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Sep 19, 2012

New report shows limited funding for social entrepreneurship

I just released a report The State of the Ohio Nonprofit Sector based on the responses of over 120 Ohio nonprofits.  The report identifies the problems nonprofits are confronting and how successfully they are finding solutions in 2012. To download a copy of the report, go to this link.

The good news is that the financial picture is brightening and a majority are taking proactive steps to enhance the sustainability of their programs.  The number anticipating operating deficits in 2012 is lower than in 2011 and the vast majority expect to end 2012 in surplus or at least balance.

While reductions in expenses or services are the path for some, 67 of the 126 respondents are seeking to preserve their high-mission services by expanding profitable lines of business or starting up new businesses in order to diversify and increase their net revenues.  The creation of profitable businesses in order to support higher mission activities is often called social entrepreneurship.

Given the limited potential to expand charitable contributions and the continued downward trend in government funding, I believe social entrepreneurship is the most promising source of sustainable funding for the nonprofit sector.

Yet the energy of their entrepreneurial approach to the future is colliding with the limitations of traditional nonprofit financing sources.  Most of the 60 entrepreneurs are self-funding their expansion.  Fifty-one are using current operating revenues and almost half of these nonprofit entrepreneurs applied for and received grants to fund their growth.  Nevertheless, operating surpluses remain sparse and accumulation of sufficient reserves can take years.  The grant application and approval process also can be prolonged and uncertain.

In contrast, only two entrepreneurs were able to borrow to finance their expansion and only three found angel investor funding.  This is problematic.  These latter two funding sources are a primary engine of for-profit entrepreneurship yet they barely register on the nonprofit entrepreneurial radar.

Nonprofits that have the ideas and ambition to start up new ventures to earn reliable revenues to support their mission activities need to have timely access to adequate sources of capital.  In the technology area there is already a broad recognition that innovation requires seed capital, incubator programs, and angel funds in order for good ideas to become viable businesses. Nonprofit social entrepreneurship has the same needs.

The critical role of profitable activities to offset the necessary losses of high-mission activities  is a core principal of Linking Mission to Money, Second Edition.  If you still aren’t convinced after reading this book, let me present to your nonprofit or foundation my talk The new definition of a successful nonprofit – or – Stop Getting in the Way of Fulfilling Your Mission so you can better understand how to chart a sustainable course for the future.