November 2001

JCHS

Neighborhood Reinvestment Corporation was established by an Act of Congress in 1978 (Public Law

95-557). A primary objective of the Corporation is to increase the capacity of local community-based

organizations to revitalize their communities, particularly by expanding and improving housing

opportunities.

nonprofit partnerships that include business leaders and government officials. All together they make up

The Joint Center for Housing Studies analyzes the ways in which housing policy and practices are shaped

by economic and demographic trends and provides leaders in government, business and the nonprofit

sector with knowledge and tools for formulating effective policies and strategies.

Established in 1959, the Joint Center is a collaborative unit affiliated with the Harvard Design School and

the Kennedy School of Government. The Center’s programs of research, education and public outreach

inform debate on critical housing issues and illuminate the role of housing in shaping communities. The

Policy Advisory Board, a diverse group of business leaders in the housing sector, provides support and

guidance for the Center and its activities. The Joint Center also receives input from its Faculty

Committee, which draws on the expertise of a university-wide group of scholars.

____________________________________

This paper was written under the support of the Neighborhood Reinvestment Corporation’s Emerging

Leaders in Community and Economic Development Fellowship, which provides opportunities for highly

qualified professional students at Harvard University to research and publish applied analytical projects of

interest to the community-development field.

____________________________________

Any opinions expressed are those of the author and not those of the Joint Center for Housing Studies of

Harvard University or of any of the persons or organizations providing support to the Joint Center for

Housing Studies, including Neighborhood Reinvestment Corporation. The findings and conclusions of

this report are solely the responsibility of the author.

This analysis was performed with the support of the Neighborhood Reinvestment Corporation. The

Corporation has full rights to use and distribute this document.

Copyright © 2001 Ellen Stiefvater. All rights reserved.

1033 Massachusetts Avenue

Cambridge, MA 02138

(617) 495-7908

1325 G Street NW, Suite 800

Washington, DC 20005

(202) 220-2300

www.nw.org

Mel Martinez, Secretary, U.S. Department of Housing and Urban Development

John Reich, Director, Federal Deposit Insurance Corporation

Yolanda T. Wheat, Board Member, National Credit Union Administration

John D. Hawke, Jr., Comptroller of the Currency, U.S. Department of the Treasury

This paper examines social entrepreneurship from a community-development perspective. The

target audience is community-development nonprofit organizations. The paper begins by

contextualizing social entrepreneurship in community development and creating an analytical

framework in which to think about efforts of organizations to integrate entrepreneurial and

businesslike thinking. The paper presents key findings regarding both earned-income activities

and strategic alliances as options for these organizations, as well as 10 key issues that arose as

factors that impact their successful implementation. Information was gathered through a

literature review, 29 interviews of practitioners, policymakers and academics and a survey of 59

community-development nonprofit organizations.

ABSTRACT ............................................................................................................................................................... iii

EXECUTIVE SUMMARY...................................................................................................................................... 1

PREFACE................................................................................................................................................................... 3

I. CONTEXT.......................................................................................................................................................... 4

II. ANALYTICAL FRAMEWORK...................................................................................................................... 7

A. Strategies ....................................................................................................................................................... 7

"Tightening Up".......................................................................................................................................... 7

Collaboration................................................................................................................................................ 8

Growth.......................................................................................................................................................... 9

Diversification............................................................................................................................................ 10

Consolidation............................................................................................................................................. 10

B. Methods ...................................................................................................................................................... 11

III. EARNED-INCOME ACTIVITIES.............................................................................................................. 12

Key Observations Regarding Earned Income Activities............................................................................. 12

1. Earned-income activities have a history of mixed success in community development......... 12

2. "For profit" does not necessarily mean that an activity generates income. .............................. 13

3. Earned-income and revenue-generating activities require constant balancing of

"mission and money."........................................................................................................................ 14

4. Community-development nonprofits cannot maintain values and make money in

all lines of business. ............................................................................................................................ 17

5. Market-based activities involve some degree of unavoidable risk. ............................................. 18

IV. STRATEGIC ALLIANCES........................................................................................................................... 19

Observations Regarding Strategic Alliances .................................................................................................. 19

1. There is spectrum of types of strategic alliances............................................................................ 19

2. There is great potential for community-development organizations to build their

existing relationships with the private sector into more strategic alliances. .............................. 20

3. Community-development nonprofits have assets that are valuable to a variety of

for-profit companies. ......................................................................................................................... 22

4. Marketing and personal relationships are crucial to success........................................................ 24

5. Not every alliance with a for-profit is strategic.............................................................................. 26

V. IMPLEMENTATION: THE REAL TEST................................................................................................. 28

1. Maturity of the Organization................................................................................................................... 28

2. Policy and Regulatory Requirements....................................................................................................... 29

3. Operating Reserves and Capital............................................................................................................... 29

4. Human Resources ..................................................................................................................................... 30

5. Objective Analysis..................................................................................................................................... 30

6. Leadership and Board............................................................................................................................... 31

7. Understanding of Market Forces............................................................................................................. 31

8. Project-Based Cost Accounting................................................................................................................32

9. Sticking Close to Core Competencies .....................................................................................................32

10. "Being Ahead of the Curve".....................................................................................................................33

VI. CONCLUDING REFLECTIONS................................................................................................................35

1. Improving the Dialogue............................................................................................................................35

2. Sharing the Responsibility .........................................................................................................................35

3. Customizing Social Entrepreneurship to Fit the Organizations .........................................................37

4. Realizing the Limits of Nonprofit Self-Sufficiency...............................................................................37

SELECTED SOURCES.........................................................................................................................................38

Additional Recommended Resources for Social Entrepreneurship and

Community Development........................................................................................................................39

APPENDIX A: GLOSSARY.................................................................................................................................40

APPENDIX B: EARNED-INCOME ACTIVITIES AND STRATEGIC ALLIANCES: A SURVEY

OF COMMUNITY-DEVELOPMENT NONPROFITS.................................................................................42

APPENDIX C: ILLUSTRATION OF WORKING TOWARDS INCREASED SOCIAL IMPACT....44

APPENDIX D: CHARACTERISTICS OF EFFECTIVE NONPROFITS.................................................45

ACKNOWLEDGEMENTS..................................................................................................................................46

In an attempt to unbundle the complicated web of business and entrepreneurship ideas and

jargon that nonprofits currently face, this paper identifies five strategies through which a nonprofit

might apply tools from the private sector. The first, "tightening up," is a catch-all for

measures a nonprofit might take to increase its fiscal and operational discipline and level of

accountability to stakeholders. These measures have been extensively covered in both business

and nonprofit literature and include changes in accounting, human resources, planning and

performance measurement. The remaining four strategies, collaboration, growth, diversification

and consolidation, are ways in which nonprofits might apply entrepreneurial thinking, which is

often identified with the private sector but is in reality abundant in both sectors. Each general

strategy represents a way of better carrying out an organization’s mission, which, in essence, is

the business of a social entrepreneur.

Using this framework of five strategies as a backdrop, the paper then focuses on earned-income

activities and strategic alliances, both currently popular methods for putting some of those

strategies into practice.

Key observations regarding earned income activities are:

1. Earned-income activities have a history of mixed success in community development.

2. "For profit" does not necessarily mean that an activity generates income.

3. Earned-income and revenue-generating activities require constant balancing of "mission

and money."

4. Community-development nonprofits cannot maintain values and make money in all lines

of business.

5. Market-based activities involve some degree of unavoidable risk.

Key observations regarding strategic alliances are:

1. There is a spectrum of types of strategic alliances.

2. There is great potential for community-development organizations to build their existing

relationships with the private sector into more strategic alliances.

3. Community-development nonprofits have assets that are valuable to a variety of

for-profit companies.

4. Marketing and personal relationships are crucial to success.

5. Not every alliance with a for-profit is strategic.

A central theme that emerged from this research was the importance of the implementation

phase as the real testing ground for both earned-income activities and strategic alliances.

Therefore, a thorough implementation analysis emerged as an essential step before undertaking a

new alliance or activity.

Ten major issues were most frequently cited by interviewees as determinant of an organization’s

likelihood of success with either an earned-income activity or a strategic alliance:

1. maturity of the organization,

2. policy and regulatory requirements,

3. operating reserves and capital,

4. human resources,

5. objective analysis,

6. leadership and board,

7. project-based cost accounting,

8. understanding of market forces,

9. sticking to core competencies, and

10. "being ahead of the curve."

Four concluding reflections are offered regarding the future of social entrepreneurship in

community-development:

1. "Improving the Dialogue" discusses the frequent and inconsistent use of jargon that

makes these issues seem out of reach to many organizations. More careful definition of

terms and better use of everyday language for clearer communication would improve the

usefulness of this dialogue for practitioners.

2. "Sharing the Responsibility" raises the issue of who, besides nonprofits themselves, must

share in the work of both increasing the use of appropriate business discipline and

encouraging a spirit of entrepreneurialism in the field of community development.

3. "Customizing Social Entrepreneurship to Fit the Organization" suggests that because

community-development nonprofits vary so widely in their capacity, maturity, focus and

goals, entrepreneurial thinking and business discipline cannot be uniformly prescribed.

Organizations instead can take what is useful from this discussion to increase their social

impact.

4. "Realizing the Limits of Nonprofit Self-Sufficiency" questions the appropriateness and

feasibility of nonprofits becoming independent from traditional funding sources.

This paper is geared specifically toward nonprofit organizations involved in community development.

Many of these organizations began during or evolved from the community development

corporation (CDC) movement and the War on Poverty, but they vary widely in form, size,

maturity and focus. Many work toward the provision of affordable housing. Many focus, either

solely or in addition to housing, on economic or workforce development. Selected ideas will also

apply to a larger group of community-based organizations (CBOs). The common thread is that

the majority of these organizations center their work around economic inequalities and focus

their work on a specific population or geographic area.

The purpose of this discussion is to bring into the spotlight two ideas currently popular among

nonprofit organizations: earned-income activities and strategic alliances. There is currently great

pressure from funders, society and communities for nonprofits to become more self-sufficient

and less reliant on traditional funding sources. To do this, it is necessary to navigate through the

rhetoric of social entrepreneurship and business. "Businesslike" and "entrepreneurial" thinking

are emerging in the rhetoric as the keys to self-sufficiency. Initial research found a great need for

untangling this rhetoric to find out where earned-income activities and strategic alliances fit into

the discussion. Further investigation found a lack of coverage in the literature of these topics

from the perspective of community development. Finally, interviews revealed a large skill and

capacity gap among nonprofits when it came to actual implementation of the strategies and

methods being discussed.

Methodology for this paper includes a review of

nonprofit, community-development and business

literature. Primary qualitative data was then collected

through 29 interviews, largely with practitioners,

some with academics and policymakers.

This topic is sorely lacking in quantitative data,

partly because of the nonuniformity of nonprofit

accounting, measurement and reporting systems.

Therefore, the author conducted a survey of

practitioners to provide some snapshot quantitative

data.

A survey of 59 community-development

organizations was conducted to

provide some snapshot, quantitative

information on the use of earned income

activities and strategic alliances.

This survey was administered at the

Neighborhood Reinvestment Training

Institute in Washington, D.C., in

August 2001. The complete survey and

results can be found in Appendix B.

In 1994, Greg Dees wrote, "the world of social enterprise appears poised for significant

change." He pointed to shifting norms about the appropriate roles of the public, nonprofit and

private sectors, characterized by four trends:

public-service provision and skepticism of government bureaucracy has led to increased

contracting with the nonprofit and private sectors to take over provision of some

services. Dees predicted that this trend would favor social entrepreneurs "who are

politically astute and adopt more businesslike practices."

Due to the growing number of nonprofits, competition for grant funds is getting

tougher. Dees cites the rise of "program-related investments," social-purpose business

ventures and social-venture capital funds as evidence of this trend.

growth of social problems have caused suspicion that many social programs have been

somehow self-defeating. The frequency of disappointing results may be due in part to

the unintentional effect of pricing goods and services below cost, stimulating excess

demand for subsidized services.

increase in corporate philanthropy, but for more skills transfer from business to the

social sector and more cooperative problem-solving. In response to this call, there has

been growth in the number of cause-related marketing partnerships, relationships that

Many papers of this nature begin by describing the shrinking resources available to the nonprofit

continue to feel scarce to nonprofits. But this scarcity cannot be explained simply by "shrinking

resources." Nonprofit organizations in the U.S. have seen unprecedented growth in recent

decades. Almost 60 percent of nonprofit organizations (excluding churches) were founded

Foundation giving has grown more than two-and-a-half times since 1990. The real growth in

private giving was 3.7 times the revenue losses the nonprofit sector experienced due to decreases

increased and diversified in form. The Low Income Housing Tax Credit, for example, has had

an enormous effect on the production of affordable housing.

Federal budget shifts from 1980 to 1997 did generally increase pressures on nonprofits (outside

resources decreased, there was a rise in state and local spending to offset these federal spending

cuts. When all these factors are considered, it is unclear whether overall public funding really

None of this is to say that resources are easy for nonprofits to get. There are many communitydevelopment

nonprofits competing for the same funding. There are over 30 CDCs in Philadelphia

alone — it would seem nearly impossible for all of them to find adequate grant funds.

However, this "shrinking funding" paradigm is not the most powerful argument for nonprofits

to become less dependent on these sources and more creative about finding support.

The following are stronger arguments that perhaps are actually behind the "shrinking funding"

paradigm.

of unrestricted income, because so often funding is attached to a specific program and

cannot be used for operating expenses. Better access to operating capital can increase the

self-sufficiency of a community-development nonprofit. Without it, the organization is

less reliant on public and private grants, whose timelines and restrictions can decrease

efficiency of operations overall. Organizations have much greater freedom to plan longterm,

take advantage of windows of opportunity, respond quickly to evolving community

needs or adequately invest in staff and technology if they have consistent sources of

support and control the use of funds.

seek to increase the amount of social impact they can make with the resources they have.

In other words, any organization hopes it can maximize the ratio of impact or social

return to the amount of resources invested. This ratio in most cases is not readily

measurable, but rather a theoretical construct. In business, the ratio would simply

measure revenues relative to costs and would be improved by increasing organizational

effectiveness and reaching economies of scale that produce better marginal return. Many

nonprofit entrepreneurs have a similar goal — reaching economies of scale in core

competency areas to achieve greater marginal social impact.

The root word for entrepreneur means "one who undertakes." We commonly use the word to

mean anyone who owns or runs a business. However, in the rhetoric of "social entrepreneurship"

and especially in the increasingly widespread use of the word "entrepreneurial," common

usage refers to creative people and new ways of doing things. Greg Dees incorporated this into

cue from common usage of the word "entrepreneurial" and uses it to describe new approaches

and better ways of getting things done. Notably, this usage really has nothing to do with economics,

profits or business discipline, but rather with creativity and problem-solving.

Much of the current literature and discussion of social entrepreneurship is focused in particular

on earned-income activities and strategic alliances. However, these discussions often fail to make

some important distinctions:

2. There are several distinct strategies and many methods for carrying out these strategies;

earned-income activities and strategic alliances are not the only choices for a social

entrepreneur.

This strategy is distinct from the others (as shown in Exhibit A) in that it is simply an application

of concrete, businesslike principles. It is not about being creative or coming up with new ideas,

but about applying all of those tools and principles from the business world to improve

organizational discipline and efficiency. "Tightening up" is how many practitioners characterized

this group of steps. All practitioners interviewed referenced this group of improvements as

integral to an effective nonprofit operation. Some examples of what changes tightening up might

mean are:

opportunity cost, etc. (per hour of homebuyer education, per unit of housing, etc.);

the most important things);

Seventy-three percent of practitioners surveyed reported that their organization has done a

business plan spanning multiple years. However, only 32 percent identified themselves as "very

confident" that their organization’s current accounting system could accurately calculate total

costs for each of their activities (including staff time, overhead, etc.). These types of improvements

have little to do with entrepreneurship and everything to do with discipline. This is one

area where the nonprofit sector noticeably comes up short when compared to the private sector.

However, the improvements listed above are widely covered in both nonprofit management and

business literature. There are abundant resources for community-development nonprofits

The remaining four strategies, or any other new initiative, can be more successful with the

benefit of the knowledge and organizational discipline that comes from tightening up.

At its most basic, collaboration is simply accomplishing more by working together than could

have been accomplished by each collaborator working alone. Finding and constructing an effective

collaboration is an entrepreneurial action because it is an example of finding a better way to

get something done. Businesses and nonprofits alike use collaborations in situations where the

value generated by the collaborative effort will be greater than the sum of the resources put in by

each party. Businesses look for situations where they could collaborate to earn more money. For

a community-development nonprofit, the challenge is to find collaborations that increase social

impact.

This might mean forming a regional collaborative of CDCs to divide the region’s communitydevelopment

work by activity rather than by neighborhood. This is one way to reach some

economies of scale and decrease the overall amount of resources the collaborative uses relative

to the social impact. For example, a collaborative of eight CDCs in the greater Boston area

manages a fund that financed an Athlete’s Foot franchise project by one of the collaborative’s

According to Sharon Anderson of the Business Planning Practice Group at Neighborhood Reinvestment

Corporation, the business-plan format organizations must use to become a Community Development

Financial Institution (CDFI) is quite good. There are also tools available for creating a business plan for a new

business plan to fit into the larger organizational plan.

Foundation. In addition, The United Way, community colleges and consulting firms offer workshops and

classes on accounting.

Tools for quantifying social impact: Social Return on Investment (SROI) Reports, designed by the Roberts

members, Urban Edge. Because the fundraising effort was shared by these organizations, they

were able to raise $2 million. The advantages of pooling resources in a large fund include earning

more on the money as a lump sum than would be earned by each CDC having its own smaller

account; being able to take on projects that any individual organization could otherwise not have

financed; and attracting subsidies and partners for those larger projects which otherwise would

not have been involved.

"Strategic alliances" between for-profits and nonprofits are increasing in popularity from the

successful and high-profile. Shore’s organization, Share Our Strength (SOS), is well known for

its success in partnering with corporations like American Express in large-scale, cause-related

marketing partnerships that benefit both organizations. The "Charge Against Hunger"

campaign, for example, in which American Express made a small donation to SOS for every

charge made by a customer during November and December, pulled in millions of dollars for

SOS and noticeably increased customers’ use of their American Express cards. Value is created

in this case because proceeds from the partnership allowed SOS to increase their social impact,

and American Express to increase profit for its shareholders.

Community-development organizations are looking for ways to partner effectively with the

private sector. It is important, going forward, that organizations are able to think strategically

about what alliances might truly benefit them and to learn how to take an active role in building

such alliances. Also, while corporate partners are very sought-after these days, there are still

many situations where a savvy social entrepreneur will see that what may be most effective is a

collaboration with another nonprofit or a public agency.

Finally, a collaboration cannot be truly successful in the sense that there is "co-production" of

value unless the following basic things happen: (1) members jointly develop goals of the

collaborative, (2) members share responsibility for achieving goals and (3) members work

Some organizations are able to acquire scale by

simply growing their organization or a certain

activity. However, not all community-development

nonprofits will be able to do this, given the regional

focus of community development and the stiff

competition for resources.

Property management is an activity undertaken by

many nonprofits where the size of the operation

matters: some organizations have been able to make

their property management business profitable, but

usually it’s a large organization that has reached a

Spring 2001.

One example of successful growth of

an activity is the loan fund run by

Community Ventures Corporation in

Kentucky (CVC). CVC fundraised

intensely for several years, accumulating

over $4 million for its lending

program. Because of its substantial

loan fund, it is able to lend directly

rather than getting capital from a

bank. Since it pays no interest on its

money, it can charge a below-market

rate to the borrower and still make a

profit to increase the fund.

critical mass of units. Other organizations have found that although a large part of their energy

went into property management, they did not have enough units to benefit from efficiencies of

scale and therefore continued to lose money on their property-management activity. For

example, Urban Edge, a Boston CDC, earned a profit on its property management operations

for the first time last year — but only after expanding its operation to manage over 1,000 units.

In some cases, growth of certain activities can work hand-in-hand with collaborations. Organizations

that decide to divide up provision of services by area of expertise rather than by neighborhood

can potentially tap into the advantages of "scaling up" as a group. If each organization

focuses on a different core competency, individual organizations can reach larger markets within

the region while the group benefits by being able to provide better services at lower cost.

Foundations and other organizations are increasingly focusing on "venture philanthropy," a

practice of providing funding and creating a relationship between funder and nonprofit that

mimics the principles of venture capitalism. One of these organizations, New Profit, Inc.,

specializes in bringing nonprofit organizations with good potential "to scale." Specifically, they

seek out nonprofits with a single strong core competency and an annual budget of less than $1

million, and invest in them with both financial and technical support in an effort to grow them

Most nonprofit leaders would agree that is in an organization’s best interest to have a diversity of

funding streams. This way, they are more protected from financial loss because of changes in

federal funding, failure to get a grant renewal, or failure of an earned-income activity to generate

more revenue than cost. Many organizations view earned-income ventures as a way to diversify

funding streams by becoming less reliant on grant funding. Strategic alliances with for-profits

may be a path to diversification also if the partner or the alliance itself provides a source of

funding.

Some community-development nonprofit leaders take this idea of diversification further by

applying it to their activities. Kevin Smith, executive director of CVC in Kentucky, believes the

key to self-sufficiency is diversification not only of finances, but also of programs and

geographical focus. CVC works to provide as many services as possible in order to be highly

valued in the community. Besides housing, it does business development and lending.

Financially, it diversified by offering services to low-income and also higher-income markets;

what Smith calls "going up-market." Income made on up-market services can then subsidize

services to lower-income people. CVC also diversified geographically, gearing some services

toward rural people, some toward urban. This makes CVC valuable to the entire region as well

as eligible for more funding streams and attractive to more partners.

This may seem out of place in a list of strategies for increasing organizational effectiveness.

However, given that when working in the world of nonprofits and community development, an

organization’s ultimate goal is maximum social impact, not infinite survival. As organizations

social impact is to eliminate an activity or even to close their doors. A rule that many community

organizers still hold to is that an organization or campaign should continually be trying to

"organize" or "succeed" itself out of existence. Community-development nonprofits, in theory,

should be watching for their success as an indicator of their relevance (or irrelevance). Although

a nonprofit seldom consolidates or closes by choice, it should be considered as a viable option if

the interest is truly in maximizing overall social impact.

Nonprofits, like other organizations, develop survival instincts, and decisions are usually made

with the intention of keeping the organization afloat. Directors feel a responsibility as employers

to keep their staff’s jobs safe and guarantee the organization’s future. However, examples

abound where philanthropic or public dollars have more impact in one type of program than

another — or perhaps no impact at all over many years. This a nearly impossible calculation to

done with that time, money, effort?), both of which are tough to measure and subjective. While

acknowledging the near impossibility of making such a calculation in most cases, this option

should still be considered when appropriate.

Referring back to Exhibit A, earned-income activities and strategic alliances are shown below the

five strategies and labeled "Methods." This illustrates the idea that starting an earned-income

activity, for example, is one way to tackle some larger goal. An organization could start an

sources or services. Both of these methods can be entrepreneurial in the sense that they might

be a new and better way to accomplish the organization’s mission. They also might apply

business principles and discipline since they both require a nonprofit’s interaction with market

forces.

It’s important for organizations to consider the whole gamut of strategies they may want to

pursue, and then to consider which method(s) will best carry out their strategy. Because earnedincome

activities and strategic alliances are widely discussed and encouraged these days, organizations

may rush into them without thorough consideration of either overall strategy or risk.

Organizations may also overlook some other method that may be more appropriate for their

situations. Examples of other methods of pursuing a strategy of growth, for example, might be

forming a CDC collaborative, approaching a venture philanthropy organization or applying for a

new grant.

Increasingly, community-development organizations are striving for greater self-sufficiency. The

desire for more sustainable and steady sources of revenue and more unrestricted revenue that

can be used as operating capital are powerful incentives for organizations to find ways to launch

earned income activities. In addition, an organization’s secure, diverse and sustainable sources of

income to total annual budget (which was, on average, 25 percent) would increase.

generate earned income would increase over the next five years.

As organizations look increasingly to earned-income activities as a way to be more self-sufficient,

it’s important to distinguish between income earned and revenue generated. While organizations

are having increasing success with revenue-generating activities that cover all or part of their

costs (usually through fees), it is still rare that an activity actually earns income (generates

revenue that exceeds costs). Both types of activities can help an organization be more selfsufficient,

and while few activities are good candidates for earning income, many can become

revenue generators.

Current discourse makes the idea of earned-income activities for nonprofits seem like a recent

trend. However, there are plenty of examples from the larger nonprofit world of organizations

that rely on earned income — museums, hospitals and universities. Within the field of community

Earned-income activities vary widely, from unrelated for-profit subsidiaries to fees charged for

mission-related activities. Many organizations have activities intended to earn income. But we

must distinguish between revenue-generating and income-earning activities: Revenues – Cost =

Income. Therefore, an activity only earns income if it generates more in revenues than it costs

the organization to run. Most community-development organizations have one or more

revenue-generating activities; more would like to have actual earned-income activities.

For example, many organizations currently charge fees for a variety of activities: homebuyer

education, residential lending, real estate services, home rehabilitation, business and employment

services, and miscellaneous services like inspections and home-delivered meals. Increasingly,

community-development organizations are finding ways to generate revenues through fees, and

successfully cover some of their own costs:

their activities. Forty-one percent responded that their organizations had, at some point

in the past, started an activity that had revenue generation as one of its "top goals."

were charging some fees; 20 percent had been since 1988. Among these organizations,

fee revenue typically supported at least 15 percent of their operating costs. In most

However, although charging fees is helping these organizations to be less reliant on grants by

Although books and articles on the subject often seem very optimistic, practitioners interviewed

for this paper agree that successful earned-income activities are unusual and that communitydevelopment

organizations capable of creating them are the exception, not the rule.

Approximately seven of ten small businesses fail within the first five years in the for-profit

world. In the nonprofit world, an earned-income activity is up against even tougher odds

because of the inefficiencies brought about by the organization’s social goals. In 1988, Edward

factors make it difficult to identify or discontinue a "failed" nonprofit earned-income activity:

much incentive to talk about their failures. They may decide to highlight an activity’s

social impact rather than its financial shortcomings.

organizations may continue to run the business even though it loses money because of

its social impact; for example, training or employing a target group.

outset, be they social or financial. Consequently it is difficult to recognize failure. Instead

of defining a number of years after which the business must generate profit and what the

return must be, many organizations just hope for the best, concentrate on the social

goals, and are happy if the activity generates some revenue to recover some costs.

Another point of confusion in the discourse of social enterprise and earned-income activities is

the distinction between "nonprofit" and "for-profit." When organization staff refer to their

"for-profit subsidiary," the rest is often assumed: that this entity turns a profit that helps fund

the nonprofit’s other activities. This may not be the case.

Many revenue generators that earn income are actually fee-based services or investments that are

a part of the nonprofit’s operations. On the other hand, some for-profit subsidiaries of nonprofits

consistently lose money, but are maintained because of the service they provide or social

goals they accomplish. "Nonprofit" and "for-profit" are IRS distinctions and do not actually

indicate whether an activity is a money-maker or a money-loser. New Community Corporation

in Newark is a good illustration of this distinction.

New Community Corporation (a nonprofit CDC) has a two-thirds equity share in the Pathmark store

it developed in the Central Ward of Newark, New Jersey, from which it makes significant income. In

contrast, NCC opened a Mailboxes Etc. franchise (a for-profit subsidiary) a few years ago for reasons

related to its mission. The U.S. Post Office in Newark’s Central Ward simply was not providing

adequate service to the community; any resident who wanted to start a business, seek employment or

engage in significant marketing and communication needed another resource. So NCC opened the

store and has kept it open even though it has lost money since opening. It covers those losses with

proceeds from the Pathmark store. In this case, the money-loser is a for-profit and the money-maker

A "nonprofit" is actually differentiated from a "for-profit" by its 501(c)(3) tax status and its

sources of capital. The most important constraint in the nonprofit tax classification is distribution

of surplus. While a for-profit would try to maximize surplus to distribute it to shareholders,

a nonprofit may not. There is nothing besides the culture of scarcity prohibiting a nonprofit

from generating some surplus. The difference is that this surplus will be reinvested in the

organization’s activities. The motivation for many organizations to become "nonprofit" is to

make them eligible to receive donations from individuals and other organizations, who want

their donations to go to a 501(c)(3) so they will be tax-deductible for the donor.

Nonprofit organizations must pay corporate-rate tax on unrelated business income. For

example, admission fees at a museum would not be taxed, but income from the museum café

would be. The definition of "unrelated" is open enough so that there is a wide berth for nonprofits

to earn income within the limitations and protection of their nonprofit, tax-exempt

This challenge can best be managed by careful consideration, during implementation analysis

and throughout implementation, of an activity’s impact both on the organization’s financial

health and mission. This constant rechecking of the balance between money and mission was

described by many practitioners as extremely difficult, but essential to success. Please see

Appendix C for an illustration.

An earned-income activity may come into conflict with an organization’s mission or core values

in a least four ways:

1. It is morally inappropriate to treat certain goods and services provided by nonprofit

organizations as commodities. Relief services for victims of natural disasters, for

example, are not an appropriate service to sell. Fees may also be inappropriate for public

goods, or goods the entire community benefits from but individuals would probably not

be willing to pay for, such as the community-organizing services provided by many

CDCs.

2. It may conflict with an organization’s concern for economic and business development

to engage in a business that competes with local entrepreneurs. If a good or service is

readily available in the community and there are local businesspeople in that sector, a

nonprofit may choose not to become a competitor.

3. There are some sectors of business in which the profit margin is relatively low, even for

a for-profit company. Consequently, a nonprofit may find that in order to run the

business successfully it may have to make decisions which go against its values or social

goals, such as charging high prices, paying low wages, or producing a poor-quality

4. The line of business itself may not contribute to the organization’s mission in the

context of its neighborhood. For example, Fifth Avenue Committee in Brooklyn, New

York, has chosen not to get into the market-rate real estate business because housing in

its neighborhood is getting too expensive for many low-income people. FAC determined

that by competing in market-rate real estate, it would become part of this problem.

Most activities taken on by community-development nonprofits are efforts to better integrate

lower-income people into the larger economy of the community. Since they tend not to be

emergency services and tend to serve people across a range of incomes, charging fees for many

of these activities is appropriate. However, pricing services can often be a crossroads of the

tension between money and mission. Finding a price that covers cost but is still within constituents’

ability to pay can be difficult. Many organizations charge prices below cost for some

activities because of this. The consequence is that the activity does not break even and must be

subsidized by a grant or other income.

Exhibit B illustrates this relationship between mission and money. The upper left corner of the

box is where both social impact and income are maximized. The bottom right represents activities

that lose money and have little social impact. By maintaining an appropriate balance of

activities above and below the break-even line, organizations can become more self-sustaining.

And by weighing the true social impact of an activity against its costs, organizations can prioritize

their resources. Some potential types of activities are described following Exhibit B (next

page).

means substantial financial losses. However, this organization must be aware of the

opportunity cost of this loss of money. What must they do to subsidize the

activity? What else could be accomplished with that amount of money?

Community organizing may fall into this area of the chart.

gains can be tough on an organization’s reputation and stakeholders. Organizations

who did choose to operate here could reinvest the earned income in the

organization or a type-A activity.

Unfortunately, few nonprofit activities have the potential for high gains and high

impact. If an organization can identify one activity of type C, it can use the profits

to subsidize a type-A activity.

operating here. However, organizations that have not kept up with outcomes

measurement and changes in their neighborhoods may be.

There is a way to generate some revenue from them and they have some substantial

social impact. Type E activities may fall short of breaking even, but if an

organization has a type-F activity, which generates revenue over cost, its earned

income may be able to support E.

There are cases where there is truth to the statement, "if there were money to be made here,

someone would be making it." Some industries have very slim profit margins and some may

have no profit margin in the context of a low-income community, since the profit margin will be

determined by what people are actually willing to pay. Other industries have profit margins only

because of practices that for-profits engage in, but nonprofits may choose not to.

The Enterprise Foundation started a well-researched and adequately capitalized venture called

Enterprise Environmental. It tried to replicate a very successful program in Baltimore where the

business collected donated used appliances, repaired and resold them while employing and training a

target population. It found that its costs were higher than its competitors because it did high-quality

work, offered warranties with the appliances, and paid and trained employees well. Its competitors

could consistently undercut it because they did not spend money on these "inefficient" measures.

The service guarantee Enterprise Environmental offered didn’t give it a competitive advantage

because members of the community had learned not to trust such guarantees. The business folded,

rather than engaging in the socially undesirable business practices necessary to compete in that

Some industries have such a slim profit margin that for-profit companies have trouble succeeding

in them. The social goals and values a nonprofit brings to the venture tend to make the

business less, not more, efficient. If the margin is small for an efficient, pure-market actor, it

simply may not exist for a nonprofit with a code of conduct based on mission. In a child-care

business, this might mean an organization would have to charge higher prices than its community

members can afford in order to cover costs. Some lines of business may be best left to

companies that can do it most efficiently.

Commercial development is another line of business where profit margins may not exist for a

nonprofit. For example, community-development nonprofits are likely to lose money on

developing grocery stores even though many of their communities badly need them. Chain

stores usually have their exact rent figure already calculated because it is a low-margin business.

No one can develop a building in the inner city for an amount low enough for that rent amount

cleanup, and delays due to political issues.

Finally, if an organization chooses to start an activity with the purpose of earning income (not

operating a small business incubator, it is difficult to generate income because the organization

usually has several social goals: it cares about who is employed in the activity, who gets the

income, who the entrepreneurs are, mix of business sizes and types, location in a distressed area,

etc. Each one of these social goals has the potential to make the business more costly or less

efficient.

generate any income. As Alvaro Lima of Initiative for a Competitive Inner City-Boston put it, it

may be more accurate to say that some of these enterprises are actually "pretending at business."

An organization may, for example, operate a bakery to employ a target population and provide

training in baking and business. This business may not cover its costs and may be subsidized by

grants. Organizations may look to these enterprises as earned-income models to replicate when

in fact they are often not a way of generating income so much as an innovative way to

This "enterprise" model is a useful tool for accomplishing certain goals and

achieving partial cost recovery, but not necessarily for earning income.

No matter how careful an organization is in carrying out its feasibility analysis and planning, a

market-based activity may still be at risk of failure. Indeed, seventy percent of new businesses fail

within their first five years. For nonprofits, the odds may be even worse because of the valuesrelated

financial inefficiencies most nonprofit businesses carry. Nonprofits may not be accustomed

to working in this risk-based environment, dependent on market forces.

In addition, nonprofits may be at additional risk of failing at a new earned-income activity because

it is difficult for them to answer all feasibility and implementation questions beforehand,

The Enterprise Foundation had put everything in place to launch an Internet-based business when

the dotcom decline began in 2000. It had "done everything right" — the enterprise was based on a

successful one in Denver, was well capitalized, was going to accomplish social goals in workforce

development and employment, and its extensive analysis showed that it would also be profitable. This

is a good example of what seemed like a sure thing — except that it was based on a fast-growing

market sector that was more volatile than expected.

The idea of forming strategic alliances with for-profits may sound unfamiliar to some

community-development nonprofits, but the basic ideas are ones most organizations already use.

As the private sector searches for new ways to compete, many companies’ philanthropic

activities are being used to develop new markets, increase brand recognition, create community

goodwill, overcome regulatory hurdles and improve employee morale and productivity.

Simultaneously, nonprofits are searching for new ways to become self-sufficient and are

increasingly turning to corporations as they seek to leverage their assets and create new revenue

sources. Of the organizations surveyed:

with a for-profit partner.

By entering into partnerships with for-profit entities, nonprofits can enter a new program or

endeavor without carrying the entire financial or risk burden. Bringing in private-sector partners

can also increase the effectiveness of community-development activities by creating a movement

that different sectors of the community contribute to in different ways. Partnering with businesses

can also enhance the strategic and entrepreneurial skills of a nonprofit and make it more

structuring such partnerships, organizations can capture the latent value that is created when

truly strategic alliances are made; this added value can benefit communities to an extent that

nonprofits may not be able to achieve alone.

Most literature and publicity of nonprofit-corporate partnerships focuses on a select few

national cause-related marketing alliances. This narrow focus misses the wide variety of alliances

that organizations might consider and largely ignores the strategic alliances that already exist in

the community-development field. Strategic alliances in community development need not be

national in scale and they are not limited to cause-related marketing arrangements.

Many corporations and nonprofits are forming "partnerships" — alliances that can range from

truly integrated programs involving the sharing and exchange of human, capital and financial

resources, to simpler marketing arrangements or short-term volunteer projects. One way to

classify the array of partnerships is into four basic forms, each one focusing on some overlap of

Marketing arrangements are the most commonly discussed, but there are great opportunities in

community development for the sharing of human resources and capital resources and for joint

ventures, such as the Pathmark grocery store in Newark, New Jersey, which New Community

Corporation developed and also acts as an equity partner.

In addition to the categories listed above, there are also several types of arrangements between

public relations firm) and the nonprofit work together to craft a message for the campaign

that satisfies the marketing goals of both parties. Nonprofits may receive a fee or a

percentage of sales from the corporate partner in exchange.

name. These arrangements can be risky for nonprofits because their biggest assets are usually

their name and reputation, which then become associated with the corporate partner.

involve either a single event or series of events and can be local, regional national or

international. Usually the company commits financial support and in return the associated

nonprofit ensures publicity for the company’s sponsorship.

When considering the various types of alliances, organizations should consider the variety of

resources that can be gained from a strategic alliance, other than money. Seventy-two percent of

the organizations that reported having strategic alliances said they gained some nonmonetary

resources from the alliance. Maria Garciaz of Salt Lake Neighborhood Housing Services, a

resources needed to make it possible — everything from paint to good interest rates; then she

tries to think of partners who both have some of those resources to offer and would stand to

gain something from an alliance.

Within community development, there are currently many examples of sponsorships. There is

also a wide variety of other marketing relationships that are not licensing agreements but are also

not traditional cause-related marketing alliances. Many involve nonprofits helping companies to

access their communities better as markets, while having a say in the products and services that

will be offered. Many organizations have relationships with lenders that get them better access to

capital. Finally, there are many informal alliances in which the for-profit partner is providing

money as well as volunteers and technical assistance. These are marketing relationships, but also

involve human capital and expertise sharing.

Most practitioners from organizations interviewed reported having some type of "pure

philanthropic relationship" with a for-profit organization. Many corporations have grant

programs or support nonprofits with employee volunteer days or workplace giving campaigns.

These relationships may have great potential for blossoming into strategic alliances (see Exhibit

D). It is up to the entrepreneurial community-development nonprofit to think of ways the

relationship could benefit its partner and begin to propose ways of working together that create

Virtually all community-development nonprofit organizations have at least one pure business

relationship with a for-profit. Examples might be the bank where the organization’s accounts are

kept, a contractor who frequently works on the organization’s development projects, or a vendor

who regularly supplies the organization with office supplies, construction materials, etc. In all of

these cases, the nonprofit is likely a valued customer in a business relationship. These relationships,

like pure philanthropic or "grantor-grantee" relationships, may also have the potential to

be arranged in a way that becomes as beneficial to the nonprofit as it is to the business. See

Exhibit D for an illustration.

Strategic alliances are nothing more than an extension of excellent relationship-building and

donor development, skills which nonprofits have been honing for years. The widely known

examples like SOS–American Express are different from more common examples only in their

scale and complexity, which were carefully developed over time. The basic best practices in

donor development — such as finding new ways for donors to be involved, finding projects

which will benefit both the donor and the nonprofit, increasing levels of commitment from both

sides as the relationship progresses and wins are accumulated — are already being used by some

community-development organizations. Next steps might be to turn these relationships into

contractual agreements, examine whether the nonprofit’s assets are being appropriately valued

and see if more value can be extracted from the relationship. For example, if the opportunity to

supply goods or services for a certain project or event is valuable enough to for-profit entities

Virtually all community-development

nonprofit organizations have at least

one pure business relationship with a

for-profit partner, usually a vendor. In

addition, many organizations already

have a purely philanthropic relationship

with a for-profit. Both types of relationships

have the potential to be

arranged into strategic alliances that

create value for both partners.

because of the visibility or marketing potential, nonprofits may be able to bid the opportunity

out. Share Our Strength bids out the privilege of supplying bottled water for some of their

events. Companies pay them for this opportunity — and not just in free water! CDCs can offer

valuable opportunities like this to prospective for-profit partners.

One alliance that began as good donor development on the part of the CDC has emerged into

something unique and has the potential to grow. Maria Garciaz, executive director of Salt Lake City

Neighborhood Housing Services (SLNHS), called GE Capital Financial several years ago to request

an in-kind donation of a refrigerator and microwave for the SLNHS office. The relationship that

began there evolved, building on each successful interaction. Today, GE Capital Financial supplies

organization is able to save about $5,000 on each unit and the company gets its product into more

households and the chance to build consumer brand loyalty. Executives from GE have sat on

SLNHS’s board. Company employees participate as volunteers in community-service events, helping

to paint newly built housing. Again, this satisfies a need of both organizations, improving employee

satisfaction for GE and increasing community involvement and free labor for SLNHS. As yet, this

arrangement is not in writing — it is just an example of how practitioners are fashioning their own

strategic alliances by being creative. When it comes to any potential partner from the private sector,

Garciaz says she just tries to think in terms of "how can we work together in a way that will build

Community-development professionals surveyed named the following assets that they bring to

their alliances with for-profit partners:

Community development knowledge and experience; increased profit; credibility

in the neighborhood; eligibility for city funding; access to second mortgages;

credit- and homebuyer-counseling services; eligibility for tax credits; housingdevelopment

experience; management expertise; good reputation; political ties;

expertise in preparing buyers; loan and savings account customers for banks;

intake and education services of prospective homebuyers; neutral advice; qualified

staff; good publicity and press opportunities; access to low-moderate income

According to Bill Linder of New Community Corporation, another important asset of inner-city

community-development organizations is access to large numbers of people during a time when

companies are growing and employees are scarce. This trend has changed because of the current