Importance of Business Modeling in Social Ventures (1/3)

(This is the first in a series of three posts on Business Modeling in Social Ventures. See here for the second and third entry.)

Understanding nonprofit economics is a tricky endeavor. Nonprofits have an enormous impact on both society and our economy at the micro and macro levels. Because of my personal and professional experiences as a social entrepreneur and having worked in the nonprofit sector, I have become increasingly interested in the details of the financial underbelly of these do-gooder sectors. Specifically, I am working to answer this question: How can nonprofits and social ventures develop stronger, sustainable business models?

This interest came to a head when I was recently asked what business model most inspires me. Before I started researching for this case study my answer was Kiva, a non-profit microfinance organization that provides “micro loans” (usually less than $1,000) to entrepreneurs in developing countries. Kiva is not an original idea. The Kiva business model is built off of the hard work of a ground-breaking predecessor, Muhammad Yunus and Grameen Bank, each of which I’ll get to in a minute.

My interest, and the reason I think a conversation about sustainable business modeling is critical for nonprofits and social ventures, stems from having spent the better part of a decade in this world. Most social ventures and most nonprofits do not develop viable sustainability plans or long term business models beyond pursuing grants and donations. (This excludes the likes of the NFL and NCAA, both of which have billions in revenues every year, and I’ll address the role of the nonprofit and foundation as tax shelter some other time.) Nonprofit business models are heavily dependent upon their tax status. In turn, their reliance on charitable giving is influenced by tax regulations, stock market performance, government and foundation grant-making and overall health of the economy. Social ventures, as well, rely too much on “return on impact”. Influenced heavily by experience and research from education, many education-focused social ventures buy into the belief that if they can prove impact that will drive revenues. Especially in a complex education marketplace where the end user is rarely the buyer, this is rarely the case.

In a nutshell, they each – nonprofits and social ventures – depend on the generosity of individuals and grant makers. The costs of not being financially independent puts any social-focused venture in jeopardy of not being able to serve its ultimate purpose.

To put it into bullet points: why do nonprofit businesses need to develop sustainable business models? Three reasons:

  1. Nonprofit is a tax status, not a business model, and too often nonprofits and social ventures rely on their tax status as their business model.
  2. Sustainability through long-term, steady, non-grant revenues is an ethical and business imperative for serving a nonprofit mission.
  3. Nonprofits and social ventures play a critical role in our society and in our economy. The non-profit sector makes up 5.4% of US GDP, 9% of the economy’s wages and nearly 10% of US jobs.

The implications for being more business-minded are both micro and macro. So who out there has figured out how to serve these two seemingly warring masters: mission and sustainability?

In two follow up posts I will highlight two microfinance organizations – Grameen Bank and Kiva – who have developed exemplary business models that serve their respective missions, are sustainable, and can scale all while being capable of existing independent of traditional forms of philanthropic giving.

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