Balancing the Mission Checkbook

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?

I have shared some of my thoughts and opinions about the field of social enterprise in this blog, including the question of whether the hubbub about creating business ventures is just a new name for a long-standing practice (see Is Social Enterprise Really New or Different). However, I have to extend my congratulations and admiration to the Animal Humane Society (AHS) for their plans to open a premier pet boarding facility at the Minneapolis-St. Paul airport. This plan sounds like a real winner that merges the assets of the nonprofit with a real market demand. I have high hopes that the return to the AHS will not only be financial, but will also increase their visibility, community support and donations, and reputation. The plans are described in a press release issued on March 10th.

When I lead discussions with nonprofits interested in finding a social enterprise idea to pursue, I encourage them to resist the temptation to replicate what looks like a good idea that they read about in an article or heard at a conference. The best enterprises are grounded in both the mission and the assets of the organization. The most successful enterprises support the mission beyond a projected financial return. They also take advantage of one or more assets, such as knowledge and expertise, location, understanding of a community, and reputation. To be financially viable, an enterprise must also find a market – a bona fide market that is willing, and wants, to buy the service or product.

The pet boarding facility looks like a good idea on all of these fronts. It’s a mission fit, takes advantage of organizational assets including understanding of how people relate to and care for their pets, and the reputation of the organization. The market demand is demonstrated every time you talk to a colleague who has to take a half day off before a vacation to drive across town to drop off and then pick up their pet. There are risks, of course. The facility is expensive ($4.25 million) and the AHS is investing $750,000 of their own designated funds to launch the venture. The goal is to return financial dividends to the nonprofit to support other programs, and the pet boarding facility is structured as a for-profit subsidiary of AHS.

Best wishes to the AHS on this venture – and thanks for the great case study for us all to observe.

I’ve been mulling the question of what makes a nonprofit organization distinctly different from a for-profit business. Thinking about this is percolating because of an article in The New York Times about a week ago, A Capitalist Jolt for Charity, about the nonprofit In2Books, the related for-profit business ePals, Inc, and the enthusiasm of venture capital entrepreneurs to use their money and talents to do good. According to the article, by morphing the nonprofit into a for-profit with access to angel capital and business practices, the combined organization is better than it could have been as a single nonprofit. They are “making use of some of capitalism’s virtues.” Really? I’m all for any trend that gets smart people from business, and their capital, focused on doing good work, but I am put off by the implication that (a) “regular” nonprofits don’t employ growth strategies already, and (b) there is not a real difference between a for-profit business and a nonprofit, as long as the business owners are working towards a community good.

Some of the phrases used in the Times article include “encourage more nonprofits to become self-sustaining” and “make the market work for social goals.” The terms revenue, profit, earned income, investment, and entrepreneur are bandied about as if they have a clear, singular definition that is unique to this topic. This muddy and imprecise use of business terms applied to nonprofit organizations (as if we hadn’t thought about these before) contributes to the confusion.

First of all, I can think of numerous nonprofits (including Nonprofits Assistance Fund) that have demonstrated smart growth, good business and financial practices, and important community impact. Would we have done better work if we had been a for-profit instead? The bigger issue to me is the essence question – what makes a nonprofit different? Is it just tax status, or is there a more essential distinction? I would love to participate in a broad discussion about this, starting with two fundamentals.

1. Business Model Differences: Nonprofits almost always require some form and amount of subsidy to make the income, expense, and asset model work. Subsidy can take the form of direct financial contributions or grants to pay for some or all expenses, but volunteers, donated inventory and services, sponsorships, and low cost or free physical and financial capital are also forms of subsidy. In the case of ePals, described in the Times article, Intel is including the ePals icon on the Classmate laptop computers. This is a type of subsidy, since a traditional business partner would surely have to pay for this access. I also think that the investors who are willing to purchase shares in a social business without expectation of a market rate return on investment are effectively providing another form of subsidy. All this leads me to suggest that the idea that business practices will help nonprofits become “self-sustaining” and “make the market work” is trickier than it looks on a spreadsheet.

2. Structural Differences: Nonprofits and for-profit businesses have very different sources of accountability. The shareholders of a business can certainly decide to have a social mission. But the board of directors of ePals, Inc, even with its social mission and good intentions, has the option of changing their mind at a later date and reorganizing to return maximum profit. A nonprofit organization is accountable to the mission and community forever. The workings of boards of directors and staff can certainly be messy, confusing, and inefficient, but the measure will always be a true double bottom line, as it always has been.

What do you think – does this hit a nerve for you, or do you think I’m way off base?