Social Enterprise & Earned Income: Key To Revenue or Distraction

Answering some key initial questions will help you choose whether it’s the right path for you.

Have you been in a board meeting discussing funding and the challenges of growing revenue and heard someone say, “I know, we should open a for profit venture!”

In an era of continuous government funding cuts and foundations seeking “innovation,” many organizations are turning to launching social ventures as another way to earn revenue. While it may sound like a great idea to start a social enterprise that provides both income and impact, it’s a bit more complicated than it sounds. Answering some key initial questions will help you choose whether it’s the right path for you, and thinking through your business model, target market, and the resources you’ll need create the conditions for success.

Is a Social Enterprise the Right Path?

Let’s start from the beginning. How do social ventures materialize, and better yet, why? Often a board member with “real-world” business experience will come up with an idea to create additional revenue to support the mission. While their intentions may be good, it’s a whole other matter to determine the operating model. Similarly, some nonprofits fall into the trap of thinking social enterprises make it easier to earn revenue instead of traditional fundraising. If you fall into this scenario, think twice!

First off, ask yourself:

How does this social venture support the overall mission of the organization?
Do we really have the expertise to run a program that may not have anything to do with our core operations?
Is our business plan based in reality, or is it a best-case scenario?
How much time, energy, and resources can we invest in this venture?
Who else is providing similar services or products and why do we think we can do it better?

If after answering these questions you have a compelling case to continue forward, think through the following factors as you create your social venture:

Consider the Structure and Model

Ted Levinson, founder of Beneficial Returns, a loan program that provides micro-finance to social enterprises in emerging markets, suggests two options that can work well: franchising and creating a separate for profit. In the first case, see if you can replicate or franchise an existing enterprise that is succeeding in another market. 17% of US companies are franchises, yet in the world of social enterprise it’s almost non-existent. Franchises are appealing because they need good management—not necessarily a brilliant entrepreneur—to be successful. And most successful businesses or social ventures are more than happy to have someone else replicate their model—even if they’re not set up to do this already—especially if you’re open to paying them royalties or a percentage of the revenue you generate.

If you’re planning something unique or that option isn’t otherwise open to you, consider setting up a separate for profit entity owned by the nonprofit. Start the social enterprise with its own governance structure and a limited amount of capital and have it sink or swim on its own power to limit your exposure.

Whatever structure you choose, before launching any enterprise, have a clear vision, revenue model, and expertise in the sector. Ra’Shaud Haines, who focuses his investments toward entrepreneurs of color, suggests that just because you’re opening a for profit business, it doesn’t mean finding start up capital is going to be easy. In fact, it‘s typically more difficult since you’re a nonprofit, plus you should be sure to plan ahead for any additional cash you’ll need down the road. But either way, if you get funding from a foundation, bank, or government agency, it may take months or even years to receive the funding, so consider prioritizing individual investors.

Do Your Research

This should go without saying, but don’t assume that because your idea is good there’s a market for it; and you should never assume folks will support your venture just because it’s associated with a good cause. Interview potential customers to gauge their interest and get commitments from them if you can.

Mary Kay Sweeney and Paul Fordham stress this point. As creators of Homeward Bound of Marin, they successfully launched several social ventures, from making chocolate truffles to opening a commercial kitchen with training opportunities for people who were previously homeless. They’ve seen it all. Here’s how their venture shifted based on doing market research: “When Homeward Bound of Marin launched its Fresh Starts Catering company, there were 50+ catering businesses listed by the local Chamber of Commerce. We learned there was much less competition for onsite catering. So, we repositioned ourselves and opened The Next Key Room onsite catering business and our revenues doubled within six months.”

While you can’t rely on your mission to drive sales, Sweeney and Fordham also stress that that the key to success in social enterprise is to hold the nonprofit mission front and center but run the venture with a for profit mindset.

Rely on Relationships

As in all business endeavors, building your network and finding industry expertise to fill in the gaps is important. Homeward Bound found that industry leaders wanted to support a good cause, but not necessarily if it meant paying more or sacrificing quality, so finding an underserved niche was key to their success. Before Mary Kay and Paul launched Wagster Treats, a dog biscuit company, they spent more than six months meeting with pet food sector leaders and learned the pitfalls and opportunities. Take the time to set up informational interviews and listen to leaders in your network to set your venture up for success, while simultaneously identifying potential customers, investors, and partners.

Ra’Shaud agrees that it’s all about leveraging networks: “Many entrepreneurs of color lack networks and financial cushions. Most of the successful social ventures that I have seen get their start based on a key relationship, plus they have the financial resources to sustain operations while developing them. One of the most important keys to success is your network. Find a mentor with experience in your industry: test your ideas with them and listen to their council.”

Bottom line: every smart, successful pro I’ve spoken with says do your research and talk with other social entrepreneurs and industry leaders. A note of caution, however from Ted Levinson; if you have to hire outside consultants to write a business plan, figure out product or service offerings, pricing, staffing, and so on, STOP! If you don’t have the in-house talent to conceive of a successful social enterprise, you definitely won’t be able to run one successfully.

While there are several benefits to launching a social enterprise, including additional marketing for your organization and potentially growing and diversifying your revenue base, it is not for the faint of heart. Raise the tough questions with your staff and board to see if investing time, energy, and funding really makes sense. If it does, use the tips above and check out the additional resources below to put you on the path to success!

Additional Resources:

Social Enterprise Alliance provides trainings and convenings, and has a large membership of social entrepreneurs and nonprofits who may be able to provide advice and guidance.

Propeller offers equity investments to social entrepreneurs of color. They’re based in New Orleans, but have contacts throughout the States.

The REDF Workshop online series is really helpful and offers practical how-to trainings.

Catalyst Kitchens offers training for organizations interested in creating a social enterprise in the food sector.

Thanks to Ted Levinson and Ra’Shaud Haines—two savvy lenders—and Mary Kay Sweeney and Paul Fordham—two serial-social entrepreneurs—for allowing me to interview them and collect best practices from their broad experience. Check out what they’re doing here:

Ted Levinson: Beneficial Returns

Ra’Shaud Haines: Foundation for Louisiana, providing loans and equity investments to minority-owned businesses

Mary Kay Sweeney and Paul Fordham: Homeward Bound of Marin, an affordable housing and homeless service provider in Marin, California

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About the Author

Marc Rand

Marc Rand has focused the last twenty years on supporting the nonprofit sector through capacity building and finance. He spends his time creating new and innovative ways of supporting organizations through finance as the Executive Director of American Nonprofits, which includes operating the Nonprofits Insurance Alliance of California and Bridge to Bridge Loan Funds. He is the former Program Director for Loans and Affordable Housing at Marin Community Foundation, one of the country’s largest community foundations. Prior to being a funder, Marc served with the Peace Corps in Romania where he led a team that developed five credit unions focused on underserved population. Before his service with the Peace Corps, Marc served as a Capital Markets Analyst with First Union National Bank.

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