Principles Entrepreneurship by aye16554


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									                           ENTREPRENEURIAL spirit

Eight Basic Principles for Nonprofit
These lessons from the pioneers in the field could save you many heartaches.

        fter hovering around the                                                     on the kindness of strangers—and
         edges of the nonprofit sector
          for years, social entrepre-
                                              Innovation can                         that’s a risk social entrepreneurs are
                                                                                     unwilling to take. They’re passionate-
           neurship has moved into the        take a nonprofit                       ly committed to their mission, but
           mainstream. Venture phi-                                                  they’re just as passionately commit-
lanthropists, traditional grantmakers,          only so far.                         ted to becoming financially self-suffi-
boards of directors, nonprofit entre-                                                cient—in order to do more mission!
preneurs, consultants, and academics                                                 And as traditional sources of funding
are all rushing to the table—many            First, they fail to perceive the dif-   became less available during the
without the tools they need.             ference between “innovation” (doing         1980s and 1990s, more and more non-
     They can find those tools by        something new) and “entrepreneur-           profits discovered the importance of
turning to the experiences of the pio-   ship” (doing something that makes           paying their own way—and became
neers in the field—nonprofit veterans    money). “Social entrepreneurship”           genuine social entrepreneurs.
who’ve been quietly making mistakes      becomes a convenient label for
and learning from them for decades.
Here are eight basic principles that
                                         almost any new approach that has a
                                         social outcome. But it’s one thing to
                                                                                     2 Beall.player or don’t play
have emerged from those travails as      design, develop, and implement a                Peter Drucker began preaching a
articles of faith:                       new program—and quite another to            new gospel to nonprofits in the early
                                         sustain it without depending on phi-        1990s that has helped social entrepre-
1 Earned income is
                                         lanthropy and government subsidy.
                                             And that leads to the second
                                                                                     neurs sharpen their organizational
                                                                                     focus and expand their impact.
     The nonprofit sector has tradi-     problem. Those who confuse innova-              When Jack Welch took over as
tionally been driven by a reliance on    tion and entrepreneurship are also          CEO at General Electric in 1981, he
philanthropy, voluntarism, and gov-      prone to forget the most important          asked Drucker to tell him the single
ernment subsidy. Earned income has       difference between earned revenue           most important thing he could do to
been viewed as something extra.          and donated revenue. One can lead to        improve the company. Drucker’s
     Social entrepreneurs have turned    sustainability and self-determination.      answer was simple: If your products
that formula on its head: On the rev-    The other cannot.                           or services are not number one or
enue side, earned income has                 Innovation is a precious                number two in the market, kill them.
                                                                                                                                                    July • August 2001

become the primary goal. Philan-         resource, and it served as the primary      In other words, stop trying to be all
thropy, voluntarism, and government      engine of nonprofit growth through          things to all people. Since then,
subsidy are welcome, but not central.    the 1970s and 1980s. But innovation
     This is a tectonic shift, and not   can take a nonprofit only so far.           Nonprofit World • Volume 19, Number 4 July/August 2001
well understood or accepted by many      Without self-generated revenue, non-        Published by the Society for Nonprofit Organizations
                                                                                     6314 Odana Road, Suite 1, Madison, WI 53719 • (608) 274-9777
in the sector, for two reasons.          profits will remain forever dependent

                                                                            because they think it means starting      rate staff, separate compensation
                                         Stop trying                        a business venture, something few         policies, and as much independence
                                                                            know how to do.                           as possible.
                                      to be all things to                        But creating a business isn’t the
                                          all people.                       only way to be successful as a social
                                                                            entrepreneur. In fact, the most fertile
                                                                                                                      4 Unrelatedare dangerous.
                                                                            ground for most nonprofits is some-            Most nonprofit entrepreneurs
                                  Drucker has repeatedly urged non-         thing called “earned income strate-       have discontinued the attempt to
                                  profits to do the same. He calls it       gies,” which have nothing to do with      mount businesses unrelated to their
                                  “organized abandonment.”                  starting a business venture.              mission. Twice (in the late 1970s and
                                       Drucker’s advice runs against the         The two approaches differ sub-       mid-1980s), nonprofits chased the
                                  grain of the traditional nonprofit men-   stantially in terms of purpose, expec-    chimera of a cash cow—the apoc-
                                  tality, but most nonprofit executives     tations, and structure:                   ryphal unrelated business venture
                                  will admit that they’re spread too             Earned income strategies:            that would operate almost as a per-
                                  thin, that they’re trying to do too       Experience has shown that almost          petual motion machine, without
                                  many things for too many people, and      every nonprofit has opportunities for     much need for supervision, churning
                                  that they’re therefore unable to give     earned income lying fallow within its     out floods of cash to fund the non-
                                  any of their clients the attention they   existing programs. The opportunities      profit’s mission.
                                  deserve. Organized abandonment            may be tiny or they may be huge, but           Those nonprofits learned a
                                  gives them a way out of the morass.       exploiting them can have a signifi-       painful lesson: Attempting to start an
                                       The process can be agonizing. It     cant cumulative impact. By turning        unrelated business venture means
                                  isn’t easy to kill programs, especially   inward and searching for pockets of       they were hit with a double whammy.
                                  if they’re beloved by board members       opportunities, nonprofits can register    They were trying to start a business
                                  or funders. And there is an important     impressive gains, often raising their     (which they probably didn’t know
                                  caveat: Being a social entrepreneur       percentage of revenue from earned         how to do), and they were trying to
                                  does not mean eliminating a program       income by as much as 15% within one       start it in an arena they knew nothing
                                  just because it loses money. If a non-    to three years.                           about! At least by eliminating the sec-
                                  profit is the best or the only provider        Business ventures: Once a non-       ond aspect, they could improve their
                                  of a program that’s critically needed,    profit has gained experience with         odds.
                                  it has an obligation to continue the      earned income strategies, it may               The business ventures being
                                  program—and a managerial chal-            want to consider launching a formal       started by nonprofits today are there-
                                  lenge to find other sources of rev-       business venture—but the goals            fore emerging directly from their
                                  enue to cover the cost.                   would be much more ambitious and          core competencies and basic
                                       Fundamentally, organized aban-       the strategy completely different. The    strengths—from their missions, the
                                  donment relies on a nonprofit’s abili-    only reason for a nonprofit to start a    programs they have already perfect-
                                  ty to be honest with itself—exceed-       business venture is to exploit a spe-     ed, and the assets they have devel-
                                  ingly difficult for any organization,     cific opportunity for significant         oped in the process. This also avoids
                                  nonprofit or otherwise. But the           growth and profitability—a substan-       trouble with the IRS, since their ven-
                                  results have been worth it, and the       tial difference from earned income        tures are mission-related and no
                                  ultimate winners have been the            strategies, which are designed prima-     threat to their tax-exempt status.
                                  clients. Social entrepreneurs have        rily to cover more of a program’s              Instead of unrelated businesses,
                                  discovered that reducing the number       costs, without any real expectation of    nonprofits have been concentrating
                                  of programs they offer actually           making a profit or even reaching a        on two types of ventures:
Nonprofit World, Vol. 19, No. 4

                                  enables them to serve more people—        break-even point.                              Affirmative businesses. John
                                  because they have the time and                 The pioneers in the field have       DuRand of Minnesota Diversified
                                  resources to expand their efforts.        also discovered that the chances for      Industries (MDI) invented the con-
                                                                            success will be dramatically              cept of an “affirmative business” in
                                             a business
                                  3 Startingsuccess. only
                                    venture is not the
                                    path to
                                                                            increased if the organization creates
                                                                            a “skunkworks”—a completely sepa-
                                                                                                                      the early 1970s, and it has since
                                                                                                                      become the most common form of
                                                                            rate entity insulated as much as pos-     social enterprise. Unlike a sheltered
                                      Many nonprofit board members          sible from the day-to-day operations      workshop, an affirmative business is
                                  and executives are daunted by the         of the parent organization. That          created specifically to provide per-
                                  prospect of social entrepreneurship       means having a separate board, sepa-      manent jobs, competitive wages,

                                          reach their goals. According to an         turn prototypes into going concerns,
       The greatest                       MIT study, significant revenue for         then they get bored. And that’s when
                                          most companies doesn’t begin to            the professional manager arrives to
        danger is                         flow until the seventh year of exis-       secure the future. They are the
                                          tence. And by the sixth year, the          trustees, the ones who install the sys-
          under-                          nature of the business has typically       tems and other parts of the infra-
      capitalization.                     changed completely.
                                              In addition, social entrepreneurs
                                                                                     structure that make sure the going
                                                                                     concern keeps going.
                                          are as exposed to the vagaries of the          Unfortunately, in the nonprofit
career opportunities, and even own-       market as any other business, and          sector, often because resources are
ership for people who are disadvan-       that means the greatest danger is          scarce, organizations try to shoehorn
taged, whether it be mentally, physi-     under-capitalization. Profitability is     people into positions where they
cally, economically, or educationally.    no protection: The crucial element is      don’t fit, and many of the problems
Employees have included people            cash flow. More than one profitable        nonprofits have when they begin
who are developmentally disabled,         company has failed because it didn’t       adopting entrepreneurial strategies
chronically mentally ill, recovering      have the money it needed at the time       arise from having an innovator trying
substance abusers, former convicts,       it was needed.                             to do an entrepreneur’s job or a pro-
visually impaired, physically chal-           The rubric here is simple:             fessional manager trying to be an
lenged, members of inner-city minori-     Nonprofits must invest in their busi-      innovator, and so on.
ty groups, and others. Over the years,    ness ventures. If they cling to a cost
DuRand took MDI from an initial
investment of $100 and seven
                                          mentality, their chances for success
                                          are minimal.                               7 The “nonprofit” culture
                                                                                       gets in the way.
employees to a $68 million business                                                       What is a “culture”? In the non-
                                               Recognize the differences
employing more than 600 people who
were developmentally disabled.            6    between innovators,
                                               entrepreneurs, and
                                                                                     profit world, it is usually a collection
                                                                                     of unspoken compacts that tell us
Recently, dozens of other nonprofits                                                 who we are, who we serve, why we
have followed his example.                     professional managers.                serve them, and how. We rarely pause
     Mission-driven product or                  Perhaps the most important les-      long enough to examine the tenets of
service businesses. Many nonprof-         son learned by the pioneers in the         our cultures, but new employees
its have started businesses that deliv-   field has been one that strikes to the     absorb them almost by osmosis.
er mission-driven products or servic-     very heart of their self-perceptions.      Within weeks of their arrival, they
es directly to clients, although          So often, nonprofits discover (too         understand what it is about this
payment may come from a third             late) that their entrepreneurial efforts   organization that makes it different
party such as a government agency         are doomed because they’re being           from that organization.
or entitlement program or from a pri-     led by people with the wrong skills.            But culture eats change for
vate insurance company. Unlike affir-           Regardless of whether a nonprof-     breakfast, and any nonprofit that
mative businesses, few of these busi-     it is attempting to engage in a variety    hopes to become entrepreneurial,
nesses actually employ the people         of earned income strategies or is try-     regardless of whether it’s starting a
they serve. Examples include assis-       ing to launch a business venture, it’s     business venture or pursuing earned
tive devices for people who are phys-     important to understand the differ-        income opportunities within its pro-
ically challenged, personal care serv-    ences between three types of leaders.      grams, must undergo a radical set of
ices to help elderly people at home,            Innovators, entrepreneurs, and       changes. Here are five of the most
interactive instructional programs for    professional managers are all needed       important ones:
potential high school dropouts, semi-     in the evolution of a program or an             Be willing to take risks. There
nars for couples contemplating            organization, but at different times.      is a myth that entrepreneurs love to
divorce, hospice care for terminally      Rarely does an individual possess          take risks. Not true. But they will
ill patients, and many, many others.      more than one of the three skills.         take risks. That’s part of what makes
                                                                                                                                July • August 2001

                                                Innovators are the dreamers.         them entrepreneurs. Unfortunately,
     Be patient–and don’t run
5    out of money.
                                          They create the prototypes, work out
                                          the kinks—and then get bored, anx-
                                                                                     there’s no more risk-averse entity
                                                                                     than a nonprofit board of directors.
    Social entrepreneurs are notori-      ious to return to what they do best,       To a degree, this is as it should be:
ous for underestimating the amount        which is inventing more prototypes.        The board is the steward of scarce
of time and money they’ll need to         Entrepreneurs are the builders. They       resources. Too often, however, the

                                                                              strategies in order to have a 3-5% net            Muehrcke, Jill, Are You Sitting on a Gold
                                      There are a lot of                      profit margin at the end of the year—           Mine? Fundraising Self-Assessment Guide.
                                                                                                                                Muehrcke, Jill, ed., Enterprise, Leadership
                                                                              their definition of success. Non-
                                      wannabe social                          profits, however, are usually gleeful if
                                                                                                                                Skloot, Edward, “Seeking Earned Income
                                                                              they can cover their direct costs, a
                                       entrepreneurs.                         reaction that bars them forever from
                                                                                                                              Ventures,” Nonprofit World, Vol. 7, No. 4.
                                                                                                                                Wilson, Leslie, “A Study in Nonprofit
                                                                              achieving any significant progress              Entrepreneurship,” Nonprofit World, Vol. 6,
                                                                                                                              No. 6.
                                  result is a mentality that shies away       financially. If nonprofits are going to
                                  from anything new until success can         be serious about financial self-suffi-            These resources are available from the
                                  be guaranteed, and nothing is more          ciency, they must adopt more aggres-            Society’s Resource Center, 608-274-9777, Ext.
                                  antithetical to entrepreneurship.           sive pricing policies. Doing so may be          221,
                                  Nonprofit entrepreneurs enter the           difficult in the short run, but, over
                                  game knowing that three-quarters of         time, it’s the only sure way to be cer-
                                  what they try will fail, but they have      tain all of the organization’s direct
                                  the personal and institutional courage      and indirect costs are covered.
                                  to make mistakes, learn from the
                                  experience, and start all over again.
                                  As Ben Cohen, the founder of Ben &          8 Remember the Noah
                                  Jerry’s, is fond of saying, “To stumble          The final lesson learned by the
                                  is not to fall. It’s just a way of moving   pioneers in the field has been the
                                  ahead more quickly!”                        importance of making a commitment.
                                       Make tough choices about               There are a lot of wannabe social
                                  staff members. Some of a nonprof-           entrepreneurs in the world, who talk
                                  it’s longest-serving, most loyal            and plan and talk and plan and talk
                                  staffers won’t understand the princi-       and plan—but never do anything! The
                                  ples of entrepreneurship, or won’t          courage to act is in distressingly
                                  agree with them, or won’t have the          short supply.
                                  skills to live in an entrepreneurial             True, there aren’t any guaran-
                                                                                                                              Jerr Boschee has spent the past 20 years as
                                  world; compassionate out-placement          tees—except for one. If you always
                                                                                                                              an advisor to social entrepreneurs in the
                                  is the only solution for both them and      do what you’ve always done, you’ll              United States and abroad. He is the founder
                                  the organization.                           always get what you’ve already got.             and executive director of the Institute for
                                       Relinquish control. Too many           As Wayne Gretzky, the Hall of Fame              Social Entrepreneurs, 9560 Dogwood Circle,
                                  layers of approval weigh down an            hockey player, has often pointed out,           Eden Prairie, Minnesota 55347-3028,
                                  organization’s ability to move quick-       “I always missed a hundred per cent   , He is a
                                                                              of the shots I never took.”                     member of the affiliate faculty at Virginia
                                  ly–a hallmark of entrepreneurship,
                                                                                                                              Commonwealth University, the adjunct fac-
                                  where opportunities appear on the                So the pioneers have learned to
                                                                                                                              ulty at the School for Social Entrepreneurs
                                  radar screen for an instant and then        live by the Noah Principle: No more             (London, England), the distance learning
                                  blink out of existence. Changing a          prizes for predicting rain.                     faculty at the Learning Institute for
                                  nonprofit’s culture means eliminating            You only get a prize if you build          Nonprofit Organizations (a subsidiary of
                                  some of those layers.                       an ark. s                                       the Society for Nonprofit Organizations),
                                       Emphasize market pull.                                                                 and the faculty for the American Symphony
                                                                                           Selected Resources
                                                                                                                              Orchestra League Management Academy.
                                  Changing its culture also means               Boschee, Jerr, Social Entrepreneurship        His recent publications include Merging
                                  aggressively adopting the type of           Videotape.
Nonprofit World, Vol. 19, No. 4

                                                                                                                              Mission and Money: A Board Member’s Guide
                                  “customer focus” mentality that               Brinckerhoff, Peter, “Are You Financially
                                                                                                                              to Social Entrepreneurship, a monograph
                                  eludes most traditional nonprofits.         Empowered? A Quiz,” Nonprofit World, Vol.
                                                                                                                              published in 1998 by the National Center
                                                                              15, No. 1.
                                  Regardless of their protestations to          Cohen, Jan, “You’ve Got to Know When to       for Nonprofit Boards, and (as co-editor) A
                                  the contrary, nonprofit planners still      Hold ’Em, Know When to Fold ’Em,”               Reader in Social Enterprise, a collection of
                                  begin too often with the needs of           Nonprofit World, Vol. 17, No. 1.                essays by 20 leaders in the field, published
                                  their own organization, not with the          Emerson, Jed, “Famous Last Words of           last year. The Social Enterprise Sourcebook,
                                                                              Failed Nonprofit Entrepreneurs,” Nonprofit      to be published this fall, will contain pro-
                                  people they serve.                                                                          files written by Mr. Boschee about the busi-
                                                                              World, Vol. 15, No. 4.
                                       Price more aggressively. For-            Lauer, Larry, “Using Your Organization’s      ness ventures started by 20 nonprofits. This
                                  profit service companies build a 50%        Culture to Build Productivity and               article is published with the permission of
                                  gross profit margin into their pricing      Reputation,” Nonprofit World, Vol. 11, No. 6.   the Institute for Social Entrepreneurs.


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