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Social Finance Week: We're in business!

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As part of Social Finance Week, CharityVillage talked with Derek Gent, the executive director of the Vancity Community Foundation, a public foundation with more than 100 donor-advised funds associated with the Vancity Credit Union. For more than 20 years, the Foundation has modeled a progressive approach to investment, making grants and directly delivering collaborative programs focused on sustainable development.

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CharityVillage: Foundations often give funds to business initiatives, but tell me why a regular nonprofit should consider doing likewise.

Derek Gent: Most organizations need to look at several strategies to diversify their revenue streams in order to successfully serve their mandate. Very few organizations can survive these days on a single source of income. The decision to invest in a business activity is often initially driven by a need for money – the more successful ones look at the decision a bit more strategically than this.

CV: Would you suggest a nonprofit only get involved with a business when it's a perfect fit or how does a nonprofit board decide to invest in an initiative?

DG: There needs to be some clear connection between the mission of organization and any business activities they choose to support. There are very few business activities out there that just kick off excess cash and the effort required to support this type of enterprise strategy should ultimately build on the capacity and strengths that already exist.

There’s also a risk of mission drift when a nonprofit starts making money (or starts losing money) that may cause them to make decisions they might not otherwise make to meet business objectives rather than following the organizational purpose. Ideally, they can more directly tie into the passion of the people behind an organization, and there can be very positive feedback loops where business success leads to more impact in the community, which leads to more engaged support and more success.

Strong boards will look at their organization’s strengths and capacity, clearly articulate the impacts and performance measures they seek to achieve, and then go through an iterative process of putting together a development path. A good matrix (with very honest self assessments) can help boards to make decisions. They also need to know when to stop.

A number of success stories we’ve seen involve a smaller investment in decent feasibility studies (or even pre-feasibility work) and more detailed planning whereby they may come to the conclusion that a particular opportunity is a bad idea.

CV: What's the risk for a charity? What are the benefits?

DG: There are many risks associated with investing in a business, not the least of which is that they could lose the money. This is generally money that might otherwise be spent on directly achieving social, environmental or cultural outcomes, so they better be pretty sure that this investment represents a better strategy for achieving the impact. A revenue-generating business often takes more time to get to the impact, but over the longer term, this can represent an effective way to achieve even more, and to rely less on the traditional sources of funding. Savvy organizations build their internal capacity in the process and often are better positioned to effectively deliver services and grow the organization, so they may end up securing more traditional sources (and interesting new partners) on this path.

A number of social enterprises I’ve connected with have attracted interesting new board members who were attracted to the approach and now contribute as very effective volunteers and supporters. The process of investing in a business also often enhances the organization’s approach to risk, becoming more entrepreneurial, and seeking new opportunities they may not have otherwise pursued. Some of the nonprofit organizations we’ve worked with to start or invest in a business have subsequently purchased real estate, diversified operations and are building stronger balance sheets, in a sector that has a tradition of spending everything they get each year rather than truly investing in a (broadly defined) set of assets.

CV: Have you ever encountered any degree of resistance from board members or other stakeholders in this kind of investment?

DG: Definitely. This is not necessarily a bad thing, as I alluded to in the discussion around deciding not to proceed with certain initiatives. But resistance from the board is often what stifles many organizations in terms of moving in this direction toward social enterprise. If the board doesn’t have the tools and willingness to take a good look at the risks and the potential returns, and isn’t ready to take a decision when the time comes, there may need to be changes in the governance group or approach. I’m sometimes astounded by the behaviour of some directors, who in their day jobs are highly effective risk takers and entrepreneurs, but when they volunteer for a nonprofit, they go into a paternalistic and protective mode that only serves to protect the traditional model and resist any change. Good governance and strong management are important prerequisites to success in nonprofit enterprise models.

CV: Do you see this primarily as a smart financial decision, a good partnership or what?

DG: It depends on the revenue model, the control systems in place, the various roles and expectations of the people and organizations involved. It should definitely be seen in some sense as a financial decision, with the appropriate analysis undertaken, but still likely involving some element of risk taking. Risk and return are not necessarily always calculated in purely financial terms.

In terms of any partnership, it’s important to gauge the power dynamics involved. There are few true partnerships where each party is equal. Determining what each partner brings to the relationship, what benefits are achieved by working together, who bears what risks and how they will resolve disputes or part ways are all elements that should be clarified. They also need to consider what to do with the profits if things go well. This last one often isn’t thought through very well. It’s a good problem, but has undone a number of organizations.

CV: Have you ever seen this "blow up" - where the investment is lost? What's to be learned?

DG: Yes, and sometimes with fairly serious consequences. It is important to recognize when the costs may be measured in terms of negative impacts on the lives of vulnerable individuals. This does not mean we shouldn’t take risks, but steps should be taken to understand, mitigate and make everyone aware of what the risks are so that the potential downside is measured and managed. I’ve learned that the potential for the upside (in terms of improving individual lives, building organizational sustainability, developing new models) sometimes warrants the risk, and people are often willing to take these risks with eyes wide open. Sometimes a failed venture is also the first iteration of a new strategy for success. There’s almost always a lesson to be learned from the ones that didn’t work out. Tough decisions need to be made and even the most successful enterprises are going to go through peaks and subsequent troughs from which they may not emerge (or may need to invest more horsepower).

One of the most interesting things I’ve learned investing in social enterprises or partnerships between business and nonprofits is that some measure of dedicated community support is a very effective proxy. When a strong group within a community is behind an initiative, they provide the support that will raise it from the trough and a measure as to whether the impact is valuable and worthwhile.

Susan Fish is a writer/editor at Storywell, a company that helps individuals and organization tell their story well. She has written for the nonprofit sector for almost two decades and loves a good story.

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