Business Ventures Go Beyond the Bottom Line
From The Chronicle of Philanthropy
©The Chronicle of Philanthropy
August 8, 2002


By Evan Hochberg

As nonprofit groups face increasing demands to provide services on tight budgets, many are looking for ways to earn money through businesses or other moneymaking ventures rather than relying exclusively on government or philanthropic sources for support.

Unfortunately, discussions about such ventures often fail to recognize the multiple benefits of starting these ventures beyond just income. Part of the problem has been that the discussion about nonprofit business ventures tends to divide into two camps.

One camp advocates only those ventures that are completely aligned with the mission of the nonprofit organization and shuns all others as distractions that have the potential to undermine the charitable nature of the organization. Those who hold this view would consider it suitable for a nonprofit group that trains its clients in culinary skills to start a restaurant business to provide a quality work experience for its graduates, but would look askance at an environmental organization that opened a restaurant.

The other camp is less concerned that nonprofit ventures be so closely tied to a group's mission, but looks exclusively at the potential for financial return to figure out whether a business enterprise is worthwhile.

Both ways of thinking ignore the valuable "halo" benefits that nonprofit groups that start business ventures often enjoy. Many nonprofit groups start ventures that are not completely mission-based but clearly have a significant impact on the organization's ability to deliver on its mission beyond providing direct financing for its programs and projects. Such ventures should be judged by criteria broader than just financial performance.

For example, the Prichard Committee for Academic Excellence in Lexington, Ky., is widely recognized as a leader in improving the educational performance of Kentucky's public-school system. One of Prichard's most successful programs is the Commonwealth Institute for Parent Leadership, which trains 200 Kentucky parents each year on how to be more effective advocates in their local school districts. Prichard receives requests from across the country for advice on how to develop similar programs. However, Prichard's mission has been limited to serving the state of Kentucky. To dive into national consulting, Prichard needed to be confident that its efforts in Kentucky would be helped, and that the attention placed elsewhere would not get in the way of its work at home.

Prichard recently started Parent Leadership Associates as a consulting subsidiary to assist cities and towns nationwide to develop similar institutes. A primary goal of the subsidiary is to generate revenue that will help finance Prichard's efforts in Kentucky. Nonetheless, focusing solely on the revenue potential of this venture ignores the multiple benefits Prichard expects to attain from the organization.

Through the subsidiary, Prichard will get visibility and become known as a national expert. It also offers Prichard the opportunity to work in other states and incorporate lessons learned elsewhere into the approach Prichard uses in Kentucky. What's more, the national consulting project gives Prichard greater access to grant makers and wealthy donors, and to partners that can support efforts in Kentucky. And as more and more cities and towns nationwide get parents successfully involved in the schools, overall support for parent programs will increase in Kentucky and elsewhere.

Those benefits are critical to Prichard's success. Without the subsidiary, pursuing those ends would show up as expensive line items in Prichard's budget. With the creation of Parent Leadership Associates, they are investments that reap a direct financial return as well as broader halo benefits. While Prichard would not have invested in the subsidiary without a solid direct financial return, those other benefits are important factors in determining the level of investment and commitment Prichard should dedicate to the subsidiary.

Numerous other nonprofit groups have started ventures based on a similar assessment of the benefits that go well beyond the bottom line. Among them:

• Gould Farm in Monterey, Mass., operates a store that sells the products that people with mental illnesses who live on the farm produce. The store generates revenue that offsets the cost of the programs run on the farm, but the real benefit is a less tangible one: It helps fight myths that people with mental illnesses can't be self-sustaining and lets people in the region know more about what the farm does, thereby ensuring the area's residents are supportive of the group's choice to operate in their neighborhood.
  
• The Welfare to Work Partnership, a nonprofit group in Washington, seeks to encourage the hiring and promotion of welfare recipients and other unemployed and low-income workers. Welfare to Work created Aptus Consulting to work directly with corporations to help them build strong welfare-to-work programs. Aptus makes money for its parent organization, but also provides a real-world laboratory to figure out what actually works in helping people get off government rolls and into decent-paying jobs.
  
• The Compass School works with troubled youngsters, as well as those with mental and physical disabilities, at its campus in Boston. Its subsidiary, Compass Consulting, assists other school districts around the country that work with such youngsters. Compass Consulting generates profits for the school but also provides staff members at the school the opportunity to work with other educators and visit other schools. In addition, the consulting business gives employees a way to earn supplemental income.
  
• The Latin American Youth Center, in Washington, recently purchased a Ben & Jerry's ice-cream-shop franchise. The center employs young people whom it trains in the shop, and expects to earn a profit, but the community visibility that the shop affords the center is invaluable. Hundreds of thousands of people will walk into the shop to buy ice cream and learn about the center's mission and programs -- a result that would cost many thousands of dollars for a marketing campaign to achieve.

A recent study by the Yale School of Management-Goldman Sachs Foundation Partnership on Nonprofit Ventures highlights the importance of these additional benefits. The partnership surveyed more than 500 nonprofit organizations regarding their experiences with business ventures and found that 80 percent said the venture had a good or great impact on their organization's overall reputation, while nearly three-quarters said the venture had a positive impact on the organization's delivery of services that were an essential part of their missions. One-half of the respondents said the business ventures had helped them attract and retain staff members.

Potential social entrepreneurs and grant makers who support entrepreneurial ventures at nonprofit groups should pay close attention to those findings. They show that business ventures related to a group's mission may be attractive investments -- even when they project losses -- as long as the business venture helps offset some of the costs associated with delivering the mission. If the Latin American Youth Center were otherwise going to spend $50,000 placing youths in outside jobs, one could argue that as long as the Ben & Jerry's shop loses less than $50,000 a year, it is a wise investment.

Cost-benefit analyses of nonprofit ventures should include all potential benefits, such as the value of publicity and help in retaining good employees. The Latin American Youth Center might have already planned to spend $30,000 on public relations and marketing and $20,000 to deal with recruiting and turnover costs, so that would mean another $50,000 could be justifiably invested in the ice-cream shop.

The benefits of nonprofit business ventures are substantial and varied. Scrutinizing investment decisions only on the basis of the connection to a group's mission and potential financial returns will eliminate critical support to the numerous organizations that provide benefits that make their organizations stronger.

Evan Hochberg is director of Community Wealth Ventures, a for-profit consulting subsidiary of the nonprofit group Share Our Strength that helps nonprofit organizations plan and carry out business ventures and corporate partnerships.

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