There is an article in Forbes this month that bothered me. Carrie Rich, co-founder and CEO of The Global Good Fund, argues that more nonprofits should move from a “donor-driven organization” to a “revenue-producing social enterprise.” Instead of “relying on donor funding” more organizations should “create revenue-producing services.” In essence she is encouraging more nonprofits to figure out how to sell their services.
The problem with her argument, though, is that it encourages nonprofits to think one-dimensionally about funding sources instead of developing an overall financial strategy that may or may not include earned income.
Rich’s argument is that earned income, or what she calls “revenue-producing social enterprise” is a more sustainable and impactful way to create social change. She goes on to list all sorts of reasons (10 actually) that revenue generation (or earned income) is better than contributed income. These reasons include that revenue generation allows nonprofits to be “more responsive to change,” “attract employees who seek growth,” “accelerate growth and impact,” “become more financially sustainable and mature,” and the list goes on.
Rich is echoing a repeated dichotomy in the social change space between traditional, broken nonprofit approaches, and new, more sustainable and impactful social entrepreneurship approaches. Her line of argument stems from a distaste for fundraising done badly.
Believe me, I get it. Fundraising is broken. But just because traditional fundraising is flawed doesn’t mean we should eschew all contributed income.Yes there is deep dysfunction within the nonprofit sector – I talk about it all the time. But the answer is not to simply dismiss the sector and all of its trappings (and revenue sources).
Let’s remember that a nonprofit organization is often created to provide a public good that is not offered by the market. In other words, nonprofits are selling what someone is unable to purchase.
Thus, nonprofits typically have two customers:
- Those who benefit from the services (“Clients”), and
- Those who buy the services (“Donors”)
When social change organizations are able to conflate the two – when the client becomes the buyer – a social enterprise is born. And while that is great, it is rarely the case. Therefore, market-based solutions will never provide all the social change we need.
Every social change organization must analyze their overall strategy and develop a financial model that best delivers on that strategy. That financial model may have earned income elements, contributed income (individual, corporate and foundation grants) elements, government funding or, most likely, some combination of all of these. And every nonprofit should at least analyze whether earned income is right for their financial model. But social enterprise will never be right for all nonprofits, or even a majority of them.
Instead of completely throwing out “traditional charity models,” let’s make them better. Rich argues that one of the many reasons earned income is better is that it allows organizations to “afford the best technologies to help them succeed.” If social change organizations need more capital investments for technology (which they definitely do) then let’s make capacity capital ubiquitous in the sector. But let’s not erroneously assume that more earned income equates to more capital investment.
Let’s move past these social enterprise vs. charity debates and instead focus on helping social change organizations develop smart, sustainable financial engines that include the right revenue (and capital) mix.
Photo Credit: Yoel Ben-Avraham
Totally agree with you on this one Nell. As someone with a fairly strong earned income stream which reaches as much as 25% of revenue some years I can say from our perspective that the net contribution is lower than every other form of revenue, even our events do better. Earned income can be a healthy way to achieve program growth but it most certainly is not something that everyone should do, especially if the expectation is that it will help build cash.
Thanks Andrew. And you raise an equally important point which is that nonprofit leaders should always evaluate their various revenue streams to determine the effectiveness and profitability of each so that they can allocate resources in their financial model effectively.
Nell, you are so right that each nonprofit must develop a fundraising plan for their organization and community. We are fortunate that our social enterprise is made up of three resale shops that provide over 17% of the organizations annual budget, but, we have never lost sight of the importance of our individual donors that give to our annual campaign, our corporate supporters for the special events and the grants that provide dollars for our crisis clients. It takes all different types of funding to sustain a healthy nonprofit!
Well said, Glenda. Thanks!
I am recent follower of SV’s blog posts and greatly appreciate your perspective and willingness to ask some of the harder questions regarding nonprofit organizational development. I was excited to see this topic appear in your forum, but admittedly I was surprised and somewhat disappointed by the general sentiment you expressed regarding social enterprise revenue streams. I fully agree that social enterprise is not the only answer to fundraising woes for every organization, and that simply eschewing current systems, however failing, is not an intelligent solution either. However, I don’t think that’s what Carrie Rich was saying really. I have been consulting grassroots nonprofit agencies in the Portland area for over a decade now and, time and again, I find most nonprofit leaders falsely believe that foundation and/or government grants are the big answers. When other leaders say they are willing to put energy into diversifying their fundraising streams, including looking into social enterprise/earned income opportunities, it gives me real hope. Ultimately I want to continue encouraging organizations to look at all of the options and incorporate those best suited to their specific capacity needs and program services. I am an advocate for social enterprise revenue streams because they are sparked by and often fuel innovation, and, in my opinion, the best way to combat a failed system is to innovate a new one.
Rebecca, thank you for your very thoughtful response. I think we are both on the same page, actually. Just as I don’t think social enterprise is the silver bullet for nonprofits, neither is foundation or government funding, and often nonprofits are overly dependent on one or both of those revenue streams.
The answer is for each nonprofit to create a strategic financial engine for their organization that is made up of the best mix of revenue and capital for them. If that includes earned income, that’s great, and if it includes philanthropic or government income that’s great too. It just needs to be thoughtful, strategic, and ultimately sustainable.
To your point about innovation, however, I don’t know that social enterprise is always innovative. I have seen plenty of nonprofits develop social enterprises that were far from innovative. For me, true innovation is when social change organizations think about everything (financial models, organizational strategies, leadership, service delivery) in new ways.