Heart of gold: nonprofits are reaping the rewards of starting for-profit ventures

Entrepreneur, Sept, 2004 by Chris Penttila

BALTIMORE'S CHESApeake Habitat for Humanity (CHH) is a nonprofit organization that renovates vacant houses and sells them at no-interest mortgage rates to low-income home buyers. This year, the nonprofit's 11 employees will oversee 2,000 local volunteers renovating 11 homes.

But CHH is renovating much more than houses; it's also updating its business model. In June, CHH launched its own for-profit venture called TeamBuilds, where corporate teams pay $7,500 for an all-day team-building session with an organizational development consultant while they work together to rebuild an old house. Amid nail guns and drywall, teams will work out their problems and increase their competitiveness.

TeamBuilds could generate $100,000 in revenue during its first full year of operation in 2005--a not-too-shabby addition to CHH's $1.4 million annual operating budget. The profits from TeamBuilds will be used to finance the renovation of even more homes. "There's not a service like it," says Mike Mitchell, 34, CHH's executive director. "It's a real entrepreneurial response to an unpredictable financial environment."

Today's nonprofits are looking to for-profit ventures as a way to diversify their revenue streams in tight financial times. But nonprofits also want to operate in a more businesslike fashion, says Cynthia W. Massarsky, deputy director of the Yale School of Management--The Goldman Sachs Foundation Partnership on Nonprofit Ventures, which sponsors an annual competition where nonprofits submit for-profit ideas and compete for prize money and consulting services. "Nonprofits are looking to be more efficient in the way they do things," Massarsky says. "By taking a few lessons from the business world, perhaps they've learned how to operate a little more efficiently."

The idea of nonprofits starting for-profit entities isn't new; it's been around since the 1980s (think museum gift shops and churches with daycare programs). What is new is the level of sophistication today's nonprofits are reaching with their new ideas, says Liz Livingston Howard, associate director of the Center for Nonprofit Management at Northwestern University's Kellogg School of Management in Evanston, Illinois. The movement has also acquired a name within the last decade: social entrepreneurship. At least 20 major business schools, including Duke, Harvard, Stanford and University of California, Berkeley, now offer programs dedicated to social entrepreneurship, and groups such as Net Impact are connecting people interested in it. "This has become an acceptable, teachable concept," Livingston Howard says.

The most successful for-profit ventures, experts say, tie directly into a nonprofit's core mission. Mitchell, whose background is in work force development, got the idea for Team-Builds while watching how groups interacted on construction projects. "The whole concept fits right into our mission of building decent, affordable housing for low-income people," he says. "It's not a separate service that differs from what we already do. It's in line with what we do."

But if the idea comes naturally, thinking entrepreneurially might not. Like any for-profit company, nonprofits have to figure out their target markets and how they'll sell to them. Consider AccessWorld Solutions, an earned income consulting venture that helps major corporations such as Adobe Systems and Cisco Systems make their products more accessible to the blind. It was started in 2002 by the American Foundation for the Blind (AFB), the venerable New York City-based nonprofit that aids the visually impaired. AFB is grappling with how to set appropriate fees for AccessWorld's consulting services. "We want to be a fair value proposition," says Walt Decker, 55, executive vice president of AFB. "If we price too high, clients might not use us. As a nonprofit, we're not used to those pricing challenges." AFB has hired a consultant to learn how to market AccessWorld's services to corporate prospects.

Nonprofits starting for-profit sides will bear the administrative headache of running two separate entities, something that can lead to liability if done incorrectly. "Doing all the separate bookkeeping, accounting and cost allocations can be a bit burdensome, time-consuming and distracting," says Jeffrey Tenenbaum, who specializes in representing nonprofits as a partner in the Washington, DC, offices of Venable LLC. 'A lot of people don't realize going in that, if you're going to do it, you need to do it right, and that takes a lot of work."

But nonprofit organizations that make it work stand to reap huge profits down the line. "This is just one idea we're developing," Mitchell says. "Maybe through this example, Chesapeake Habitat can eventually help other nonprofits do the same thing."

1 in 10 households operates some type of full-or part-time homebased business.