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SOCIAL ENTERPRISE for SOCIAL IMPACT

Emerging Funding Strategies

Dr. Ralph E. Plumb

April 2014

The purpose of this paper is to succinctly outline how community-based organizations

and charities can generate new streams of revenue outside of traditional

methodologies. This paper represents a compilation of concepts in an intentionally

abbreviated form. Numerous articles and books have been written on each of the

contributing concepts, a few of which are referenced here. The leadership of organizations

and institutions which engage in social enterprise must be informed and prudent, but also

entrepreneurial opportunity thinkers who understand the dynamics of risk and reward.

There is a common misperception in some quadrants of the philanthropic world that charities

cannot engage in activities that generate “profit”. Of course, this is not true. They can and

where possible should but these profits are not distributed to shareholders, but rather to the

programs for which the social enterprise has been engaged.

Global Trends

Every social, charitable, philanthropic, service oriented . . . organization or institution needs

money. But the methods, means and decisions on where to access resources is changing

dramatically. No, in fact, it has changed dramatically – and most institutions are still panning

for gold in a stream long since depleted. Not only do we need to stop panning in the same

place . . . we need to get out of the stream and stop panning all together!

“Philanthropy is – by design – episodic, donor directed, temporal, fragmented,

decentralized and disaggregated” (Lucy Bernholz).

“Despite the best efforts of charities and governments across the world, the problems that

they have poured so much money into trying to solve over the last century persist. If

anything, they get worse. . . The more we looked at charity, the more it occurred to us that we

live in a world where charitable (dollars), tax (dollars) and investment (dollars) are operated in

isolation of each other, in three completely different ways . . . Charities must access (new)

capital if they are to succeed or even survive . . . It is capital that is the powerful force – not

income from capital. So the idea for deploying it all for our purpose, rather than merely the

income from it, is a revolutionary one. The most important feature of this new global

economic architecture will be to complete the half-built theoretical framework of

capitalism by including a second type of business, social business, in the global

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marketplace. Once social business becomes a recognized element in the framework, it

can play a very important role in solving the financial crisis, the food crisis, and the

environmental crisis. Furthermore, it can provide the most important institutional

mechanism for resolving poverty, homelessness, hunger and ill health” (James Perry).

The following chart illustrates the structure of these three sources of capital:

Another important global trend comes from an understanding of what is now a recognizable

term “the bottom of the pyramid”, the 5 billion people who represent the “invisible,

underserved market” as described and acclaimed in the ground-breaking work of C.K.

Prahalad. At the core of his work is the proposition that the private sector has a critical role in

alleviating poverty and should be involved in creating market-based solutions for the world’s

poorest consumers. There is an emerging trend in the public’s attitude away from direct

aid to one focused on an exchange of ideas and capital.

Until recently there was little attention paid to the role of the private sector in poverty

alleviation. The UNDP (United Nations Development Program) is now fully engaged in this

concept as is the World Economic Forum (Davos, Switzerland), which among various

consortium have created the Social Entrepreneurship Forum. (This author taught Social

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Entrepreneurship for a brief time at USC, Marshall School of Business at the MBA level and

has a strong passion and interest in this field.)

To reach this 5 billion consumer public requires a different business model. Charities and

organizations who are accustomed to “serving” this population will more readily adapt

IF they engage in a new way of thinking AND a new way of doing business. There is a

market for world-class goods and services if they can be made available at affordable prices.

For example, there is not a single country where the poor have not embraced the cell phone.

The North American model (although it is changing) requires two-year contracts, expensive

rates and the demand for costly smart phones. But a cell phone minute in India costs less

than $0.01. And many phones are inexpensive, even throw away. An entire industry has

been created around an ecosystem of mini-entrepreneurs who sell prepaid cards or “loads”.

Innovation and scalability are critical. And sustainability is emerging as innovations expand.

Charitable Context

Considering the charitable giving trends in our North American context leads one to some

sobering conclusions . . . and the realization that resource development must embrace new

models of replication. (Indiana Univ. & Purdue Univ. see www.philanthropy.iupui.edu).

This paper defines and encourages the engagement of social enterprise – not at the

exclusion of resource / donor / fund development but in addition to it (although some

charities have made the strategic decision to secure their required operating revenue

exclusively through social enterprise!)

First, note this simple empirical summary (from Giving USA using 2012 statistics):

Charitable Donations Grew in 2012, but slowly like the economy

Americans donated an estimated $316.2 billion (a 1.5% growth rate adjusted for

inflation)

2012 also saw policy changes considered at the federal level that could alter future

giving, including proposals aimed at capping or eliminating the longstanding charitable

deduction.

Giving by individuals rose to $228.9 billion – a 3.9% increase

Giving by bequest decreased by an estimated 7% to $23.4 billion, but this is a volatile

category of giving affected by many variables

Giving by corporations rose by 9.9% (adjusted for inflation) to an estimated $18.1

billion both directly from the corporation or their foundations.

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Giving by private foundations increased by 2.3% (adjusted for inflation) for an

estimated $45.7 billion.

Now note this informative generational donor giving summary by Pam Loeb, Gayle Vogel and Emily Hahn of Edge Research.

In our recent survey “The Next Generation of American Giving,” it was no surprise that Boomers and Matures report giving the most money to the most charities; they are more established financially and in their charitable values. Add to that the sheer size of the Boomer generation, and it is clear that they have taken the reins as the primary source of charitable giving now and into the foreseeable future. Boomers are the generational cohort that charitable organizations should focus on today.

But don’t forget the long game – our research shows that most Boomers and Matures first learned about their top charities in their 30s. Now is the time to cultivate the pipeline for future giving among younger generations. The return won’t be immediate, but it will pay off in the long run.

The generations are as similar as they are different in their giving behaviors. A fundraising strategy should be integrated across many channels, but with a slightly different emphasis by generation:

Gen Y (b. 1981-1995)

They are the “social” generation, both virtually and in the real-world. Build engagement and harness the power of word-of-mouth through the social media they check in with daily and face-to-face events. Gen Y is more likely to give at check out and purchase a product where a portion of the proceeds goes to a charity; think of these shop-to-give opportunities as ways to raise a little cash and brand build with the younger generation. They are also comfortable making a mobile gift – but more so through a website or app than text.

Gen X (b. 1965-1980)

Gen X is more established and more likely than Y to give money as a primary means of supporting a cause. They are truly multi-channel donors, and they want to hear about the impact of their donation. However, they are also still figuring out which causes they care about. Cultivate them through peer-to-peer fundraising opportunities (like fun runs) and workplace philanthropy. Though not as evangelical as Gen Y, large numbers of Gen X use social media for news and updates and to show their support for organizations.

Baby Boomers (b. 1946-1964)

Many Boomers established a connection with the organizations they care about in early adulthood, and they are now in a position to give financial support. Your strategy with Boomers can be less about increasing brand awareness and more about bringing in dollars. While many still give through direct mail, don’t dismiss digital channels – Boomers’ online giving and social media usage shot up since we last checked in with them in 2010. In fact,

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Boomers appear to be the transitional generation – the last one where direct mail will do the heavy lifting.

Matures (b. 1945 or earlier)

Tried-and-true direct mail fundraising has worked with this group for years, and continues to — they give regularly and generously. Direct mail is still incredibly important, far from dead, but it won’t last forever.

Bottom-line

Stop obsessing about younger donors, that’s not where the money is. However, if your average donor is 80, it’s time to worry. If the average age is 60, you are in the sweet spot. But younger generations are paying attention, and it’s important get on their radar with an integrated strategy today.

(See more at: http://www.npengage.com/analytics/learning-who-gives-how-generations-baby-

boomers-and-matures-donate).

And consider these very useful insights on “Top 10 Trends: How Major Donors are

Changing and What to do About It” by Gail Perry – see www.gailperry.com/2013 for

complete article and details.

Trend 1 - Donors are wary of trusting us

Trend 2 - The Boomers are becoming the #1 donor population

Trend 3 – Older ladies are THE major donor demographic

Trend 4 – Donors want donor-centered communications

Trend 5 – Major donors who volunteer give more. MUCH more.

Trend 6 – Major donors are all over social media

Trend 7 – Major donors look at their gifts as investments. They want to see impact and

ROI

Trend 8 – Major donors are assured when they see the financials and the numbers

Trend 9 – Like most of us, donors are feeling overwhelmed and jaded…

Trend 10 – Major donors love a BIG IDEA.

Finally note these astute principles and observations from James Perry.

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The way in which donors give to charity inadvertently causes problems, through:

• One-off gifts make it difficult for charities to plan

• Restricted gifts contort management decisions and force management

to make decisions that are not consistent with their long term strategy

• Feeding the myth that money spent on administration is wasteful

• A passive attitude and lack of engagement with the charity beyond the

cursory, leading to the lack of functional accountability dynamics

The inadvertent consequences of these practices are:

• Distracted and overworked leaders with two jobs, unable to focus exclusively

on their leadership or fundraising role

• Short term thinking, aversion to success, delusional thinking

• Level funding playing field, regardless of charity effectiveness

• Low pay for charity workers… and hence inadequate skills and experience

There are some facts of current charitable life that also conspire to make success

more difficult:

• Genuine issues around measurement and the probable impossibility of

establishing a universal, meaningful measure of effectiveness… the need to

engage on an individual charity level to establish optimal measurement

• Accountability vacuum for leaders, caused by the ‘gift’ culture of donors, the

dual-role of the leaders and the structural inadequacies of the trustee system.

No answer to the question of where – in reality – ownership of the charity’s

mission resides

The highly functional world of business has enormous knowledge that can be

leveraged for the benefit of charities. But the knowledge must be distilled and reapplied

for a sector with a different history, opposing objectives, a different culture,

different drivers and some unique knowledge of its own:

• Functional ownership dynamics from business, with funders driving

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accountability, are key to future success of charity

• This leads to the donor adopting an investment mindset to complement their

giving motivation. By so doing, they will force charities to answer questions

such as:

Strategy: what is the strategy that will achieve the vision?

Management: are the people capable of delivering the strategy in place?

Governance: who will oversee my investment/gift in this charity to

ensure that it will be successful, and do they have my confidence to do

that?

Success Criteria: how will we know that we have been successful, and

what are the key milestones?

• Different financial levers (soft loans, hard loans, convertible loans, equity

etc) all have a powerful role to play if the correct lever is employed to

contribute to the direction that the investee charity needs to go

• To borrow from L .P. Hartley, charitable donors or investors must realize that

charity is like a foreign country, ‘they do things differently here’. Business

culture does not translate - and charity culture could teach business a thing

or two

• In business, competition drives progress. One is not required to look beyond

one’s own fate. In charity, co-operation drives progress. We cannot move

forward without joining with others. We must avoid the trap of placing

ourselves at the heart of a solution to the issues in charities, and instead look

upwards and outwards with the objective of joining hands with others. United we

stand, divided we fall.

To conclude this section, commentary on both the “state” of charitable giving and the inherent

limitations of it were given to set the stage for the timeliness of considering social enterprise

as a planned, significant revenue generating source for the organizations involved in the

business of making a “social impact.”

Social Enterprise

One acknowledged definition of social enterprise (though not the only one) is, business

whose primary purpose is the common good and who use the methods and disciplines

of business and the power of the marketplace to advance the social, environmental

and human justice agenda.

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Another description of social enterprise is businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximize profit for shareholders and owners.

As with all businesses, social enterprise activities compete to deliver goods and services. The difference is that social and environmental purposes are at the very heart of what they do, and the profits they make are reinvested towards achieving those purposes.

Social enterprises operate in almost every industry from health and social care to renewable energy, from retail to recycling, from employment to sports, from housing to education. Whatever they do, they do it differently from typical business, because they are driven by a social and environmental mission, and they are focused on the community they serve.

Our global system is failing us as humans. Governments are not efficient or innovative

enough to address the challenges of our new world, which is characterized by

interconnectivity, knowledge economies, and urbanizing populations. Businesses can no

longer avoid the question of 'sustainability,' but few are practicing truly responsible corporate

citizenship. The not-for-profit sector is growing faster than the public or private sector, but its

outputs (social change) aren't keeping pace with its inputs (cost).

In this context, we need a new formula to address major challenges that are emerging and

growing domestically and abroad. Social enterprise, using business models and practices to

create market-based solutions for social problems, is not a silver bullet, but an important part

of that new formula. And existing, high-performing not-for-profits can lead the charge, if they

take a social enterprise approach and use business principles to build scalable and

sustainable solutions.

“There's a ton of buzz about social enterprise these days. Which thrills me. I believe that we

can all do well by doing good. Here are three ingredients required to mainstream social

enterprise” (N.D. Debevoise).

1. Hybrid skill sets

Social enterprise requires a blend of skills and perspectives. Effective social enterprises and

their teams have to use best-in-class business practices, while also pursuing a mission. This

hybrid approach requires analytical skills like market research, product design, and revenue

modeling, as well as soft skills like empathy, vision, and dedication, qualifications that don't

co-exist in traditional roles.

2. Training, Recruitment, and Management

Cultivating this new mix of skills requires new structures. Traditional education and training

programs prepare professionals for corporate or not-for-profit careers. Similarly, recruitment

and management processes and personnel specialize on one side of the fence or the other.

To grow the talent required to build social enterprises, we need formal and informal training

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opportunities to cultivate hybrid skill sets described above. Then recruitment and

management processes need to catch up: identifying the right candidates, developing and

rewarding them appropriately for creating a blend of financial and social value.

3. Investment

As for most change processes, this growth and maturation of the social enterprise sector

investment requires investment. Many forms of capital are needed, from early, field-building

philanthropic capital to impact investments with adjusted timelines and return expectations,

and even commercial investment. Such funding will establish training programs; enable social

enterprises to pay adequate salaries (Dan Pallotta explains this need here) and develop

suitable talent; and facilitate action-focused research to inform the social enterprise

ecosystem. (N.D. Debevoise)

All those committed to social impact (organizations or institutions) need to consider

“generous solidarity with the poor and the utilization of impact investors” (Claude

Alexandre) which now more than ever will be creatively achieved through the

employment of social enterprise.

Replication Models

Who is involved today in social enterprise and how are they doing it? The list is growing.

And the areas of engagement are as diverse as the imagination!

Goodwill - www.goodwillsocal.org

This well known national organization, as well as the Salvation Army, some rescue

missions and many other charities have been actively engaged in the operation of thrift

stores (both low-cost and high-end) for many years. But Goodwill Southern California

has invested significantly in the development of a Center for Non-profit Innovation and

Social Enterprise in conjunction with the University of Southern California - Marshall

School of Business. This author recommends to the readers the “Innovation Process

Handbook: Transforming Ideas Into Social Enterprise” as an excellent primer and

guideline for any institution who wishes to engage in social enterprise. The paper

outlines everything from idea generation to opportunity identification and selection to

business concept development to business model development, to launch. In addition

this paper articulates social enterprise considerations including: explicit social aims,

funding composition, investment, risk aversion, scale, stakeholders and sweat equity.

Enterprise for Humanity –

EFH was a concept created out of the environment of the Claremont Colleges by

Claude Alexander. It was design to function as a non-profit business advisory

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organization which provides an array of social enterprise services to transform the way

churches and faith-based organizations enhance their local communities. The EFH

model combines the resources of the faith-based community with socially-oriented

businesses. The proposed EFH services include: Organizing CDCs (community

development organizations); directing socially responsible business enterprises in

local communities; filling gaps in products or services offered to residents in the

community; creating businesses with living wage jobs and benefits for local residents;

and, advising CDCs regarding best practices. This initiative included specific reference

to various enterprises including Mama’s Hot Tamales and Templo Calvario Home

Care. The EFH is not currently in operation, but its principles of practice live on!

The Brookwood Community – www.brookwoodcommunity.org

Located in Brookshire, TX, 40 miles west of Houston this non-profit is a residential

facility and vocational program for adults with disabilities. “Through the Grace of God,

the Brookwood Community provides an educational environment that creates

meaningful jobs, builds a sense of belonging, and demands dignity with respect for

adults with disabilities. We see every individual as a unique creation of a wise and

loving God, deserving not only of our abiding patience and respect, but of boundless

awe. We cherish diversity in all forms and eschew narrow-minded normalcy.” (How is

that for a powerful statement of vision and purpose!) Committed to this purpose and

with planning and intentionality The BC engages in multiple, income generating, job

creating and self-worth building social enterprises including: The BC Gift and Garden

Center; the BC Store On-line (which sells everything from crosses and nativities, to

Christmas cards, soaps and fragrances, ornaments, gourmet food and dinnerware);

The Gallery at Brookwood (jewelry, paintings, ceramics, sculpture and other arts

creations); Shuddle Brothers Hatters “not just a hat…a piece of history”; The Café at

Brookwood and more. Check out their web site.

The Great Commission Foundation – www.tgcfcanada.org

Founded by Dr. Marvin Kehler, globally successful business man and significant social

investor, this foundation located in Alberta, Canada has established a broad vision, and

capacity which supports “people and projects – national & international, registered

charities (in Canada) and international charities.”

They have found a unique niche in serving the philanthropic community in Canada with a

range of social enterprise services that assist the registered charities navigate a rather

complex Canadian charitable tax structure. Their services include: Administrative

services (audit, donation processing, group benefits and payroll), management training,

values-based estate planning and investments.

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In discussions with Dr. Kehler this author understands their interest in intentionally

expanding the breadth and scope of social enterprise offerings and capabilities with a

higher level of engagement in the U.S. as a part of their planning.

Lutheran Social Services – www.lssmn.org/housing AND www.frontporch.net

This paragraph is intended as a composite emphasis rather than focusing on just the two

organizations whose URLs are identified above. The social enterprise sector

represented is housing – permanent affordable, permanent supportive, mixed use etc.

Among many statements of purpose include, “ending long-term homelessness and

obtaining affordable options for those who are …. Active members of the labor force.” All

social sector planners indicate we are about to be hit by a tsunami of Baby Boomers,

some 10,000 per day who reach retirement and 80% of whom are inadequately prepared,

financially, to thrive or successfully survive their elongated retirement years. Hundreds of

social service agencies – particular those in the Lutheran community, but also many

others, have embraced the provision of affordable housing – on its own merits, or

supporting housing which serves various client cohort and provides vitally

needed, safe and affordable housing while at the same time generating significant

operating funds through the receipt and management of rental income.

Micro-Franchising –

Micro-franchising, simply stated, is business replicated to scale. It addresses three core

problems that prevent people from becoming economically self-reliant: 1.The lack of skills

needed to grow a successful business; 2. The lack of jobs in under-developed areas of

the world (including the U.S.); 3.The lack of goods and services available to the poor

(Fairbourne). (Micro-lending solves the issue of start up capital.) The word franchise

conjures up images of a McDonalds or other fast food enterprise. But the franchise

model is viable around the world (from micro levels and up) in practically every industry.

Characteristics of a franchise include:

Local owners in a symbiotic relationship with an enabling institution

A brand or other significant intellectual property

Shared know-how codified in an operating system

An overt mission to alleviate poverty through enterprise

“Micro-franchising is not a hand out; rather it is a handover mechanism or tool. The

opportunity of running a proven business model is handed over to willing and able

individuals who would otherwise be forced to learn through the very painful and often

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traumatic start-up, fail and start again cycle prevailing in the informal economy. With the

capital available either through microcredit institutions or NGOs and the guidance,

training and direction of the micro-franchisor, talented but inexperienced and untrained

individuals can bridge the gap between the informal and formal economies in ways that

were previously nearly impossible (S.L. Hart, Chair Sustainable Global Enterprise,

Johnson Graduate School of Management, Cornel University).

Excellent examples of this model include –

Global Med Partners Portable Laboratory which fosters low tech jobs in mobile

clinical laboratory services . . .

Honey Care Africa promoting sustainable community-based bee keeping . . .

Mama’s Tamales fostering entrepreneurship by providing existing and future

business owners with the tools they need . . .

The HealthStore Foundation model to improve access to essential drugs, basic

health care and prevention services for children and families . . .

Vodocom Community Services offering rural telephone service . . .

Monetization –

Billions of dollars each year in goods are donated to 501 c 3 charitable organizations in

the U.S. Commonly called gifts-in-kind, these donations must be used toward the

furtherance of the charitable intent and purpose of the organization but the disposition of

how they are used will vary. A charity may use the GIK to reduce operating cost. It may

donate the goods to another charitable organization (with or without a handling fee) to

achieve the highest or best use of the donated product. Or it may monetize the product,

that is liquidate it for cash provided: 1. The corporate donor did not receive an enhanced

tax deduction (170 e 3) for the gift, 2) There is tacit or implicit permission of the donor,

and 3) That the cash is used in accordance with the charitable purposes of the

organization.

Fee For Service / Fee for Space –

There is nothing new about churches and institutions utilizing an un-used or under-

utilized asset to generate revenue. In the context of social enterprise this will either: 1)

Be done by the church or institution on an intentional and more aggressive basis, with

revenue included in operating budget projects, and/or 2) Will involve the creation of a

separate LLC or business structure to do the same. A few (of many) examples included:

Cell phone tower rental (St Olaf’s Lutheran Church)

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Sub-letting space to other congregations and entities (many churches)

Skid Row commercial laundry services (rescue missions)

Operating a pre-school, K to 8 or high school (many churches)

--------------------------------------------------

Social Enterprise . . . is an emerging funding strategy which . . .

Is compatible with global trends

Is vital when considering our changing charitable context

And which uses the methods and disciplines of business and the power

of the marketplace to advance the social, environmental and human

justice agenda

RELATED RESOURCES & REFERENCES CITED

Alexandre, Claude. 2004. “Enterprise for Humanity: Help People Help Themselves”.

Unpublished document. Submitted to Claremont, CA: Claremont School of Theology.

Alexandre, Claude. 2008. “Goodwill of Southern California Center for Non-Profit Innovation

and Social Enterprise: Innovation Process Handbook, Transforming Ideas Into Social

Enterprise.” Submitted to Los Angeles: USC Marshall School of Business.

Fairbourne, Jason, Gibson, Stephen W. and Dyer, W. Gibb, Editors., 2007. Microfranchising:

Creating Wealth at the Bottom of the Pyramid. Northampton, MA: Edward Elgar Publ. Ltd.

Grant, Heather McCloud and Crutchfield, Leslie R. Fall 2007. “Creating High-Impact

Nonprofits”. Stanford Social Innovation Review. www.ssireview.org

Holly, Marc J., Carr, Mathew J and King, Mindy Hightower. 2014. “Informing and Inspiring

Leaders of Social Change.” Stanford Social Innovation Review. www.ssireview.org

McCrae, Jennifer and Walker, Jeffrey C. 2013. The Generosity Network: New

Transformational Tools for Successful Fund-Raising. New York: Deepak Chopra Books.

Perry, James. 2011. “The End of Charity…and the Renewal of Welfare”. Panahpur. Great

Britain. www.panahpur.org

Prahalad. C.K. 2010. The Fortune at the Bottom of the Pyramid: Eradicating Poverty

Through Profits. Upper Saddle River, NJ: Wharton School Publishing.

Yamamori, Tetsunao and Eldred, Kenneth A., Editors, 2003. On Kingdom Business:

Transforming Missions Through Entrepreneurial Strategies. Wheaton, IL: Crossway Books.