SEA: This isn’t really an altogether new concept for nonprofits is it? Roughly speaking, how common are earned revenue strategies among nonprofits, and is this something that’s becoming more popular?
Diana Peacock: Earned income is not a new concept at all. We joke with a lot of clients who come to us to help them find their “Girl Scout cookie.” Organizations like the Girl Scouts and YMCA have been leveraging their assets to develop earned income streams long before the term social enterprise existed. Community Wealth Ventures (CWV) was founded by Bill Shore in 1997 as a social enterprise of Share Our Strength, a national 501c3 nonprofit that is fighting childhood hunger, to help other nonprofits use the kinds of market-based strategies Share Our Strength used to sustain its own organization. Since that time, we’ve seen a remarkable increase in nonprofits employing earned income strategies – from launching a social enterprise business venture to implementing a tiered fee structure to recover some costs of their regular programs. This trend is also apparent through other indicators like the tremendous growth in membership for the Social Enterprise Alliance (SEA) and the emergence of more formalized social capital markets.
SEA: How important is it that earned revenue streams closely match mission, and if they don’t, what are the implications?
Diana Peacock: CWV research and experience with clients demonstrate that mission-aligned ventures are much more likely to be successful than those that are unrelated. The main drivers are related to organizational buy-in and capacity. Mission-aligned ventures are better understood by key stakeholders like staff and Board, and therefore are more likely to garner the support required to set the venture up to succeed. Further, earned income activities that are mission-related are more likely to fall squarely within an organization’s existing capabilities. For example, the organization may already have experience delivering the service/product, infrastructure in place (e.g., systems, processes) to support it, and some level of competitive advantage in the marketplace. Certainly, additional organizational capacity (e.g., skills, resources, infrastructure) is likely required to launch the venture and bring it to scale. However, these mission-related ventures are often starting from a stronger position than those that are not.
Another implication, of course, is that unrelated earned income activities are subject to income tax. We encourage nonprofits to consult with a lawyer with specific expertise in social enterprise to help determine whether their income would be considered taxable by the IRS.
SEA: In identifying earned revenue streams, is it better to expand on what the nonprofit already does or to start something completely new?
Diana Peacock: CWV wouldn’t say that one approach is better than the other. Really, the question of whether an organization should expand on an existing program or start something new depends on organizational risk tolerance and the existence of three pre-conditions required for successful ventures. Let me explain… earned income ventures are most successful when three critical elements overlap: organizational assets that can be leveraged, market opportunity (i.e. customers that are willing and able to pay for a product/service), and sufficient organizational capacity (e.g. skills, staff bandwidth, infrastructure, resources, etc.). Organizational assets are the foundation of this equation. We define “assets” as things that nonprofits have, do, or know. So while CWV won’t take a position on whether it’s better to expand on existing services or start something new, in practice, we often see organizations that are new to social enterprise start with ventures that are an extension of existing programs.
SEA: Will implementing earned revenue streams make a nonprofit a social enterprise?
Diana Peacock: Not necessarily. As I mentioned earlier, we see an increasing number of nonprofit organizations that are beginning to charge fees on a sliding scale for the services they provide through their core programs. I would categorize those fees as an earned revenue stream. These fees may not ever cover the full cost of the service, but they help defray growing gap between need and philanthropic or government funding available to support that need. Additionally, these fees often have a positive side-effect of clients attaching more value to the service they are receiving since they are not for free. (note: the nonprofits that we see implementing these kinds of sliding fees still offer fully subsidized services to those with greatest need)
SEA: What distinguishes a social enterprise from other earned-income activities?
Diana Peacock: Social enterprise is one example of an earned-income activity. CWV defines “social enterprise” as a distinct venture – a program or separate business entity that delivers a product/service to create social benefit in a profitable or self-sustaining manner. Like all business ventures, these may not be profitable at first and are subject to operating at losses during challenging market conditions. The distinction that CWV makes is that social enterprises are not intended to rely on philanthropic subsidies. Earned income activities that are not “social enterprise” by our definition include fee-for service activities that subsidize costs, revenues from cause marketing, passive rental income, royalties, etc.
As a result, CWV focuses less on how to label or categorize a particular earned income activity, and more on determining which assets can be leveraged to generate unrestricted revenue. We also help clients determine the earned income streams from which they can generate profits. Profits help nonprofits advance their missions – whether this means expanding programs, building reserves, or covering overhead expenses that are so difficult to fund through grants.
SEA: What’s a healthy ratio of contributed vs earned revenue?
Diana Peacock: It’s impossible to state a percentage that is “healthy” for all organizations. CWV’s research shows that revenue diversification and predictability are two of the most important drivers of nonprofit sustainability. For some organizations, earned income is their most reliable source of predictable unrestricted revenue; for other organizations, consistent funding is easier to secure through contributed sources. While a particular ratio of contributed to earned is not right for every organization, diversified revenue that has a high percentage of predictability is most sustainable.
SEA: Will implementing revenue streams decrease a nonprofit’s chances of getting funding?
Diana Peacock: This concern is one that we hear frequently, but one that we have rarely, if ever, seen come to fruition. The best way to mitigate this risk is through very open communication and frank dialogue with funders that may have these concerns. We find that clients that educate skeptical funders on the reasons for and long-term benefits of earned income strategies often can secure additional funding to help implement them. In our experience, these are the organizations that are most innovative and continue to attract revenue anyway. Funders want to invest in those nonprofits that attain the best outcomes and are strong organizations – if earned incomes contributes to these results – funding is never usually an issue.
Diana Peacock: While the specific level of investment completely depends on the nature of the business venture that is being launched, I will say that the investment is not insignificant! This investment starts by devoting sufficient staff time to planning for the venture – testing the feasibility of different venture concepts, developing a research-based business plan with financial projections (which will define the actual financial investment required), and then identifying a comprehensive implementation plan with specific milestones and ownership of tasks. In addition, it is critical for leadership to invest time to build buy-in from key stakeholders such as the Board, staff, clients, funders, etc. Then, once the venture is launched, our research demonstrates the importance of having a dedicated leader for the venture – an individual that sometimes must be hired from outside the nonprofit that commands a competitive salary and brings necessary skill-sets to the venture (e.g., experience with sales or growing/scaling small businesses).
One of the hardest aspects of this process is to recognize that at any point along the way, the research may demonstrate that the concept is not a viable opportunity. Organizations must acknowledge that the time and money spent to get to the “no go” answer was not a waste, but a sound investment in the organization’s future in defining what not to pursue.
SEA: How can a nonprofit go about getting the initial capital for this?
Diana Peacock: In 2008 a National Field Study of Social Enterprise was conducted by the Center for the Advancement of Social Entrepreneurship at Duke University, CWV and SEA, with support from REDF. The study, which was completed by more than seven hundred nonprofits across the country, showed the top four sources of start-up funding to be foundation grants, individual donations, general operating funds and organizational reserves.
To add some color to those findings, CWV finds that these are typically foundations and individual donors/investors that already have some relationship to the nonprofit. They are donors that already believe in the organizational mission and appreciate the step that the nonprofit is taking to strengthen its own financial sustainability by launching earned income strategies.
SEA: What are the more common types of industries that work for earned revenue strategies?
Diana Peacock: The same National Field Study revealed that the three most common mission areas for organizations launching social enterprises are workforce development, housing, and community & economic development organizations. The most common types of social enterprise ventures are education & training, retail/thrift shop, consulting services, food/catering services, and art ventures. That said, CWV works with nonprofits with diverse types of missions and earned income ventures – from those that are common to those that are quite novel.
If you're a nonprofit a chief executive or senior staff member at a nonprofit, join Diana on Wednesday February 9th for a live Webinar on Developing Earned Income Revenue Streams.
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