The Danger of Funder-Driven Social Entrepreneurship

I work with start-up social entrepreneurs and people often talk to me about new ideas they are hatching up. These conversations are usually full of energy and excitement, with the aspiring entrepreneur talking a mile a minute about a great idea they have for a venture and why it will be a great solution to a particular problem.

These individuals are passionate about the impact they want to create, but also passionate about starting a business to do so. Their excitement and willingness to take on the challenges that come with launching a venture shows.  

Recently, however, I’ve had some conversations that don’t follow this pattern. Instead of the usual excitement, I sense hesitation and reluctance. I ask these “aspiring entrepreneurs” why they want to start a business.  “My funders suggested I start a business and use the profits to help my nonprofit organization be more financially sustainable” is the answer.

Somehow, it seems, social entrepreneurship has gained the reputation of an easy solution to a nonprofit organization’s shortage of donor funds. Instead of funding the nonprofit’s work, some funders now see it a better use of their funds to help the organization start a side business that will then continuously fund the nonprofit.

In theory it sounds simple, if the donations aren’t coming in start a business and supplement your revenue with the profits. Unfortunately, it’s not simple at all. Entrepreneurship is not for everyone. It takes a certain personality, someone who is knowledgeable and passionate about a particular industry, is stubbornly persistent, and has an appetite for risk and an ability to deal with many ups and downs and constant uncertainty.

Early-stage investors say that it’s all about the people and the idea is secondary. You can have a great business idea, but the wrong people will not be able to implement it. Or you can have an average business idea, and the right people can make it a great business. As with everything else, some people are suited for entrepreneurship, some are not.

Because the right entrepreneur is such a key factor, we cannot assume that every nonprofit organization will have the right person on the team to launch an enterprise. Most in fact will not.  Starting a business, social or not, is very risky, and the failure rate of start-ups is incredibly high. Many successful entrepreneurs succeed not on their first try, but on their second, third, sometimes fifty-sixth.

Even if a nonprofit organization has someone on the team who has an entrepreneurial drive and the right skills and experience, launching an enterprise will take time and resources. For most businesses that do become profitable, it is a matter of years and many resources invested.

Funders encouraging a nonprofit to become enterprising must consider how much of their time staff will need to devote to the effort (or how much it will cost to hire a good management team) as well as the financial resources needed.

In addition to the risk of failure, another potential negative consequence is the effect on the nonprofit’s core activities if staff are devoting time to starting a business.  There have certainly been examples of nonprofit organizations that have established business ventures that have become profitable and contributed back to the revenues of the parent nonprofit.

Important factors for success, however, are the right people to lead the venture, and a business opportunity that can leverage a core competency of the parent nonprofit organization. A social enterprise is a powerful tool when used in the right circumstances. But expecting it to be a sure way for a nonprofit to add to its revenue streams is almost sure to result in a stressed out entrepreneur and funder, lost funds, and a loss of focus on the primary work of the nonprofit.