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Enterprising Nonprofits: A Toolkit for Social Entrepreneurs - Why Running a Nonprofit is the Hardest Job in Business

Think running a for-profit business is hard? Then try heading up a nonprofit, says HBS Senior Research Fellow Jed Emerson, co-author of Enterprising Nonprofits: A Toolkit for Social Entrepreneurs. Forget about installing an information system—too much overhead. Need to raise capital? Good luck. Oh, yes, some of your labor pool may be homeless.

Enterprising Nonprofits: A Toolkit for Social Entrepreneurs

Working Knowledge: What role does risk play in social entrepreneurship? Is there more or less risk involved than in "regular" entrepreneurship?

Jed Emerson: In some ways, the issue of risk is no different for a social entrepreneur than a traditional entrepreneur. Social entrepreneurs must assess risk at any number of levels: enterprise, managerial, market, financial, and so forth. They must be able to evaluate potential reward and position their own resources in order to most effectively decrease the possibility that a risk may become a reality—and if it does so, they must be prepared to address that turn of events effectively.

Social entrepreneurs, however, must also contend with the fact that they may carry a larger universe of risk elements than a traditional entrepreneur. For example, the businesses operated by entrepreneurs in the Roberts Enterprise Development Fund portfolio were all launched with the dual mission of being both market-based and having a commitment to hiring the majority of their employees from the ranks of formerly homeless individuals. Imagine that—trying to run a successful businesses with an employee base that has already been fired by all your competitors! Certainly the "social" aspect of the vision for social entrepreneurs brings with it a set of risk factors a traditional businessperson would simply view as "externalities" and not seek to address.

Q: How does competition differ in the nonprofit world, compared to the for-profit world?

A: In the same way risk has many similarities and yet is different, competition operates in much the same way. In addition to traditional aspects of competition, the social entrepreneur must also contend with the fact that in some ways the performance indicators that govern competition (i.e. whether or not one is viewed as having succeeded and won the competition) are different. For example, while the for-profit sector is able to rely on key metrics upon which success may be assessed, in the nonprofit sector, competition and success at competing may be driven by not simply metrics (profit or loss), but politics (knowing the "right" people in order to assure your organization is in the game) and media coverage (being viewed as "effective" at what you do—since many times documentation of success can be difficult to secure). Therefore, while competition is alive and well for social entrepreneurs, there are a variety of levels that competition takes place and various tools you need to be successful in competing.

Q: In your research and experience, can you point to particular nonprofits you'd describe as truly entrepreneurial?

A: In some ways, simply existing as a nonprofit is a testament to one's success as an entrepreneur. Think of it this way—imagine waking up one day as a business leader only to find that your strategies for raising capital are limited to what you can convince people to give you (you have no equity options to provide investors and extremely few options for securing debt), your MIS is non-existent because none of your investors believes in funding "overhead," and you have been operating your venture for three years, yet have absolutely no idea whether or not you are being effective in the marketplace. That may sound incredible, but think about it…many nonprofit managers have to raise funds annually and many times from "investors" who think if they end the year with any money in the bank the organization isn't "doing enough." Most nonprofit organizations are penalized for building managerial or other capacity since everyone wants their money to be "targeted to the cause." And while some nonprofits are able to track output (numbers served, units built), it is almost impossible to track long-term value given both the nature of the work and the lack of metrics or tracking infrastructure. In many ways, if you're even operating after five years, that in and of itself is a testament to your entrepreneurism!

I sometimes laugh when I listen to businesspeople say that "nonprofits need to become more business-like." I think if more mainstream businesspeople understood what it's like to manage to a double bottom-line, they would offer their advice with a bit more humility and perhaps be more willing to acknowledge the incredible value offered by nonprofit organizations. After all, if you're only concerned with a single measure of success, you can do whatever it takes to achieve it—cut personnel, move your plant—but if you're a community-based venture you can't move out of town and you have to assume that the problems in the community are your problems. It's a very different game.

With that consideration in mind, many nonprofits reflect incredible entrepreneurship. HousingWorks in New York City operates a number of businesses employing people with AIDS—and does so with a minimum of government funding since their ventures generate millions of dollars annually in income to support the organization. Food From the Hood, founded in South Central LA, employs inner city kids in urban agriculture and sells salad dressing, apple sauce, and other products with profits going into a scholarship fund for the youth participating in the program. Rubicon Programs in Richmond, CA (a city in the San Francisco Bay Area that has been left behind during the boom of past decades) operates both a landscaping venture and a high-end dessert bakery that employs dozens of folks from their neighborhood—and turns a profit as well. I could go on and on.

Q: What keeps some nonprofits from being entrepreneurial?

A: Over the past thirty or forty years some of those in the nonprofit sector have developed a sense that "business" is bad and being entrepreneurial means you have to sacrifice your social mission. If you believe that, then being entrepreneurial in your response to social, environmental, and other problems may be hard. Having said that, there is a growing number of younger people who, MBA in hand, are entering the sector. And there's an equally large number of folks with mainstream business backgrounds who are leaving business at mid-career and joining social ventures. Together with those of us who were born and raised in community work, these folks are making a real difference in both the mindset and skill set of those who are combating poverty or illiteracy or whatever your issue is. This has all combined to help, in part, create the social entrepreneur of today.

Q: Should social entrepreneurs have a different level of accountability than their peers in other industries? Does accountability mean something unique in the world of social enterprises?

A: Actually, in recent years it's been mainstream business realizing that they have a new level of accountability. I presented this past year at the World Economic Forum in Davos and was really struck by the degree to which today's CEOs are redefining the concept of accountability for business today. Business leaders who don't consider the environmental or social impacts of their business models or who fail to joint venture with NGOs (non-governmental organizations) in the countries in which they do business will increasingly find themselves out of the deal stream in a global environment. Many business leaders are working with leaders in the nonprofit sector to redefine accountability for both for-profit and nonprofit corporations. This accountability is viewed in stakeholder as well as shareholder terms and also realizes that many investors are looking for both financial performance and social responsibility. The successful CEO of the future is one who knows how to partner with NGOs to maximize value on multiple levels. Companies that figure this out will be in the driver's seat in coming years.

Q: One of your e-mail addresses includes the words "Live for Punk." Do you?

A: I started playing in bands when I was in 5th grade and am pretty much a rocker for life. I really like the "do-it-yourself" ethos of the punk community and it's part of what gives me the ability to break molds in both the nonprofit and for-profit space. My last HBS working paper ends with a "thank you" to some of my current (and long-standing) favorite bands for providing me the proper inspiration for my late night writings…. Rock on!!

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Jed Emerson is the Bloomberg Senior Research Fellow at Harvard Business School, and a co-founder of the Roberts Enterprise Development Fund.

Excerpted with permission from Enterprising Nonprofits: A Toolkit for Social Entrepreneurs, Wiley, 2001.

Social entrepreneurs are different from business entrepreneurs in many ways. The key difference is that social entrepreneurs set out with an explicit social mission in mind. Their main objective is to make the world a better place. This vision affects how they measure their success and how they structure their enterprises.

Another important difference is that social entrepreneurs do not receive the same kind of market feedback that business entrepreneurs get. Business enterprises that efficiently create value for their customers are rewarded in the long term¾rewards that eventually find their way back to investors in the form of profits; however, creating social value does not necessarily lead to long-term rewards for the enterprise or entrepreneur creating it. In these environments, for example, lack of profitability is not a reflection on organizational performance. As a result, social entrepreneurs face different challenges in attracting resources and in justifying their existence.

The best measure of success for social entrepreneurs is not how much profit they make, but rather the extent to which they create social value. Social entrepreneurs act as change agents in the social sector by behaving in the following ways:

· Adopting a mission to create and sustain social value. For social entrepreneurs, the mission of social improvement is critical, and it takes priority over generating profits. Instead of going for the quick fix, social entrepreneurs look for ways to create lasting improvements.

· Recognizing and relentlessly pursuing new opportunities to serve that mission. Where others see problems, entrepreneurs see opportunities! Social entrepreneurs have a vision of how to achieve their goals, and they are determined to make their vision work.

· Engaging in a process of continuous innovation, adaptation, and learning. Social entrepreneurs look for innovative ways to ensure that their ventures create social value and obtain needed resources and funding as long as they are creating value.

· Acting boldly without being limited to resources currently in hand. Social entrepreneurs are skilled at doing more with less and at attracting resources from others. They explore all resource options, from pure philanthropy to the commercial methods of the business sector, but they are not bound by norms and traditions.

· Exhibiting a heightened sense of accountability to the constituencies served and for the outcomes created. Social entrepreneurs take steps to ensure that they are creating value. They seek to provide real social improvements to their beneficiaries and their communities, as well as an attractive social and/or financial return to their investors.

Social entrepreneurs create social enterprises. They are the reformers and revolutionaries of our society, today. They make fundamental changes in the way that things are done in the social sector. Their visions are bold. They seek out opportunities to improve society, and they take action. They attack the underlying causes of problems rather than simply treating symptoms. And, although they may act locally, their actions have the very real potential to stimulate global improvements in their chosen arena, whether that is education, health care, job training and development, the environment, the arts, or any other social endeavor.