I was at a #LivingMyPromise retreat recently when someone spoke about why a social enterprise needs to be a for-profit entity in order to be sustainable. I immediately recalled a conversation I had had with another social entrepreneur a few months earlier. He was talking about his new venture related to mental health and mentioned that he was going to set it up as a for-profit entity. I asked him why he wasn’t structuring it as a nonprofit, to which he replied, “To make it sustainable.”
In response, I asked him if he could recall a nonprofit he is associated with that is more than 150 years old, and he could not. I said, “St Joseph’s Boys’ High School in Bangalore, where both of us studied.” Our school was established in 1858 and is still going strong as a nonprofit. Then I asked him if he could recall a nonprofit he is associated with that is 2,000 years old, and again he could not. I replied, “The Catholic Church, into which we were both baptised.” These two organisations have always been nonprofit entities and have survived longer than most for-profit corporates.
Similarly, take Alcoholics Anonymous, which was set up in 1935. It operates in approximately 180 countries and has more than 2 million members. The meetings are free to attend and there is no complicated organisational structure. Members take turns to help the organisation as ‘trusted servants’, and each group is a self-governing entity that relies primarily on donations from local members. There are no age or educational requirements. Most importantly, Alcoholics Anonymous has been around for 87 years.
These organisations show us that if you have a product for which there is a demand and one that does not require repeated infusions of large amounts of capital, you can be sustainable for decades, if not centuries. The legislations that govern nonprofits in India—the Indian Trust Act 1882, the Societies Registration Act 1860, and the Companies Act 2013—enable them to be set up in a way that they are sustainable for a long period of time. Their governance structures are tried and tested—requiring nonprofits to set up supervisory boards, conduct audits, comply with regulatory audits, and more—thereby allowing them to continuously raise funds for decades.
Of course, if governance is poor and only lip service is paid to these structures or if the team has limited fundraising capabilities, organisations cannot be sustainable, irrespective of their structure.
So why do social entrepreneurs feel the need to set themselves up as for-profits in order to be sustainable? This myth has been perpetuated for a long time and creates an unnecessary distortion of incentives along the way. The reason for this is that organisations end up being driven by the need to make money for shareholders—as opposed to improving the lives of the communities they are working with.
It is worrying to see social entrepreneurs get caught up in the stories of venture capitalists and smart bankers about how there is a fortune to be made at the bottom of the pyramid.
I remember a social entrepreneur telling me about her business that had both a for-profit and a nonprofit entity. She argued that she needed the for-profit component to be able to raise capital, create economic value for herself and others in the team, and build a sustainable organisation. It’s been more than five years and no significant additional capital has been raised nor has significant economic wealth been generated because the business model did not justify it. But both entities are still alive and thriving and continue to positively impact marginalised communities.
Another social entrepreneur told me that she needed her organisation to be structured as a for-profit. When I asked her why, she replied, “So that we can distribute dividends to the shareholders.” The shareholders were primarily she and her family. When asked how much surplus money she thought she would earn to distribute as dividends, she mentioned a figure of INR 25 lakhs. I told her that if she structured her organisation as a nonprofit and got donors to fund it, she could easily pay herself a monthly salary of INR 2 lakh, without worrying about being a for-profit entity and being unable to access donor money.
It is also worrying to see social entrepreneurs get caught up in the stories of venture capitalists and smart bankers about how there is a fortune to be made at the bottom of the pyramid. I recently attended a well-structured presentation on impact investing. The presenter spoke about one investment with a targeted return of 25 percent. I do not see how that can be achieved if the communities they serve were to get a fair share of the revenues. Clearly, the corporate entity would be gouging a significant share of the profits and the communities creating the product would continue to be exploited. In contrast, I recall the amazing transparency of an organisation (whose name I can no longer remember) that sold handmade products online. Every product had a detailed break-up of the selling price, indicating what the artisan made and what was spent on each part of the supply chain.
So how can nonprofits be sustainable?
The Forbes Nonprofit Council recommends nine steps that nonprofits can take to become self-funding.
- Monetise your services: Review the services and/or programmes that you offer and monetise one that clients would be willing to pay for.
- Apply an open-source model: Sharing and pooling resources—especially technology, tools, and talent—between organisations can help create a self-funding nonprofit model.
- Have dominant and secondary source funding: Diversify funding streams so that you’re not dependent on a few sources of funding.
- Become a social enterprise (and still be a nonprofit): Integrate other business models, such as consulting services or specialised products, that allow nonprofits to work towards being sustainably funded.
- Leverage social media and automation: Using new technologies and social media tools allows nonprofits the opportunity to regularly engage with their supporters and makes it easier for them to give securely online.
- Create proprietary knowledge: The products or solutions created by individual nonprofits can often be helpful to the wider ecosystem as well. Leveraging and licensing this research, programme, or knowledge can become an effective source of self-funding.
- Sell your value: Almost every nonprofit creates value as a by-product of its service to the community. Making this available for sale can cover a portion of revenue needs.
- Create mission-aligned earned income: Identify sources of income that align with your organisation’s mission. Doing this creates room for more creative and self-directed funding.
- Treat your beneficiaries as customers: While this might seem counter-intuitive initially, providing additional products or services to the communities you work with can translate into real benefits for both individuals and the nonprofit.
Setting up a social enterprise as a for-profit is not inherently a bad idea, but to do so on the belief that the only way to be sustainable is by being a for-profit is wrong. So, when thinking about setting up a social enterprise, remember that nonprofits can be sustainable for centuries as long as they are satisfying a need that users are willing to pay a reasonable price for and do not continuously need huge capital investments.