The Profitable Future of Traditional Philanthropy

QUESTION: I hear there are 1,000 non-profits in Santa Barbara. I am newly retired and moved
here from Chicago after selling my business. I look at an organization like the Girl Scouts which
provides for a significant portion of their financial needs by selling cookies and other things.
Why don’t more of these organizations find ways to create revenues to help them sustain
themselves? . . . Stephen in Montecito

That is an excellent question, Stephen. I feel that this is such an important question that I hired a
research assistant, Mariah Miller from UCSB, to help me research it and write this column. I
believe that finding more diverse ways for these valuable organizations to sustain themselves is
vital. You are right about the Girl Scouts. They generated $23 million in revenues through gross
profit on merchandise compared to $15.5 million through gifts, grants and bequests in the
previous fiscal year. There are other non-profits in Santa Barbara that are also using this
approach. But you are also right that this approach has been grossly underutilized.

One reason frequently given is that only certain kinds of organizations and fields can use this
approach. While that may be true, it doesn’t really appear to be as true as one thinks. In a study
of non-profits with revenue generating approaches, they were found in the following fields:
employment training, community and economic development, children and youth, rehabilitative
services, homelessness, hunger and poverty, advocacy, education and research, substance abuse,
elderly, health services, arts, culture, and humanities, other social services, environment and
animals, religious, and disaster relief. (Powering Social Change: Lessons on Community Wealth
Generation for Nonprofit Sustainability, Community Wealth Ventures, Inc., 2003.) That is quite
a list. So, lots of organizations facing social problems have found a way; but, back to your
question, why isn’t it utilized more?

It is not simple to create profitable revenue streams. It requires the will, the time, the expertise,
the training, and the commitment of the non-profit’s board and staff. Plus, it requires the capital.
It is not as simple as it was when we were kids just putting up a lemonade stand.

But, in addition, part of the challenge for non-profits is overcoming a series of myths that get in
the way.

Myth #1: Working to create earned income will distract the organization from its mission.

While this can be a problem, the change in funding may actually help them be more
effective in meeting their social goals. If the for-profit activities enable smoother funding and
can free the non-profit from the priorities of philanthropic contributions or government grants,
they can better focus on addressing their clients’ needs. When non-profits are not exclusively
dependent upon fundraising, the many talented people who serve on their boards can have more
time to contribute to the work of the board in other ways and these changed priorities may allow
board recruitment to focus on a wider variety of skills. It can enable social change and
community development.

When earned income makes non-profits more financially stable, more able to focus on their core
mission and more effective at meeting their organizational goals, money donated to them will go
further toward making an impact on the local community. Innovation and innovating responses
are needed to address the world’s social problems and finding new ways to finance and organize
our efforts in addressing them is one part of this process. Non-profits are not only aiming to
develop for-profit activities in the United States, but in other countries as well including some
unexpected places like China.

Myth #2: This approach is very risky.

In a study of respondents to a survey of non-profits, almost 60% were profitable within
two years. (Powering Social Change, p. 58.) Yes, there is risk. But by proper planning and
adequate capitalization, in many cases these risks can be reduced. It is a funny thing about risk.
Funders are often caught up in a strange quagmire. The risk between capital given as a grant and
capital given to create a profitable arm is a psychological conundrum. When a foundation, for
example, gives a grant, it expects no return other than the service provided. Therefore, all the
money is “lost”. However, when a foundation invests in a profitable arm for a non-profit, if that
money is lost it is a different feeling. In investments, we expect returns. If the investment fails
and the non-profit loses all the money, it is experienced as a loss. Investments open us up to loss.
However, in a certain sense, if the non-profit makes any return that is more than zero, it is a huge
gain and moves the organization in the direction of sustainability. Yet it doesn’t feel that way.
We hate loss as human beings.

For example, “Boomtown Café is a nonprofit that launched its venture, a catering business,
which generated revenue to support the early development of the nonprofit organization. Later,
the catering business sustained the organization when it had to temporarily shut down
operations.” (Powering Social Change, p. 64.)

If every non-profit was in the same financial position as Boomtown Café, imagine the security,
self-direction and effectiveness that would result. Currently, so much time is spent raising
money—what would happen if that time could be freed up to directly support the mission? How
much risk is it worth to attempt that?

Myth #3: There is nowhere to learn how to do this.

Training programs to help non-profits develop for-profit activities already exist, though
to the best of my knowledge there are currently no local providers in Santa Barbara County.
These programs assist non-profit professionals with the skills-development needed to
successfully manage this transition. They focus on developing what is known to work in creating
profitable arms: a supportive culture within the non-profit with a champion for the project, a
supportive board, and skills-training for staff; strategic planning with sufficient capital and initial
cash flow to get the project started; and a business orientation with focus on selling, customers’
needs, managed risk-taking, and clear goals for the present and future.

So, Stephen, you asked a vital question. In my opinion we need to start a major effort to do this
in Santa Barbara. In order for this to happen, local funders would have to acknowledge the
myths, decide to help the organizations that are interested in pursuing this direction, and then
provide the technical support needed to help them succeed.

Originally published in The Montecito Journal Vol 25 Issue #9