Charity For Profit
By Carl M. Cannon, National Journal
© National Journal Group Inc.
Friday, June 16, 2000

Until a few years ago, Diane Flannery was a respected San Francisco social worker who did the Lord's work almost every day. Armed with good intentions, a doctorate in psychology, and a wealth of hands-on experience, Flannery directed a respected city-run homeless shelter for young people called the Larkin Street Youth Center.

But something was missing.

Flannery came to the conclusion that she wasn't making enough of a difference. She couldn't help but notice that the same kids came through her program again and again; it had become a revolving door. She had a better idea: Teach the kids not just how to get a job, but how to keep one, how to manage their lives, how to be part of the culture of work -- and use the private marketplace to make her idea a reality.

Instead of approaching private businesses in the usual way -- donations secured in painstaking annual fund-raising appeals -- Flannery set a more direct route. businesses would provide investment capital, training, and the promise of a permanent job. But most important, to make sure this pipeline from the world of private enterprise would always remain open, Flannery's charity would start and run small businesses of its own. "In this economy anybody can get a job -- even the most deprived kids can get it together for a job interview -- but keeping it was another thing," she says. "When the drudgery of a day-to-day job set in, they had no work culture to fall back on. So owning our own business was important, so we could control the work environment."

And that's how she came to found Juma Ventures, which boldly declares in its mission statement that it is one of a new breed of charities that "use business and entrepreneurship as the vehicle for achieving our social mission."

Juma Ventures is not alone. In the past generation, many of America's most ambitious and creative nonprofits have concluded that handouts are no longer enough, that government and altruism can't improve the lives of the poor. The new nonprofits want to harness themselves and their causes to the unparalleled power of the marketplace.

This movement has no agreed-upon name, no single approach, and no one person in charge. But it does have a mantra: "nonprofit organizations need to do more than redistribute wealth," says Bill Shore, the founder of an innovative anti-hunger organization in Washington called Share Our Strength. "They have to create wealth."

Social activists all over the country have had similar epiphanies. At the Roberts Enterprise Development Fund in San Francisco, the entrepreneurial approach to charity is called "venture philanthropy." Common Ground, a New York City nonprofit that builds housing for the homeless -- and owns the Ben & Jerry's Homemade ice cream shop at Times Square -- refers to "creative responses." Ben & Jerry's itself speaks of "caring capitalism." Stanford Graduate School of Business, one of a growing number of business schools that have added this approach to their curricula, calls it "social entrepreneurship." Not to be outdone, Harvard Business School offers courses in "social enterprise." In Seattle, Pioneer Human Services employs the poetic phrase "community wealth," which Shore appropriated for his for-profit spin-off, a consulting firm that helps other nonprofits to become entrepreneurs. And at D.C. Central Kitchen in Washington, where social worker Robert Egger figured out how to make $300,000 a year for his charity with a catering business called Fresh Start, it's simply called "using our heads."

"It's not just pity and free food and 'Oh, aren't we doing good,' " Egger says. "It's about having a plan." In his book The Cathedral Within, Shore recalls Kurt Vonnegut saying, "There is no reason that goodness cannot triumph over evil so long as the angels are as organized as the Mafia." Shore sees a helter-skelter army of human "angels" busily feeding, healing, sheltering, and teaching the less fortunate by working through the nation's 570,000 community nonprofits. "But they are not triumphing, because they are not organized for success," he says. "They lack the tools, training, finances, and resources they need to reach their full potential."

That's the problem social entrepreneurship is attempting to solve. Traditional nonprofits, overwhelmed with the endless needs of the growing legion of poor Americans, are shackled by their dependence on money or goods contributed by people who give only after their own needs and wants have been met. The new social entrepreneurs insist that this is an inefficient way to do good. Their model combines the best methods from two worlds: hard-headed fiscal conservatism and soft-hearted liberalism.

One Dollar, Two Purposes

If this new model sounds like apostasy, Shore is one of the few players in the social service world with the credentials and the experience to stand up to any backlash. He grew up in Democratic politics -- his dad was a Pittsburgh ward boss -- and was the aide closest to former Colorado Senator and presidential candidate Gary Hart. Even before Hart flamed out in 1987, Shore had begun to doubt whether partisan politics could best help those who most needed it -- and whether, in any event, government service was his true calling. He and his sister had already set up Share Our Strength, a nonprofit devoted to feeding the hungry and the homeless. When Hart dropped out of the presidential race, Shore turned his full attention to SOS. He told his story in two well-received books, Revolution of the Heart and The Cathedral Within. Shore's genius was to see the potential for charities to break the pattern of taking contributions from the well-heeled and then doling out cash to the down-and-out. Hart may have run for President as the candidate of "new ideas," but it was his younger aide-de-camp who hit on the ideas that have helped inspire a new type of charitable organization.

Shore's first step in his anti-hunger campaign was to enlist well-known chefs, for the most basic of reasons: They like feeding people. Shore stumbled into a truth that, in hindsight, seems obvious: The stamp of approval from SOS and its cause was worth money to the restaurants that employed those chefs. In 1986, Shore, still living in Denver, got the city's best chefs together for a dinner and wine-tasting -- the chefs and their restaurants donated their time and their food -- which generated good will and invaluable publicity. SOS sold tickets and raised $10,000. The event, Taste of Denver, fathered Taste of Washington, Taste of Boston, and eventually, Taste of the Nation, an annual event now held in more than 100 cities. Taste of the Nation raises more than $4 million a year for SOS, money that is funneled to feed-the-hungry charities.

Shore's second big idea was to partner with corporations that would benefit from an association with SOS. In the case of Bon Appétit, the magazine that initially sponsored Taste of the Nation, the connection was a natural one. But sometimes, forming a link required more imagination. When American Express Co. started losing restaurants as customers because its credit card fees were higher than those charged by Visa or MasterCard, Shore cut a deal with American Express. Every time a customer covered a restaurant tab with an Amex card, the company sent money to SOS. American Express launched a national ad campaign highlighting this agreement, and the company reversed its slide in the dining industry. SOS, meanwhile, earned millions to feed the hungry and the homeless. But the deal was strictly business. The same is true in Shore's deals with other companies. "Evian gives us $2 million a year, but I don't even think they have a foundation," Shore says. "I believe that money comes out of their marketing budget."

At the U.S. headquarters of Evian Natural Spring Water in Stamford, Conn., Shore's quote gets a chuckle from Communications Director Michael J. Neuwirth. "Billy is speculating there -- but he is correct," says Neuwirth, who explains the rationale behind what the company calls "cause-related" marketing. "To be involved with Share Our Strength is, at the end of the day, a business decision, but it is a business decision designed to fulfill multiple purposes." The first is to get Evian's name out there in the bubbling bottled-water market. Another is to encourage social progress. "We don't see the two as mutually exclusive," Neuwirth says. "In fact, we see this as opportunity for the same dollar to do both." The upshot is that with partners like Evian and Amex and through dinners and wine-tastings across North America, SOS has, in a little more than a dozen years, raised and spent more than $50 million to feed the hungry.

Other charities have emulated Shore's recipe of coupling giant corporate sponsors with local businesses in participatory events in cities around the country. The June 3 National Race for the Cure, for instance, began as a single event 10 years ago when three Washington-area women -- former White House Social Secretary Gretchen Poston, Washington Post Fashion Editor Nina Hyde, and Marilyn Quayle, the wife of the Vice President -- organized a five-kilometer race to raise money for breast cancer awareness. The race is now an annual event in 109 cities, held under the aegis of the Susan G. Komen Breast Cancer Foundation. The foundation was started by Nancy Brinker, whose sister Susan died of breast cancer two decades ago. Susan's words still ring in Nancy's ears: "Nan, as soon as I get better, let's do something about this." In 18 years, the Susan G. Komen Foundation has generated some $240 million for breast cancer research, treatment, and prevention.

Shore realized that he was doing something many nonprofits could do, and this may have been his third great insight. To put his money where his mouth was -- or rather, where his heart was -- he formed a for-profit subsidiary of SOS, Community Wealth Ventures Inc., which helps other nonprofits get in touch with their inner capitalist child. "Our whole message is that nonprofits have more assets than they think," Shore says. "nonprofits never invest in themselves, in training, in benefits, in going after the best people. The culture of a for-profit is very different. It's got to sell things people want to buy -- from people who know what they are talking about."

To run his consulting firm, Shore tapped someone who definitely knew what he was talking about: Gary Mulhair, formerly the president and CEO of Seattle's Pioneer Human Services. Since the early 1960s, it has been providing the needy with training, employment counseling, and, most important, jobs in Pioneer's machine shops and other businesses. "Almost 100 percent of our income is earned," says Pioneer President and CEO Mike Burns. "About 67 percent comes from the business that we run; 23 percent comes from services we provide to government -- contract services, not grants."

If there is a model entrepreneurial nonprofit, it's Pioneer. Formed originally to help ex-convicts find work, today it serves some 6,000 client-customers a year on a budget of $55 million. Its 10 business enterprises include the stylish Mezza Cafe at the Starbucks Corp. headquarters and two manufacturing plants, one of which produces cargo bays for Boeing Co. Pioneer has some 1,000 people on its payroll, most of them ex-offenders or people with alcohol and drug problems.

"We have a double bottom line," says Burns. "First, we run a surplus each year, which is important. And there's our mission, which is to give a second chance to people who are on the margins of society, usually ex-offenders or those with chemical addiction problems who are in recovery. We give them this second chance by offering housing, counseling, jobs, and training."

Marla Gese, a 40-year-old who was convicted of possessing illegal drugs, is an example of how Pioneer's holistic approach can work. She made contact with Pioneer Human Services after she was paroled from the women's state prison at Purdy, Wash., to a work-release facility called the Helen B. Ratcliff House, which is owned and run by Pioneer. Gese's drug record didn't make her the most attractive job applicant around, but Pioneer found her a job as a receptionist in its real estate division. She excelled and was given a job as a rent collector. She did well in that post, too, and was promoted to property manager. Today, barely six years later, she is vice president for real estate management at Pioneer. It was Gese who figured out that the plumbers, painters, electricians, and handymen hired to maintain Pioneer's 40-odd buildings could bring money into the property-management division by bidding on outside jobs. That idea led to a new division, Pioneer Construction, which also falls under Gese's purview.

"We don't bring Band-Aids," she likes to say around the office. "We bring solutions."

Thinking Like Business People

Marla Gese's story may be one of uncommon success, but everybody involved in social entrepreneurship seems to have a personal story. Pioneer started after a lawyer, Jack Dalton, who had been convicted of embezzlement, emerged from prison believing that many of the men he served time with had turned to crime because they didn't have viable skills. In 1962, he set up a small metal-fabrication shop that employed other ex-cons and ultimately landed a contract with an enlightened local giant, Boeing.

Gary Mulhair's inspiration came when he was a graduate student in business at the University of Washington and volunteered for a project helping Seattle's downtown business establishment assist minority enterprises. "Until then, the business community just wrote checks -- and made dumb decisions even when they did that," Mulhair recalls. "They wanted to do something good, but they didn't know what that was. These were smart guys who ran successful businesses, but when it came to trying to make a difference in the community, they just left their brains at the door." To Mulhair, it was clear that there was a huge demand for executives who approached philanthropy with the same discipline that they brought to business.

For Edgar J. Helms, a young Boston University divinity student, it was the appalling poverty of the handicapped and the desperation of unskilled immigrants that he saw at the small Methodist chapel where he preached in Boston's South End that motivated him. Helms was scheduled to go to India on a mission, but with so much to do at home, he decided to stay put. He formed a charity that collected donated clothing, furniture, and other castoffs from Boston's well-off neighborhoods. He then opened a repair shop and a storefront and put indigent immigrants and handicapped persons to work repairing the furniture and other goods and then reselling them. That was in 1895. His nonprofit grew into Goodwill Industries International.

"In other words, this is not an entirely new idea," says David C. Becker, president and CEO of Davis Memorial Goodwill Industries, the Washington, D.C.-area Goodwill chapter. But even entrepreneurial charities need to change with the times. Product obsolescence, government programs designed to help the handicapped find work, and the high cost of labor have made it hard to raise funds by repairing broken dressers and re-upholstering faded couches -- only the Salvation Army still manages to do it. Becker hit on an idea that was a boon to the revenue streams of Goodwill and, eventually, charities all over the country. "It was in 1978, during the second oil embargo, and we were sitting around here going down the tubes," he recalls. "We couldn't get money for gas for the trucks, and they were idle while donations were going uncollected, and we hit on this idea: 'Donate your gas-guzzler to Goodwill.' "

Eager for the tax deduction, thousands of local residents did just that -- and still do today. The Goodwill used-car lot on South Dakota Avenue N.E. sells more cars than any other used-car dealer in the region, moving some 5,000 vehicles a year. The auctioned cars, along with a pest-control subsidiary and a custodial service Becker has launched, bring in some 90 percent of Davis Memorial Goodwill's $22 million annual budget and keep 750 disabled, handicapped, or poor people on the payroll, while training 2,000 more.

New York homeless advocate Rosanne Haggerty, a veteran of Catholic Charities, got her motivation when she walked by the majestic but run-down 1920s-era Times Square Hotel at West 43rd Street and Eighth Avenue. It was a building nobody wanted -- except Haggerty. Knowing that there was a pot of city money available to refurbish such buildings as housing for the poor and that, because of the building's age, she could actually sell historic-preservation tax credits to any corporation that wanted to underwrite the renovation costs, Haggerty approached several investors with a simple rap: "I don't have an organization," she told them, "but I have an idea."

Soon she had an organization as well, a nonprofit she named Common Ground. Today it manages 1,300 housing units and employs 167 people, some of them residents -- and some of whom work at one of several for-profit spin-offs, including that Ben & Jerry's scoop shop in Times Square.

"This is a model that works," says Common Ground staff member Ben Metcalf. "But it's been a real learning experience for this organization. We've launched three or four business plans, gotten them up and running, and then said, 'This is not working,' and started over. It's hard to make money."

Jim Thalhuber, president of the Minneapolis-based National Center for Social Entrepreneurs, stresses this point. His center is a nonprofit consulting firm that teaches other nonprofits how to maximize their revenues. Thalhuber believes, however, that for most of his clients, the immediate answer is not necessarily opening up a for-profit enterprise on the side. At a recent lecture to the Florida Association of nonprofit Organizations, Thalhuber illustrated this point by asking a roomful of nonprofit directors, "How many of you can define in objective terms your market size and your market share?" Only one or two hands went up. The lack of response underscored his point that before nonprofits try to run a small business, most of them need to master basic business principles and practices. Only then, he said, would they be capable of operating a business successfully. But a business may not be the answer. "Before they try to operate an actual moneymaking enterprise, they need to run their nonprofit as a business instead of a charity," Thalhuber says. "In many cases, if they do that -- if they do what they do smarter, more efficiently, and more effectively -- they can stick with their core business."

His point illustrates another aspect of creating social wealth that is little understood: The crux of the matter is not being a business executive. It is thinking like one.

There are many factors forcing the directors of charitable enterprises to adopt this new attitude. For one thing, charities are facing increased competition from other charities -- there has been a 40 percent increase in the number of nonprofits in the past decade -- and from the private sector, as companies such as Lockheed Martin Corp. develop their own welfare-to-work programs. Charities are also pressured by their boards to show that what they are doing is working. And all this comes at a time when, despite so much prosperity, per capita charitable giving is declining. "The concept of social entrepreneurship has caught fire because of what has happened in the marketplace," says Thalhuber.

But if the marketplace creates new problems, it also offers new opportunities. "Once I got into [social entrepreneurship], I felt I had been operating with one-half of my brain tied behind my back," says Jed Emerson, who teaches this subject at Harvard Business School and runs the Roberts Enterprise Development Fund, a foundation set up by George Roberts, a founding partner of Kohlberg Kravis Roberts & Co. Roberts' mission statement sets out an ambitious social agenda:

"We view all of our grants as investments," it says. "Therefore, we refer to the tax-exempt organizations receiving our support as 'investees,' instead of the more traditional 'grantees'.... While this may seem like simple semantics to some, we feel it is important to affirm the fact that we are not simply making charitable gifts, but rather investing precious philanthropic resources in helping to build the capacity of the nonprofit sector."

In this new world, according to Emerson, three types of players emerge. The first are those, such as George Roberts, who've made more money than they can ever spend and who are giving something back. The second, he says, are "recovering social workers," such as himself, who've seen the light. The third, a new bird altogether, are those such as Ben Metcalf of Common Ground, who went to business school with social enterprise in mind.

The difference in the new breed of philanthropists is that they are as entrepreneurial in their charities as they are in their businesses -- sometimes more so. Paul Newman recently joked that his charity grosses more than his movies. Newman formed a salad dressing company after friends kept saying he was wasting his talent by simply pouring his homemade stuff into old wine bottles and giving it away at Christmas. Eighteen years later, Newman's Own has developed seven lines of food products, earned more than $100 million in profits, and helped set up camps for children with blood diseases all over the world. And every nickel of that $100 million went to charity. "Shameless exploitation in the pursuit of the common good," is the official company slogan of Newman's Own.

Not all social entrepreneurs who come out of the private sector are people who made their pile and then looked around to smell the roses. Some can't wait that long. In the words of Silicon Valley entrepreneur and Harvard Business School grad Randy Komisar, these types concluded that "the deferred life plan" didn't make sense for them. Tracy Downard is one of this breed. She worked as an operations manager for Bed Bath & Beyond, then went to Blockbuster video for seven years, where she was a rising executive. Today, she's the manager of a Ben & Jerry's parlor in San Francisco's Castro District. She's making less money and has less responsibility -- and couldn't be happier. The Ben & Jerry's in the Castro is owned by Juma Ventures, and it's the store's mission to train youths who might not get a shot anywhere else at entering -- and staying in -- the work force. "I love my job," Downard says. "It's a whole different feeling."

Downard is quick to give credit to Ben & Jerry's, which waives its $25,000 franchise fee for nonprofits and provides managers with enhanced-training services. In doing so, Ben & Jerry's was being faithful to its corporate mission, which consists of three parts: making and distributing all-natural, high-quality ice cream; making a profit for its shareholders; and facilitating innovations that "improve the quality of life" in the broader social community. This has remained true even after Ben & Jerry's founders, Ben Cohen and Jerry Greenfield, sold their company to a conglomerate. It seems that the firm's reputation for having a social conscience is good for business.

"In the old days -- like 20 years ago -- people would say they wanted to go out and make money, and then, later in life, do something for the community," Emerson says. "They'd say they want to do well and then do good. Now people are coming to realize that they can do both at the same time."

The Radical Center

The economic significance of this trend is potentially enormous. In Washington, D.C., however, there is perhaps an even larger lesson to be learned from social entrepreneurship: Great strength can be created when two powerful and traditionally antithetical forces bond in a common purpose.

"It's pretty exciting stuff," says Emerson. "We're leveraging both sides against the middle, or, to put it in political terms, we are creating a radical center."

This is not a hypothetical point. The overwhelming number of social entrepreneurs, Emerson included, are liberal Democrats by temperament, ideology, and family background. And yet the language they are speaking -- when Emerson talks of being part of the "poverty industry"; when Egger says "the old system wasn't getting any results"; and when Diane Flannery complains that pulling at-risk kids out of the "work culture and work environment" is hurting them -- has a strong strain of conservatism. Moreover, they are echoing the central criticism that movement conservatives have directed at the welfare state for 40 years. They realize this, but they don't care, because they are not trying to win elections. They are truly trying to help the less fortunate.

"In bringing business principles to a strong social mission, we are bringing these two worlds together," says Flannery. "It's deliberate. We make a point in our organization of not being too conservative and not being too liberal. It's why we're able to get things done."

It's a good bet that Ben & Jerry's founders Cohen and Greenfield will vote for Al Gore in November. They are unabashed progressives. And yet, their "caring capitalism" is a virtual mirror image of George W. Bush's "compassionate conservatism." As for Pioneer Human Services, the organization most responsible for the surge in social entrepreneurship, it was singled out early on by President Bush as one of the nation's "Points of Light." And it still is.

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