By: Chris Fink & Steve Zimmerman
Like several other organizations in its community, an environmental nonprofit struggled to meet fundraising goals in 2018. A board member, having read about the benefits of social enterprise, brings up the idea of opening one, billing it as the panacea for the organization’s financial challenges. It sounds exactly like what the organization needs: it could generate some unrestricted revenue and might bring much-needed relief from having to ask, or seemingly beg, for money from donors year after year.
Could the “social enterprise as a savior” mentality be too simple to be true?
This is not a piece about whether or not a social enterprise will work for most nonprofits; it already has for many. Our purpose is focused on what is required to successfully run a social enterprise and what doing so means for a nonprofit’s overall business model.
At its core, a social enterprise is a fee-for-service activity. For example, the environmental organization might open a Nursery and sell customers responsibly grown plants, generating revenue from sales and advancing the conservation mission. However, an organization that has expertise in soliciting individual gifts and hosting fundraising events might not necessarily have the skills to successfully run a Nursery. For example, the organization will need to:
- gain access to working capital for startup costs.
- develop marketing campaigns.
- track revenue and customer satisfaction metrics.
- recruit and retain staff with small business and horticulture skills.
To develop these capacities, it will be necessary for the environmental organization to invest staff time and financial resources.
It’s worth remembering, then, that every program in an organization is linked, and collectively contributes to the overall impact and financial viability of the organization. Although some programs seem like they operate in silos, the investment in a new revenue stream or social enterprise impacts the entire organization, and as such, each program to some degree. Therefore, new programs, like the Nursery, need to be responsibly integrated into an organization’s overall business model. Leadership at the environmental organization might ask: How will we build the capacities needed to manage this revenue stream? Where will the financial investment (in direct expenses and time) come from? Will we need to divest from other activities to create time and invest in the skills we need to develop a sustainable social enterprise?
The matrix map can serve as a tool to engage leadership in answering these questions. It provides leaders with a snapshot of the organization, showing both the impact and profitability of all activities individually and how they interact for the organization as a whole. The environmental organization’s matrix map is shown below, with the potential Nursery program graphed in the middle.
By adding a social enterprise to the map, leadership can envision their future map or business model and the steps required to get there. They can predict how programs might move on the impact and profitability axes in response to investing in the new program, in this case, the Nursery. These discussions can surface a series of actions the organization might take to gradually build its capacity to administer a new program like the Nursery.
For instance, leaders of the environmental organization might sequence their decisions as illustrated in the map below:
- Close the Resource Library: A low impact, low profitability program, the Resource Library is currently using resources from the organization which might be better spent building up the Nursery.
- Decrease the subsidy for Restoration and Reforestation: While this program enjoys relatively high impact, it is expensive as shown by the size of the circle. In the short term, the organization could consider shifting resources from Restoration and Reforestation to the Nursery. Then, once the Nursery starts to generate income, these funds could be reinvested into Restoration and Reforestation to grow the program once again, even beyond where it is currently, thereby increasing the organization’s impact and financial viability.
- Invest in securing funds from Major Donors: Of the fund development programs (green bubbles), Major Donors has the largest relative impact and is also the most profitable. Developing this revenue source to better steward donors could build on the organization’s current strengths and generate more revenue to help subsidize the startup of the Nursery.
Importantly, these are not necessarily “easy” decisions as there are implications on staffing, donor interest, and organizational culture. These are also not the only choices that this organization could make. There are many routes to integrate a sustainable social enterprise but doing so requires thoughtfulness and intentionality. It is merely a dream for organizations to start a social enterprise without the necessary capacities to do so, expect it to be profitable immediately, and not bare any influence on the mission impact and financial viability of other activities. The interconnected nature of nonprofit business models requires that leaders leverage the organization’s collective expertise by bringing people into conversations about the feasibility of new programs and the overall strategy for funding impact.
 For more on the characteristics and dynamics of successful fee-for-service business models, we highly recommend Nonprofit Quarterly’s Nonprofit Business Model Series: Part 5 – The Fee-for-Service Nonprofit hosted by Kate Barr of Propel Nonprofits.