by Theresa Schieber and Adam Gaynor

Increasingly, nonprofits that seek to improve their financial sustainability and minimize their reliance on private philanthropy are taking a page from the social enterprise playbook, and looking for ways to develop or enhance earned revenue streams through a “business.” This important topic was the focus of UJA-Federation of New York’s recent “Power Your Mission” conference. In the session we were invited to present on “Raising Impact Capital,” we emphasized that despite this trend, earned revenue alone is rarely a silver bullet, and developing and operating strong social enterprises requires significant work and resources. In fact, few social enterprises thrive on earned revenue alone, and in many cases, private philanthropy or public sector support is critical to launching or scaling a social enterprise.

Based on our experience helping hundreds of nonprofits develop their strategic plans and grow their funding, the three fundraising challenges we see for any nonprofit seeking to augment their sustainability through a social enterprise model are:

1. How do you decide to monetize and then develop a business around a service you currently provide to create an earned revenue stream?

2. If you see a service opportunity that is unmet, how do you decide if you should launch a business to meet that service need, and if an earned revenue/social enterprise model will work?

And, perhaps most importantly,

3. Given that few social enterprises are 100% sustainable through earned revenue alone, if you pursue the social enterprise route, how do you engage donors to invest in launching, delivering or expanding that service?

Monetizing a Current Service or Building a Business Around an Unmet Need

Your social enterprise is intended to be both a resource development strategy (in other words, it should make money) and a method to achieve your organization’s mission or theory of change. Your social enterprise could take many forms, from a new technology or process that can be “sold” to other organizations, to packaging an expertise into a consulting service, to a shop or business that provides a service such as landscaping and which employs a special-needs population.

Before you launch a social enterprise, answer these questions: is there a customer base that will pay for this service or product? Does this business dilute our mission? Is the board ready to invest in what it will take to launch this business? Do we have the skills today or can we acquire them to support a new business? Invest in a business planning process that includes thorough market research and competitive analysis and a realistic financial plan. Be ruthless in your critique of the viability of the business.

Engaging Donors in Funding Your Enterprise

Although a social enterprise is a business, the fact remains that private philanthropy is critical to launching and sustaining these businesses. While shifts in the investing landscape are beginning to build an interest in “equity and debt” instruments for social enterprises, the vast majority of “financing” comes from traditional grants and private donations. As such, adding a social enterprise to your nonprofit will actually increase the need for private philanthropy.

The most effective fundraising for your social enterprise utilizes the best practices of traditional fundraising. While many donors will want to see specific metrics and outcomes related to your enterprise, the fact remains that they are investing in changing people’s lives. Your fundraising pitch needs to give the numbers a human face. And while we are talking pitch, be succinct, and demonstrate to your donors that you are leveraging their investment by generating earned-income. Finally, think strategically about the donors who would be most interested in your enterprise, and develop a multi-year cultivation and solicitation strategy. Be prepared to focus on a small audience and to do lots of education around what you are trying to accomplish. Plan for an 18-24 month timeframe from initial cultivation to investment; all the same rules apply to your social enterprise investor as to a major gift donor.

Social enterprises offer a compelling strategy to help strengthen a nonprofit’s financial foundation. But, they are not for everyone. However, in an era of increasing emphasis on “business methods,” the social enterprise model of metrics, a clear business case, and a strategic fundraising approach can be applied to any nonprofit’s traditional resource development strategy.

Theresa Schieber is Vice President and Chief Operating Officer at The Whelan Group, a consulting firm that provides strategic advice to non-profits of all sizes, with a focus on strategic and business planning, board development, capital campaign and annual fundraising.

Adam Gaynor is a consultant at The Whelan Group and a doctoral student in Education and Jewish Studies at NYU.