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Sep 25, 2012

For-profits are NOT the only effective social entrepreneurs

Peter Buchanan of the Center for Philanthropy published an op-ed  in the Chronicle of Philanthropy to chastise the perception that only for-profits can do effective social entrepreneurship. He opens his article, “Many nonprofit leaders, donors, policy makers, and others are increasingly looking, starry-eyed, to business and markets to solve social problems.  But in so doing, they run the risk of dismissing the importance of nonprofits—and diminishing the value of organizations that seek to make a difference without the potential conflicts that come with the profit motive.”

Buchanan is right on.  The problem is that nonprofits are really two businesses:  the high mission business that does something society needs that NO ONE  can figure out how to do well and still be profitable; the second business takes the core strengths of the nonprofit to develop FOR-PROFIT businesses to channel the profits back to the first business.  This is the new normal and the key to nonprofit sustainability.  The second business can be integrated into the 501(c)(3); it can be a separate wholly-owned nonprofit subsidiary; it can be a for-profit subsidiary.  Don’t want the restrictions of nonprofits?  Make the subsidiary a for-profit, or have your state authorize low-profit limited liability (L3C) companies.

The main reason some think that for-profits can do it better is that we are still developing the notion that INVESTING in nonprofits’ profitable activities is either morally wrong or bad investing.  No, it is morally right, financially necessary, and will provide a positive return to the investor.  Philanthropy can be the frosting if the investor wants to donate as well.

So cut the double standards.  There are thousands of examples of nonprofits running profitable businesses in order to support their high mission, unprofitable activities.  This is what linking mission to money is all about:  focus your high mission to be effective but not cover its costs; then develop supporting activities that make enough money to more than fill the gap.  See my latest survey reportto see that more and more nonprofits understand this is the path to sustainability.  Want to hear more face to face?  Hear my talk on “The new definition of a successful nonprofit – or – Stop Getting in the Way of Fulfilling Your Mission