Someone sees a need in their community so they start a nonprofit/NGO. That’s the traditional approach. But there are problems with that approach. It is estimated that 50% of these start-up organizations will close their doors within their first five years. Why’
- Lack of research on who else is addressing the identified problem, leading to duplication of services;
- Lack of solid infrastructure, due to not understanding of what it takes to run a nonprofit, often because the founder has no business management experience;
- Lack of a variety of funding methods, leading to lack of adequate funding. With an estimated 1.8 million non-profits in the USA, five million in India, and millions more in other countries, the competition for limited resources is fierce. And, if the NGO has more than 20% of their budget coming from any single source, and that source dries up, the NGO will be in trouble;
- Failure to have any type of business plan or strategic plan.
Because of the problems inherent in the traditional NGO start-up strategies and competition for funding, there are several new approaches to funding that are worth considering. Called “social enterprise ventures,” these approaches to meeting community needs are often radically different from the traditional approach, although they too can have problems.
Micro-financing strategies, developed to provide small loans to individuals in poverty, were the precursor to today’s social enterprise ventures.
More than 20 states in the USA have either passed legislation or are considering bills on new social enterprise business structures. Depending on the governmental structure of your country, some of these strategies might be worth examination.
Examples of these new strategies include:
1. L3C – Low-profit Limited Liability Corporation (for-profit), which must significantly further charitable purposes, with production of income and appreciation of property as insignificant purposes;
2. B Corporation, or Benefit Corporation (for-profit) – Corporate purpose is to create positive material impact on society and the environment;
3. For-Profit Activity of an NGO – Maintains non-profit status but pays taxes through Unrelated Business Income Tax structure (UBIT in the USA);
4. Partnerships with for-profit corporations – Although designated by the government as charitable organizations, these types of NGOs often ignore traditional start-up and funding strategies and rely on the for-profit expertise of their founders and corporate partners.
Two examples of individuals in the USA who started non-profits as social enterprise ventures are: Wayne Elsey, founder of Soles4Souls (www.soles4souls.org), and Shawn Seipler, founder of Clean the World (www.cleantheworld.org). Both men came from highly successful for-profit careers but used their entrepreneurial and business skills to start non-traditional charities. They combined their business acumen with their passion to help, partnering almost exclusively with for-profit corporations.
The social enterprise approach to funding NGOs to meet specific needs requires this kind of outside-the-box thinking and strategies. Such approaches should decrease the failures of start-up organizations because they often have more solid infrastructures, reduced competition for funding, have a business plan, and are founded because of unmet needs.
But be cautious. The same issues that cause NGOs to fail can also apply to social enterprise ventures. And, NGO and for-profit partnerships often have opposite purposes: charities work to improve their communities, while corporations are primarily interested in profit. Even so, such partnerships can significantly impact NGOs by providing more stable sources of income. The result can be significant impacts on poverty by improvements in health, environment, sanitation, and by decreasing the number of people in poverty; in some cases, even providing jobs for the poor through the for-profit social enterprise venture.
By Marilyn L. Donnellan, MS President, Nonprofit Management Services, LLC