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Pride & Prejudice: (What) Can Nonprofits Learn From the For-Profit World?

May 09, 2012

(Richard Dare is managing director and CEO of the Brooklyn Philharmonic and an entrepreneur. The article below, which appears here with permission of the author, originally was published on the Huffington Post's Culture blog.)

No one, least of all I, would argue nonprofits do anything less than important work.

In addition to providing vital art, theater, and music experiences, as Senator Bradley once noted, nonprofits have done everything from creating the polio vaccine to building the Sesame Workshop to inventing the nationwide 911 system we all benefit from. They've protected endangered species, played a crucial role in bringing down apartheid, helped rebuild civil society in Eastern Europe, de-mined war zones, cared for aged patients, fed and sheltered the homeless, and continue to provide help for schools nearly every day of the year. About half our nation's hospitals, colleges, and universities are nonprofits. And yes, nonprofits even play music.

For the purpose of this discussion, let's stipulate that nonprofits do some pretty amazing things, and we'd all like to do them properly, without compromising our integrity one iota. We can talk about what the good things are and why they matter later, perhaps, in a future article.

But for now, because I identified a structural fissure in the underlying nonprofit business model the last time I wrote, let's focus on some fundamental steps nonprofits might take if they are to follow their financially more perspicacious siblings in the for-profit sector toward a brighter financial future.

And lest we forget the reality of our situation, consider the 2012 State of the Nonprofit Sector Survey released by the Nonprofit Finance Fund last month. That report surveyed 4,500 U.S. nonprofits, including arts, education, and human service organizations. Taken as a whole, the survey found that 85 percent of all nonprofits experienced an increase in demand for their services in 2011 (and 88 percent are expected to experience an increase in demand again in 2012), while only 57 percent of all nonprofits have enough cash on hand to last them three months. No business in the for-profit sector would tolerate this state of affairs on an ongoing basis. It is certainly more than a bit precarious if sustainability really is one of our goals.

Like everyone else in the business world, we nonprofits need money to operate, folks, and lots of it.

But suggesting to the nonprofit sector that it might learn something by studying the habits of their for-profit brethren is a bit like suggesting a priest could learn something from a rock-and-roll promoter. It upsets people. But who knows? Maybe the priest should take a gander at the fellow in the next auditorium. I'm not suggesting nonprofits give up pursuing donations. There's a value to the giver, too. It's clear, however, we need to supplement our old strategies with newer ones if we're going to accomplish the goals society needs us to accomplish because the numbers show that the old methods are not working. So to prime the conversation, here are a few ideas, set within three broad strategic categories.

Strategy One: Side Ventures 

The most obvious way nonprofits already earn unrestricted revenue is through operating side businesses -- gift shops, cafeterias, renting out performance space, parking garages, and the like. For the most part, this is pretty mundane stuff, not worth rehashing here, but a category nonetheless.

For a somewhat more sophisticated example of a successful side venture, consider the 56-story condominium Museum Tower atop the Museum of Modern Art in New York City, which was conceived as a revenue-producing business meant to support the museum's operations. The details are a bit complicated to go into in a short discussion like this, but the innovative bond the city developed to finance the effort and the tax structure it operates under both seem like wins to me.

To provide a significantly simpler, street-level example, consider this idea from the for-profit world. A friend of mine in San Francisco bought a restaurant after selling a successful business. He thought it would be a good retirement project, but in retrospect it was a vanity purchase -- and one he soon regretted, after the restaurant only made $300,000 in revenues its first year and operated at a loss. By the end of the first year, he was at his wit's end.

One day when I met him at his place to console him, I noticed that the restaurant was situated on a corner next to a fairly quaint alley. I asked him why he didn't try closing off the alley and having some sort of block party there. "What would it hurt?" he must have thought. "I'm almost broke as it is." So on the weekend before Valentine's Day, my friend roped off the adjacent alley and went online to advertise a party for sweethearts -- mostly cocktails, not much food.

He sold $80,000 worth of booze on Saturday. And another $80,000 on Sunday. ("All cash," he told me later.)

Now he throws five two-day festivals in his alley every year -- on Valentine's Day, Saint Patrick's Day, Cinco de Mayo, Independence Day, and Columbus Day -- and makes about $800,000 from those parties, in addition to the $300,000 his restaurant brings in.

Okay, so my friend isn't a nonprofit. But he may have something to teach those of us who work in the nonprofit sector about being flexible. My friend wanted to sell food and drink, and now he does. He wanted a restaurant, and now he can afford to operate one. How can we do the same in the nonprofit world?

I understand, by the way, that consultants generally advise nonprofits not to become distracted by side ventures for fear they'll stray from their core missions. My own view, however, is that losing focus is more a function of weak leadership than of structure.

Strategy Two: Grown-Up Partnerships

Jason Saul tells an interesting story about a nonprofit foodbank that struggled to make ends meet doing things the old-fashioned way: begging for money from government agencies, foundations, and individual donors. It would then spend the funds it received on food for the hungry -- not a bad plan, so long as you don't need to scale in any meaningful way.

But the organization had a problem (one familiar to most nonprofits): because of the relentlessly growing demand for its services, it was never able to fulfill its mission of feeding everyone in the region who was hungry. Clearly, the organization needed a better business plan.

Its goal was, of course, to feed people. But under its existing business model, it was only able to feed some of its constituents a single meal a day. How could the organization get to three squares a day and still have money to keep up with growing demand?

Then the organization had a new idea based on the fact that many people paid for the other two meals they needed with food stamps and the biggest percentage of food stamps in America is spent at Wal-Mart stores. So the foodbank approached Wal-Mart and proposed the following:

What if we took every person we feed and registered them for food stamps (which would help to solve the problem of finding an extra two meals a day for them). In the process, we would give every person who signed up a discount coupon and a letter inviting them to shop at their local Wal-Mart. Assuming we fed roughly 100,000 people a year and were able to sign them all up, and assuming that the average food stamp benefit is about $133 a month, the program could generate as much as $13 million a year in new sales for local Wal-Marts. In other words, real money.

The foodbank then asked Wal-Mart if they would contribute roughly 7 percent of their marketing budget (as opposed to the company's much smaller philanthropic budget), or about $1 million, to help the foodbank grow and expand its business. Long story short? Today, the foodbank is doing fine.

I have no idea whether this story is accurate, but that's not the point.

Setting aside your personal feelings about food stamps or big-box retailers, there is a fundamental lesson for nonprofits in this story: the foodbank in question identified a for-profit partner that could help it change its business model from asking others for money to selling its impact in a commercially viable way that did not compromise its core mission (to feed the hungry), but instead improved its capacity to achieve that mission.

What about an orchestra, or any other nonprofit, for that matter? We plead for money then ladle out music and education, much like the foodbank in the story doled out food. Once the performance is served up, it's gone, even though we know people will be hungry for another serving in no time. How can we apply the lesson learned by the foodbank to our own efforts to achieve a similarly effective result?

Look around. There are a wide variety of these sorts of partnerships, with both for-profit companies and government agencies -- partnerships that produce value for both sides and not just one. I'm reminded of TerraCycle, an impressive company that teaches kids to recycle things like Capri Sun drink pouches. Through the partnership, the kids learn about recycling, the school makes a little extra spending money, and TerraCycle uses the waste items to make nifty handbags, purses, and other consumer items. A virtuous cycle, if there ever was one.

On the government side, New Yorkers are quite fortunate to have a Department of Cultural Affairs that is positively brilliant at helping arts organizations develop effective partnerships with government agencies, for-profit companies, and other nonprofits in order to stimulate a robust arts ecosystem in the city. Agencies like these are well worth approaching as you begin to brainstorm your ideas for beneficial partnerships.

Strategy Three: New Money from Your Core Business

A few years ago, I owned a clothing business in Asia, and my experience there might have some lessons for nonprofits. Here's the gist of it:

It was a large company that sold casual clothing with the names and logos of various rock and roll, hip-hop, and pop bands printed on each garment. The company made a lot of money because people liked the clothes. Indeed, selling clothing was the core business of the company in much the same way that cultivating donors is the primary business activity for many nonprofits.

But there was a part to the clothing company story most people overlooked -- one that accounted for an awful lot of additional revenue at the end of the day. And that extra revenue allowed us to do more of what we really wanted to do, which was to make our stores cooler, invent new things, and connect with new audiences -- all things that a lot of arts organizations want to do, too. What was the little secret hidden inside our business plan?

Well, it had to do with the way we picked the clothing we chose to sell. There was a big open stage in the middle of the company's headquarters, and every week we would invite a new indie or hip-hop band to perform during lunch hour. The performances gave employees a pretty good look at the items we were selling as well as good insights into the popular music scene.

Then each quarter, the company would pick a few of the bands that had performed and would offer to hook them up with concert gigs, help get their songs into iTunes, and so on. As a result, the bands got some exposure and grew their audiences, while the company secured exclusive rights to make and sell T-shirts, pins, and hats with the bands' names and logos, as well as partial ownership of the songs it was sponsoring.

If a band succeeded in selling a million downloads of a song, the company would sell its share of the mechanical and recording rights of the song to a major record label and sell its share of the distribution rights to a large retailer or distributor like Wal-Mart or Target. It was a win-win: the band had developed a huge following and was free to do its own thing, while we made a ton of money selling the rights. Hardly anyone knew what we were doing, or that that our parent company was responsible for generating more platinum singles than any record studio in America. Wild, right?

The for-profit business world is full of complex strategies like this, which is part of the reason so many for-profit companies are able to weather stormy economic downturns better than the nonprofit that are most needed during such downturns. And somewhere in this little tale may be the kernel of an idea for a new business model for a nonprofit that is able to look beyond the complexity and deconstruct what it has to teach us.

Making These Ideas Useful

Some readers, of course, will object to the three strategies I've described. Remember, they're intended to be a starting point for discussion, not a how-to manual. So play with them. Adapt them. See which ones might align with your activities and work. Improvise and experiment with your business model, just as you do with your art.

When I say existing nonprofit business models are not working anymore, I'm not trying to be provocative. I'm just saying the ceaseless pleading for funds infects everything we do. At the most fundamental level, it means the only way we can do what we believe is right is to wait for someone to give us money to do it. It means we can't grow as fast as successful organizations in the for-profit sector because we are forever relegated to working in the beneficent shadow of our supporters. It means we must tread lightly with and around those supporters because we depend on them for our existence. We are forced to oblige the person who funds us rather than trade value equally with those we are really trying to reach with our work. It is a paradigm that ultimately dead-ends in a master-servant relationship. Its effectiveness is waning. And we should be looking to change it. Starting now.

I'm confident the nonprofit sector can resolve this fundamental structural problem -- but only if it gets over the conceit that the laws of economics do not apply to nonprofits because our work is so meaningful and important. Instead, we must face the reality of our situation with the same vision and gusto we deploy in pursuit of our core missions.

Can we nonprofit leaders make the change? Or will our pride and prejudices consign us to a future as zombies?

-- Richard Dare

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