.

So what is social innovation? I especially like the definition used by Andrew Wolk of Root Cause in a recent speech he gave to the Texas Governor’s Nonprofit Leadership Conference:

Social innovation is the process of developing, testing, honing, and spreading transformative approaches to pressing social issues. It is finding ways to do things better and utilize resources more wisely.

Just as important is what social innovation is not! It is not only the purview of those who are leaders of social enterprises. It’s not just for Ashoka Fellows; though they are a remarkably innovative group. In fact, innovation is a discipline that each and every nonprofit and institution needs to incorporate in its work.

Getting Started

Where do we start?

We start by nurturing the seeds of discontent most of us share that we’re not making the progress we want to make on the issues facing our communities and our world.

Next, we arm ourselves with information about innovative processes. I highly recommend two books: The Medici Effect and Blue Ocean Strategy. Then add a daily Google Alert on social innovation or on the innovations in your particular field. It is okay to copy other nonprofits’ innovations in your own organization. Take a look at www.ideaencore.com – an online marketplace of other nonprofit organization’s best practices and resources.

Inside our organizations we can form teams that work on “developing, testing, and honing” advancements in our fields. We can charge individuals with responsibility to work on the next improvements in our processes, products, and services. We can start to admire the breakthroughs being achieved in other fields and think through how those breakthroughs might translate to our own challenges.

Innovating won’t be easy. Many organizations have stretched their people thin in an effort to keep delivering services at a pre-recession level despite a decline in resources. It’s not hard to predict what will happen if we don’t get around to innovation. Our results will look a lot like they do today. As the great inventor Thomas Edison said, “there is a way to do it better – find it.”

Is it puppy love or the real thing?

The Low-profit limited-liability company (L3C) structure is attracting attention and commentary about a new way to solve community problems using market-driven practices. The idea of a “new model” is so alluring, though, that I see misunderstanding and lots of hopeful thinking. I like the structure and give lots of credit for innovation and perseverance for its creation and growth to Americans for Community Development. My concern is that the L3C is being discussed by nonprofits and businesses as a single solution to some complex problems. It isn’t.

As described in ACD’s FAQS, the L3C structure is a viable approach to attracting capital with lower than market returns and a social mission. It is not, however, a solution to nonprofit or business entities that have expenses that are higher than revenue (that’s called a deficit in both worlds). It is also not a solution to a business or nonprofit that is losing its market, audience, donors, or other revenue sources.

In this recent article in The Chicago Tribune, for example, one of the cases offered is instructive:

Social entrepreneur Mike Melillo of Watchung, N.J., hopes to secure foundation funds for his social media company by converting the LLC to an L3C. He launched SocialChord, which provides local online communities, with the intention of bringing in investors. Despite two years of trying, Melillo hasn’t nabbed the capital he was counting on. Without the L3C structure to potentially open a new funding stream, Melillo said, “at this point, I’d probably just fold.”

In this case I would want more information about the ongoing business (revenues, expenses, market potentials) before agreeing that the L3C structure brings instant relief.

The allure of the L3C has been problematic for nonprofits as well. Most nonprofits require ingoing contributed funds (individuals, foundations, events) to pay annual expenses to deliver programs and services. These donors generally expect to give to an organization with IRS tax-exempt status. The L3C structure won’t satisfy this requirement – it is developed to attract capital but not tax-deductible, contributed funds. I can think of a few (but only a few) nonprofits that only require low cost, patient capital to support their mission.

Jeff Texler recently questioned whether the L3C structure was really needed by nonprofits in a blog post on JustMeans.

I say all this not to discourage anyone from forming an L3C or advocating for a similar statute in their own state. Rather, my aim is simply to provide a needed reality check. Based on the experience of another standardized social benefit form – the UK’s CIC – the L3C is likely to be no more a magnet for investment and revenue than any other kind of business. In fact, it might even prove to be less successful, since most investors won’t know what it is. Rather than simply dreaming about how the L3C could solve your organization’s money problems, you should also look into what is already possible.

I think his point is important for nonprofits that have fallen in love with the idea of a “new model.” I recently read this online post: “I would like to form an L3C to provide housing and services to various special populations …” First, I’d be interested to know why the 501c3 structure wouldn’t work for this proposed entity. Second, I wonder if the L3C would serve this mission at all. Is this a capital need, or will ongoing support be needed?

Structure should always follow purpose and goals, not lead the way. While the booklet If the Shoe Fits published by REDF was published before the L3C existed, it’s a great primer for the questions to ask before you let the excitement of a new idea outpace the needs of the organization.

At the pace we’re all traveling it’s easy to forget what you said last week, much less a few months ago. It’s interesting, then, when we receive a comment on a past post and go back to re-read it. So much is happening and developing in the nonprofit world that I’m taking this week to update three topics.

Transparency

In December 2007 I wrote about Transparency and Financial Information:

I would strongly suggest that nonprofit organizations make the effort to make usable financial information available on their website. The IRS 990 is already a public document, so it seems like the obvious tool for financial disclosure. However, I think we should go past the 990 to share better information, especially since everyone seems to agree that the current version of the IRS 990 is overly complex, confusing, and very difficult to use. A better solution would be having the audited financial statement easily available on the website.

Guidestar recently published The State of Nonprofit Transparency Report, which included these findings:

A high percentage (93 percent) of nonprofits are embracing the Internet to disclose information about their programs and services.

Only 13 percent posted their audited financial statements on their Web sites. The results of our survey show a reluctance to disclose audited financial statements publicly. Although not all nonprofits obtain audits of their financial statements, our survey sample reflects organizations of the size for which an audit is both prudent and a necessary tool for assessing management’s financial capabilities and the organization’s financial health.

Let’s hear it for more audits online!

Mergers and Strategic Collaborations

In June 2008 I suggested Speed Dating for Nonprofits:

No one would say that mergers are the right answer for every nonprofit, but if you do think that joining forces would make sense and help your organization maintain stable services, where do you find your mate? I think I’ve found the answer – speed dating for nonprofits! Speed dating is an organized event to help singles meet a number of people in one evening with the intent of finding one or two for an actual date.

I’m excited that MAP for Nonprofits and the MACC Alliance for Connected Communities have organized a Speed Dating event on May 20^th to explore strategic partnerships.

Low-profit, Limited Liability Corporation (L3C)

And in May 2008 in Where For-Profit and Nonprofit Meet I was excited about the new hybrid Low-profit, Limited Liability Corporation (L3C) that had been adopted in Vermont.

The idea is to create businesses that can attract some private capital, bolster that with more patient philanthropic or socially motivated investment, and result in value to the community (jobs, housing, local revitalization) and a below-market return to investors. This structure is not a fit for every nonprofit, or even for every social enterprise. The L3C is all about raising capital, and when the need for capital is significant, this is worth considering.

This post continues to attract readers and questions. The most common confusion is about the fit for nonprofits that need subsidy (i.e. grants and contributions), rather than capital. The L3C is designed for capital but doesn’t offer any incentive for contributions. For more information, the experts on the L3C are Americans for Community Development. We’ll explain this new hybrid form at the May 14^th meeting of the Social Enterprise Network.

Since the post was written several other states have adopted the model, with others in the legislative process. I’m hoping that Minnesota can get on the bandwagon in the next year.

Yesterday I had the great pleasure of helping to launch the Social Enterprise Network for nonprofit social entrepreneurs in the Twin Cities. Initiated by Nonprofits Assistance Fund and MAP for Nonprofits, this new monthly peer gathering attracted 40 people who braved the brutal cold to attend a lunchtime discussion hosted by Jim Thalhuber at Goodwill/Easter Seals. We couldn’t have had a better start for the network. The group represented a broad range of nonprofits – social service, arts, youth development, employment services, and educations – and types of enterprises including manufacturing, a bakery, thrift stores, consulting, and various services. Most of the nonprofits are already operating an enterprise and are eager to share their experiences about building their venture, as well as learn from their peers.

The best part about the event was the positive, upbeat tone of the ideas, questions, and discussion. I’ve been to a lot of pretty downbeat meetings lately that have focused on reductions, cutbacks, and shortfalls. While the social entrepreneurs at the network all recognize the difficult economic realities that we all face, there was an energy that I really needed to renew.

Adding to the positive momentum of the Social Enterprise Network is the possibility of a real commitment from the new administration to nurture innovations for the common good. Featured in President-elect Obama’s Blueprint for Change are a number of ideas to expand service and innovations, including a Social Investment Fund and Social Entrepreneurship Agency for Nonprofits. Government is an important player in the nonprofit sector, as contractor, funder, and policymaker, and a new, more innovative approach could help lead to real change for some big challenges. A recent blog post from Public Innovators describes this rich opportunity.

A final gift at the Social Enterprise Network was hearing Kevin Lynch, President of Rebuild Resources in Saint Paul, that he and Julius Walls, Jr. of Greyston Bakery, just authored Mission, Inc., The Practitioners Guide to Social Enterprise, which was just released and is available for sale online.

Thanks to everyone who came to the first network lunch – I needed the boost of energy and optimism. I can’t wait for the next meeting in February.

Update:

Photos from the event are available on our facebook page.

The topic of social enterprise comes up often in discussions and meetings that I have with nonprofits, businesspeople interested in nonprofits, and foundations. I keep tripping over the lexicon, though, because I don’t think that the commonly used terms are certain, universal, or completely clear. It seems that the “field” encompasses a number of different types of organizations with different definitions and identifiers. Because I dance around these phrases so often, I looked around the other day to compile definitions for these terms in regular use.

Social enterprise is defined by Social Enterprise Alliance as “an organization or venture (within an organization) that advances a social mission through entrepreneurial, earned income strategies.” This often reflects a market-based effort to receive earned income in direct exchange for a product or service. Examples of social enterprise from SEA include:

• A substance abuse treatment facility operating a moving company
• An organization promoting college enrollment that provides workshops to educators
• A youth services organization opening a pretzel shop or ice cream shop franchise
• Goodwill thrift stores

Social entrepreneurs are defined by Ashoka as those who “act as the change agents for society, seizing opportunities others miss and improving systems, inventing new approaches, and creating solutions to change society for the better. While a business entrepreneur might create entirely new industries, a social entrepreneur comes up with new solutions to social problems and then implements them on a large scale.” Examples include:

• Jim McCorkell, founder of Admission Possible (an Ashoka Fellow)
• Muhammad Yunus, founder of Grameen Bank

A socially responsible business is defined as a venture (generally for-profit) that seeks to “leverage business for a more just and sustainable world” (Social Venture Network) or “help create a better world by building healthy communities, promoting economic equity, and fostering a clean environment” (Social Investment Forum). In addition to generating a profit for shareholders, these businesses have goals in the areas of economic development, employment, environmental practices, or ethical business practices.

For me, the key distinctions between these terms are the following:

• Social enterprises are defined by revenue source
• Social entrepreneurs are defined by innovative vision and strategy
• Socially responsible businesses are defined by the intention and goals of a for-profit business
  

It may seem to some people that the definitions are just semantics, but I think they’re important if we want to create resources, find capital, and develop a knowledge base. The needs and demands are probably different if your focus is on revenue sources rather than a game changing strategy.What do you think – do these definitions matter? Are the three listed here on the right track, or would you offer some others?

The State of Vermont recently adopted legislation creating a new type of entity, a Low-profit Limited Liability Corporation. The L3C, as it is called, is sort of a hybrid of for-profit and nonprofit created as a way to attract both private and philanthropic capital to build businesses with a social benefit. The leading advocate for this new structure has been Americans for Community Development and the Mannweiler Foundation.

The idea behind this hybrid, from an excellent overview of the L3C written by Americans for Community Development, is to “access the vast pools of market driven wealth to make socially responsible investments in so called nonprofit areas.”

From what I understand, the L3C is formed as a Limited Liability Corporation, a well established and flexible business form. The members, or shareholders, of an LLC are entitled to receive a profit or return on their investment. The nonprofit-like aspect comes in the “low-profit” name. The Vermont legislation requires that the L3C must also meet these requirements:

• “Significantly furthers the accomplishment of one or more charitable or educational purposes”
• “No significant purpose of the company is the production of income or the appreciation of property”
• “No purpose of the company is to accomplish one or more political or legislative purposes”
• The name of the company “shall contain the abbreviation L3C or l3c”

This language was carefully developed to qualify these new entities to receive investments from foundations through Program Related Investments. I’ve written before about PRIs as an interesting and unique source of capital funds for nonprofits.

“The key insight of the L3C is that it is not a two-part world but a three part world and that many worthy causes are capable of being self sufficient; they simply do not offer enough of a return in order to attract for profit investors – particularly at their inception,” (Americans for Community Development). So the idea is to create businesses that can attract some private capital, bolster that with more patient philanthropic or socially motivated investment, and result in value to the community (jobs, housing, local revitalization) and a below-market return to investors. This structure is not a fit for every nonprofit, or even for every social enterprise. The L3C is all about raising capital, and when the need for capital is significant, this is worth considering. While the legal form currently exists only in Vermont, several other states are considering adopting the enabling legislation. Meanwhile, an L3C formed in Vermont can operate in any state.

For more information about the forces that are driving the demand for an alternative structure, and some arguments that a new form are unnecessary, The Aspen Institute published a report last year by Thomas Billitteri, Mixing Mission and Business: Does Social Enterprise Need a New Legal Approach?