No, social enterprise and earned revenues will not solve nonprofits’ funding problems

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Hi everyone, for those who missed the Unicorns Unite’s 5-year virtual reunion event on Valentine’s Day, the other co-authors and I are doing an encore for folks in other countries on April 18th to discuss what we’ve learned since we published the book five years ago. It’ll be midnight for me, but that’s also when I do my best work! Register here and see you then! (Folks in the US who don’t mind staying up at midnight or 3am, feel free to join too!)

A couple of weeks back, I met a great new colleague. I knew we would get along because we wore the same brand of outdoor gear, which I will not mention here until the multi-million-dollar sponsorship deal goes through. We were having a sparkling conversation when my new friend started an impassionate speech about how nonprofits should focus more on earned revenues. I watched in horror, mouth stuffed with a blue-raspberry-flavored Jolly Rancher, as my colleague, a funder, continued on about how earned income would allow orgs to have more control and not be as beholden to the whims of funders and donors.

I’m not bringing this up to shame my colleague, who occasionally reads this blog and is a delightful human who took feedback with much grace and openness. However, I thought we had all defeated the idea that earned revenues was some sort of panacea or silver bullet for nonprofit funding woe, thanks to articles like this one by the legendary Rick Cohen. Is it like polio or water pies? Is it coming back?!

Apparently so. Another colleague sent me this email: “I think [social enterprise] is constantly resuscitated by board members who are only comfortable in the for-profit world. Yes, I see the monetary advantage of solid earned revenue streams. However, I feel like increasingly, social enterprise is a way to make capitalism and wealth hoarders seem like saints. Or like it’s just a way to shift public perception to make people think that nonprofits can only be successful by somehow becoming for-profit entities.”

OK, funders, board members, and anyone else set on reviving the zombie idea of social enterprise and earned revenues as viable nonprofit funding strategies, we need you all to knock it off with this line of thinking (which, again, I thought had died off years ago, along with open-plan offices, giant-presentation-check ceremonies, and my hopes of developing six-pack abs). Earned income can be helpful, and can be a brilliant strategy for some orgs, but to expect all or more than a small fraction of nonprofits to rely on it as a primary source of funding is unrealistic, impractical, and more than a bit insulting. Here, again, are a few reasons why:

You’re expecting nonprofits to use capitalism to solve problems caused by…capitalism? Most of the problems we’re dealing with in society are caused by the unchecked growth of capitalism. The environment. Homelessness. Mental health issues. Etc. Many of our services would not be needed if many corporations would pay their fair share of taxes and provide their employees decent wages and benefits. Expecting nonprofits use capitalistic tools to solve the problems caused by capitalism is like using matches and lighters to try to extinguish raging fires.

Most for-profit businesses fail after a few years: According to the U.S. Bureau of Labor Statistics, approximately 20% of new businesses fail during the first two years of operation, and about 45% fail during the first five years. This statistic is based on data collected from 1994 to 2020, before the Plague. Another study found that the failure rate for new businesses was around 50% after five years, and around 70% after ten years. And these are for-profits entities that can just focus on making money and don’t have to simultaneously deal with running nonprofit programs and services and occasionally weeping in the supply-closet/conference-room over cashflow issues.

Running for-profit ventures would require different skills, experience, staff, etc.: It’s annoying and arrogant when businesspeople automatically think they can run nonprofits. But it’s also ridiculous for anyone to expect that most nonprofit professionals would be able to run for-profit businesses without significant time, training, and resources. They’re two separate sectors. To successfully start and maintain an earned revenue stream would require that nonprofits recruit people who have for-profit skills and experience, or divert the current work of those who do. And how are nonprofits going to do that when they’re already stretched thin?

It would be hard for nonprofits to secure start-up loans: Starting a for-profit when you’re a nonprofit is different than if you’re starting one as an individual. This is not my area of expertise, but I would imagine getting a loan to start a for-profit venture as a nonprofit would be challenging, as banks tend to require credit history, personal assets to be used as collaterals, and some guarantee of stable income, right? But nonprofits don’t have owners; they have boards of directors. And few have stable, predictable income. I mean, some nonprofits may have enough general operating funds, or supportive funders and donors, to start a venture without bank loans, but the vast majority do not.

If the earned revenues strategy is too successful, it could jeopardize tax status: While most for-profits fail within a few years, being successful may also bring on additional problems. Besides mission creep, brand confusion, and other related challenges, if a nonprofit starts some sort of for-profit venture and it brings in tons of revenues, the IRS may freak out and threaten to revoke its 501c3 status, which happened to at least one nonprofit I’ve heard of.

It can be gross, exploitative, and morally questionable: There are amazing nonprofits that do incredible work using for-profit models to provide job training and work opportunities to youth, people in recovery, people experiencing homelessness, etc. Without significant thoughtfulness around ethics, however, we could perpetuate the very injustice we’re fighting. A colleague writes of a “’job training’ program that basically puts low-income and homeless youth in low-paying jobs where the nonprofit then gets paid by their corporate employer,” which is unsettling. “Isn’t this just promoting a social caste system where low-income kids are given ‘opportunities’ that perpetuate the existing structure while making the wealthy and corporations feel better about themselves?”

It absolves foundations from having to change: Many funders love the idea of earned revenues because it allows them to continue horrible policies such as only giving out 5% of their assets each year (3.5% in Canada—update: it’s now 5% also), and hoarding the rest in order to exist in a narcissistic delusion of perpetuity. Why increase grant payout rates and fund more effectively when you can demand nonprofits stop being parasites and freeloaders and start bootstrapping and “earning” their keep by generating their own revenues?

It is a distraction from solutions that would actually work: If we’re going to solve society’s entrenched problems, we need to stop being distracted and start focusing on what will actually work: Funders and donors need to stop forcing nonprofits to waste time with shenanigans and fund more and fund better and faster, nonprofits need to cut through the crap and focus on their work, wealthy individuals need to pay their fair share of taxes, corporations need also pay their fair share of taxes and stop creating the very problems nonprofits must step in constantly to solve, and government need to do its job taking care of people so nonprofits don’t have to perpetually fill in gaps.

Overall, I am not opposed to nonprofits generating earned revenues. I am opposed to the idea that nonprofits all need to generate earned revenues as a source of income, and I’m vehemently opposed to earned revenues (or the lack thereof) being weaponized against organizations that have no interest in or capacity for it. While it may work for some organizations, and there are some who do incredible work using social enterprise models, for most nonprofits, it is unrealistic, impractical, and a distraction.

Let us please put this idea to bed for good.

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