Giving Back: Why 'Social Enterprise' Rarely Works

By Ben Casselman

For more than a decade, a number of nonprofits have been embracing the tactics of the for-profit world, starting businesses such as bakeries or catering companies that employ disadvantaged people while using the proceeds to help break free of the shackles of fund-raising.

But now some nonprofit leaders and academics argue that this "social enterprise" model is flawed. Few if any of the businesses set up by nonprofits are truly self-sustaining, they maintain, and many have failed. Moreover, some experts say an overemphasis on creating a viable business can detract from an organization's social mission.

In a report set to be released Monday, the Seedco Policy Center -- a newly formed research arm of a New York nonprofit called Seedco -- argues that "overzealous encouragement may have pushed too many nonprofits into ill-advised commercial projects." The report advocates a new model that embraces the entrepreneurial spirit of the business world without expecting social-service groups to be self-supporting. "There's no shame in subsidy," says Neil Kleiman, who heads the Seedco policy center and is one of the report's authors.

"Social enterprise" gained prominence in the 1980s and 1990s, as cutbacks in government grants and a downturn in private funding pushed many organizations to seek ways to generate revenue. Prominent grant-making organizations such as Pew Charitable Trusts and Kauffman Foundation began asking recipients develop plans to sustain themselves. Many nonprofits saw social enterprise as a way to become both more efficient and more independent.

Some nonprofits started businesses that generate a significant percentage of their budget, and a few approach self-sufficiency. FareStart of Seattle, which trains homeless people for food-service jobs and provides related services, generates about $1.5 million of its $3.5 million annual budget by providing food to soup kitchens and child-care centers, among other ventures.

Baltimore's Harbor City Services, a nonprofit moving and document-storage concern that hires workers with histories of mental illness and drug abuse, comes even closer to funding its entire budget. The organization has certain advantages, including loan guarantees that chief executive John Herron acknowledges wouldn't have been available to for-profit competitors. But Harbor City has operated for more than a decade without direct government support and without soliciting private donations.

Many efforts have been less successful, however. Mr. Kleiman and his fellow researchers say they failed to find a single subsidy-free social enterprise. Other studies, using different definitions, have found at least a few examples, but experts agree they are the exception. A 2001 survey, published in the Harvard Business Review, found that 71% of social enterprises lost money, even without factoring in indirect costs covered by their parent nonprofit.

Samantha Beinhacker, president of New Capital Consulting, which advises social enterprises, says most will always rely on grants or other subsidies -- and that isn't necessarily a problem. The risk, she says, is that in striving for self-sufficiency, nonprofits will miss other opportunities to achieve their missions.

That's what happened at Seedco. In 2001, the organization -- a 20-year-old nonprofit that runs work-force development and small-business support programs -- launched a program to provide emergency backup child care to low-income workers so that they wouldn't miss work when their primary child care fell through. It was set up as a social enterprise: Seedco contracted with child-care providers, then sold the program to businesses as an employee benefit. Seedco thought the program would cover much of its budget, help working parents keep their jobs, ensure quality care for their children and give business to small child-care providers.

But few employers joined the program, in part because it couldn't accommodate sick children or late shifts. And relatively few employees signed up, preferring to stay home with their kids rather than send them to a stranger's house. Seedco shut the program in 2003.

Mr. Kleiman says Seedco missed a chance to help its clients through more traditional means, such as looking for sustained government or foundation support to subsidize the program. "A lot of it was getting caught up in the [social enterprise] mantra," he says. Seedco President Diane Baillargeon adds that the program proved too complex, especially for an organization without experience in either business or child care.

Ms. Beinhacker says there's a lesson in such failures: "Stick to the thing that you know," she says. "Business is hard."

[Source: The Wall Street Journal: June 1, 2007]