Beyond Typical Nonprofits

Even if nonprofits can generate more of their own revenue, it's questionable whether the IRS-prescribed mold, the "Section 501(c)(3)" organization, offers the best structure for doing so. Despite many success stories of enterprising nonprofits, we share the skeptics' nervousness about confusing nonprofit and for-profit missions. Plus, we are concerned that nonprofits, however entrepreneurial, are usually poor competitors in the marketplace.

Consider just one issue--finance. While a for-profit can meet cash-flow difficulties by issuing bonds or stock, a nonprofit usually must turn to debt. Without much in the way of assets to serve as collateral, few nonprofits qualify for significant loans. Even well-run nonprofits tend to grow slowly, if at all. With a social mandate to spend accumulated earnings, most perpetually operate on the brink of bankruptcy.

After reviewing this and other problems facing nonprofits (high staff turnover, poor management, overreaching boards, zealous IRS regulators), one of the leading promoters of entrepreneurial nonprofits, the Roberts Foundation, concedes, "Were there a significant competitive advantage to being a non-profit engaged in revenue-generating activities, we would have witnessed a marked increase in the number of businesses seeking...to take advantage of the added financial benefit of non-profit status in the marketplace. In fact, we see just the opposite."

The solution for a revenue-minded nonprofit is not to give up on entrepreneurship but to set up a subsidiary. Put everything that can conceivably be placed on a break-even footing (or better) into the revenue generator, and use the proceeds to underwrite everything else through the nonprofit. The subsidiary can be either a for-profit (our preference), a separate nonprofit with a clear revenue-generating mission or even just a department of the nonprofit with a strong measure of autonomy. In all these models, the mission-oriented nonprofit need only become an investor, leaving actual operations of such an enterprise in more business-oriented hands.

The Rocky Mountain Institute, a leading promoter of alternative energy technology in Snowmass, Colorado, has embraced this strategy. E-Source, begun as a project within the nonprofit in 1986, provides in-depth analysis of services, markets and technologies relating to energy efficiency and renewable energy production. In 1992 RMI secured a program-related investment from the MacArthur Foundation to move the work into a for-profit subsidiary. By 1998 it was generating about $400,000 for the parent nonprofit, but RMI decided it could do even better under new management, so it sold the company to Pearson PLC in Britain for $8 million. Today, RMI assists and benefits from other for-profit spinoffs, such as Hypercar, Inc., which aims to create a lightweight body architecture to improve the efficiency of the entire US automobile fleet.

Another example is the Intervale Foundation, a nonprofit based in Burlington, Vermont, which derives more than half its income from inside enterprises. On a 325-acre tract of land Intervale develops socially responsible farm businesses while protecting natural resources. The leading cash generator is the largest commercial composting facility in the state. Its farms program collects rents and fees for land, equipment and other infrastructure from a dozen for-profit organic farms and community-supported agriculture initiatives. Other ventures under development include a conservation plant nursery and technology that processes cow manure into methane and other salable products.

Pioneer Human Services is a nonprofit based in Seattle that assists a wide range of at-risk populations, including the unemployed, the homeless, alcoholics and addicts, and ex-convicts. The organization serves 6,500 people a year and generates nearly all its $55 million budget through a web of ambitious subsidiary nonprofit businesses: cafes and a central kitchen facility for institutional customers, aerospace and sheet-metal industries, a construction company, food warehouses, a real-estate management group and consulting services for other nonprofits. Most of the jobs in these businesses are awarded to its at-risk clients, allowing it to further its mission to integrate clients back into society.

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