REDF | About REDF

Why Social Enterprise?
REDF partners with a portfolio of social enterprises: businesses owned and operated by nonprofit organizations. These social enterprises employ people who face barriers to employment because of various life circumstances such as homelessness, a criminal history or coming from low-income communities that offer few opportunities. The enterprises aspire to return profit to programs that help people. Offering both employment and life-skills training, our portfolio of social enterprises operates simultaneously in both the business and social service sectors.

For REDF, social enterprise offers the best opportunity to invest in long-term solutions. It also provides the best setting for those with severe employment barriers to learn how to work in real employment situations. Because they are operated by nonprofits, our social enterprises can take on the increased risk of offering transitional and permanent employment to individuals outside the economic mainstream, while providing them the support and guidance they need.

How can I support REDF’s work?
REDF depends on the generous donations of donors to achieve its mission. As a publicly supported, 501(c)(3) charitable organization, REDF gratefully accepts direct, tax-deductible gifts of cash and securities.

Thanks to our Board of Directors’ gifts underwriting REDF’s operational expenses, 100% of all donations to REDF go directly to our programs and services supporting people in need and the nonprofits that help them. For more information about investing in REDF’s work, please contact Carla Javits at 415-561-6681.

I’m considering a career switch from the for-profit sector to the nonprofit sector. What should I keep in mind?
Please refer to this PDF for an article by The 360 Group’s Vincent Robinson on transitioning from the private to the public sector. This article was originally published for Stanford Graduate School of Business’ PMP Forum, July 2002. It is posted here with permission.

What is Venture Philanthropy?
Venture Philanthropy is the philanthropic application of venture capital principles and practice. It is an approach to philanthropy that emphasizes capacity building of organizations and the belief that grants to nonprofit groups really represent a form of investment in an entity. In the same way that one would not make a significant investment and then walk away, Venture Philanthropists look for ways to be appropriately engaged in supporting the work of the nonprofit beyond simply providing funding.

Is there a body of literature on Venture Philanthropy?
There are not too many pieces one may turn to in order to understand the basics of this approach. A good place to start is the article “Virtuous Capital,” published in the January/February 1997 issue of Harvard Business Review. Another good resource is the paper “The Challenge of Change.” REDF has been engaged in documenting its experience with Venture Philanthropy, and our Publications page includes many papers written by us and others which you can download to read about the issues we are addressing.

Why is Venture Philanthropy so controversial?
As is true of many things that are “new,” Venture Philanthropy is often presented as a critique and alternative to traditional or Classical Philanthropy. In public discussions and articles, it is often easier to make cursory critiques of each approach rather then spending the time to really dig down and understand the relative value of each. In addition, the advocates of VP have sometimes had to justify the very practice of VP in the face of opposition from those who feel any direct involvement of donors in relation to their grants is inappropriate and that nonprofits should be free to pursue their vision without what is perceived of as “interference” by funders. Furthermore, many practitioners of VP ask their investees to engage in significant documentation of the results of their work, often called social impact tracking, social return on investment or other approaches. Some critics of VP feel that the central work of the nonprofit sector is beyond measurement and it is wrong to attempt to enable nonprofit organizations to measure and quantify the value of their work.

In point of fact, all funds moving through the nonprofit sector represent types of capital that are being applied in the creation of social value. This capital represents a Nonprofit Capital Market and as in any capital market, there is a place for many and all types of investors. In the for-profit market, some players are venture capitalists, while others are investment bankers. In the same way, the nonprofit sector needs both venture philanthropists and classical funders in order to provide nonprofits with the array and type of capital necessary for true success. At the end of the day, we need more resources and types of support if we are to have any chance of substantially addressing the significant challenges before us all.

What is “engaged grantmaking” and is it different from Venture Philanthropy?
Many of those involved in what has been called Venture Philanthropy are realizing that in many ways “all” they are doing is becoming more connected — more engaged — to the work of the nonprofit sector. For some funders this means being involved in monthly meetings with investees, but for others it may manifest in other forms. In some ways, Venture Philanthropy is simply a subset or smaller component of the larger movement of philanthropy toward engaged grantmaking. As we move forward over coming years, it will be interesting to see how philanthropy continues to evolve in response to the many demands of the nonprofit sector as a whole.

Isn’t it illegal for a nonprofit to run a for-profit business?
Not necessarily. Nonprofit organizations are clearly prohibited from engaging in ongoing commercial or other activities which profit an individual or outside interest; however, all nonprofits should be profitable, or you would be out of business and unable to pursue your charitable mission! In general, nonprofit organizations may operate “business” ventures to the degree that those ventures are directly related to the pursuit of the social mission of the nonprofit. They may even operate out and out for-profit ventures as subsidiary corporations but need appropriate legal counsel every step of the way, since each situation is different and has different implications for the sponsoring organization. You should always be sure to secure solid legal advice if and when you are considering any of these types of ventures.

There is no single law book regarding this process. In general, the legal “code” for nonprofit enterprise consists of existing regulations as well as a series of IRS private letter rulings over the course of the last 30 years. Each of these is specific to the original case and jurisdiction and is not pertinent to every other situation that might arise for a nonprofit executing these strategies. However, they do give a general indication as to how the IRS views various types of nonprofit business or job creation activities.

Many communities have nonprofit resource centers that may have libraries with helpful guidance on this issue. For example, The National Economic Development and Law Center can provide you with advice and documentation regarding many of the legal ramifications of creating a business venture out of a nonprofit. Other resources may be found on our Links pages. The key point to understand is that each organization is different with different conditions. Again, anyone considering engaging in community wealth creation and nonprofit enterprise should be sure to consult informed legal counsel in order to best understand how to structure the effort and limit the liabilities to the sponsoring organization. Don’t take the information on this Web Site or any other resource at face value. Talk to an attorney!!

What are the reasons for creating nonprofit enterprise?
Basically, there are two reasons an organization might pursue nonprofit enterprise:

As a strategy to further its social mission, for example to create transitional and permanent job creation to benefit a targeted population.
As a source of earned income as part of a strategy to diversify the revenue base.

What are the reasons for not attempting to launch a nonprofit enterprise?
It should be understood that launching a nonprofit enterprise is not going to solve your organization’s problems — it will simply alter the type of challenges you have to deal with! It’s important to understand that over the years many nonprofits have failed to successfully pursue this strategy, and nonprofit enterprise creation should probably not be motivated by a simple desire to replace lost funding or increase income. These types of ventures are not easy, and there is no quick return for the investment of money, time and energy. However, if you are interested in providing employment and training opportunities to individuals who have experienced chronic unemployment or if you are seeking a way to diversify your revenue base, launching a nonprofit enterprise may be for you.

How do I go about starting a nonprofit enterprise?
There are a variety of ways to start this process, but it all boils down to knowing your organization’s current capacity, understanding what “value” you may have in the market place, and identifying what, if any, competitive advantage you may have, both as a nonprofit and potentially as a for-profit entity.

You might begin by doing a self-assessment of your organization, identifying your current strengths and position as a nonprofit. At a minimum, ask yourself the following questions about your agency:

What is our core mission and reason for existence? What do our articles of incorporation say? What do our employees say? What do our clients or communities of interest say?
How do we currently deploy our resources in support of that mission?
Do we use our resources as effectively as we could to pursue our mission?
Are there activities that really don’t relate to our mission and that we could transfer to another nonprofit with greater capacity to deliver that service or program?
Are there other organizations in our area that could provide these services more effectively than our organization?
What are our total assets (financial, real estate, volunteer, professional, etc.)?
What are our significant liabilities and challenges? (carrying debt, no financial stability, etc.)?
Is it possible for us to develop earned income based on any of our current activities?
Can we modify something we currently provide for free into a product or service for which we could charge fees?

Start from the inside and work outward. The further away you get from your mission as a nonprofit, the more likely you are to fail since you will have less expertise and may encounter increasing levels of risk. Historically, those enterprise activities with which a nonprofit had no prior experience or expertise have seen a higher failure rate than those that were directly grounded in the experience or background of the sponsoring organization.

How do we educate ourselves on these issues?
Understanding the basics is not rocket science but understanding and applying them successfully often is! REDF has available for free a number of papers and books to help you learn more about these issues. Please see our Publications page for more information.

Find information based in actual experience, not on theory or philosophy (and don’t launch your enterprise based upon someone else’s vision. Base your expectations on others’ direct experiences and your dreams on your own desires!)
Conduct informational interviews with groups that are actually engaged in the type of work you are researching. While you will certainly put your own spin on your approach, many of the ventures you will consider will be in existing markets with existing nonprofit and/or for-profit practitioners from whom you may learn.

How do we determine what kind of business to start?
Engaging in a business planning and feasibility study process for yourself is really the only way to answer this question. In general, you should at least be able to answer the following punch-list of issues:

Define Goals, Assess Organization and Community:
Why do we want to start a business venture? What are our goals? Prioritize those goals.
How does creation of a business venture fit with our organization’s mission?
What other organizational issues need to be addressed?
In what areas does our organization excel, what are our strengths?
What resources/facilities do we have that might be of use in a business venture?
What aspects of our community might affect a business venture?

Develop Venture Criteria:
What is the primary goal for the venture?
What are the employment impact goals for the venture?
What are the community impact goals for the venture?
What staffing goals do we have for this project?
What are our financial and timeline goals?

You should also read books from your local library on small business development and contact your local office of the Small Business Administration. Save the Children has released a very good book called Managing the Double Bottom Line: A Business Planning Guide for Social Enterprises and other web sites can assist you as well.

What will be the impact of this on our organization? Should I anticipate board and staff changes?
“If you like your staff, board, and clients the way they are then don’t do this, because it will change everything.” (a REDF Portfolio Executive Director).

Nothing is constant but change. The pursuit of nonprofit enterprise will mean you yourself will change, as well as everything else. You will need new skills, your organization will need new resources and perhaps structures, and your clients will face new expectations. The whole point, however, is that at some level what you have pursued in the past will never be what you pursue in the future. Nonprofit enterprise creation provides you with an opportunity to reinvent your organization in anticipation of the challenges of this century. Remember, this is not survival of the strongest or the biggest — it’s survival of the fittest.

How much will it cost? How much do we need to have to launch our business?
It depends. How much time will you need to plan your venture? What are the costs associated with a solid planning effort? What are the specific capital requirements of your business idea? Staff and volunteers must be willing to make the time investment BEFORE you consider investing money in it. Without a doubt, whatever you do will probably cost more, take longer, and be more difficult to successfully execute than you may want to think. However, remember: While it’s not for the faint of heart, staying the course will probably cost you and your organization less in the long run. If you manage your resources effectively and spend only what you should, you will find that while it may not be an inexpensive change, it may well be the most effective investment you have made in the pursuit of your mission.

How do I convince my board?
Every change effort evolves in different ways. Some are led by the board, some are led by staff and others are driven by the consumers of your program or service. In general, your idea should have a champion to engage others in a discussion of the idea. Not all questions need to be answered ahead of time, but as a rule, you must have an organizational willingness at least to pursue the questions openly. An important strategy is to include one or more representatives from the “doubters” in the planning process. They need to have the opportunity to raise all the tough questions up front and, as the process evolves, could become your biggest supporters. Above all else, you should not try to stifle opposition during the planning stages. However, there comes a time in every organization when a decision must be made on the course and direction of the future. If you feel the boat is sinking and off course, you may find that it is time to change ships!

What are the most critical success factors?

Existence of or the ability to create a strong entrepreneurial team
A comprehensive planning process
Identification of a compelling business opportunity
Understanding your unique, competitive edge
Finding a fit with your overall goals and needs
The possibility to use the venture to engage in supported job training and/or employment
Existence of adequate financial controls and tools for planning and monitoring the effort
Access to long-term, adequate and appropriate financing

Should a businessperson or a nonprofit person manage the business? Should she have an MBA or an MSW?
It’s important to understand that many different skills and talents are called upon to create the successful venture. However, having said that, if you are engaging in any type of business development it is critical that your organization has managers with real, demonstrated business skills and experience. A fundamental skill set should include:

Comfort with numbers and an ability to use financial calculations to help keep the venture on track
Understanding of market dynamics
Ability to manage time, people and priorities
Ability to operate in a constantly changing environment

How do I draw these excellent people to my venture opportunity? Should we pay market rate for a for-profit manager or market rate for a nonprofit manager?
Every nonprofit enterprise must confront a core truth: if you want a profitable, sustainable business, you must pay for managers who are able to create market-based value — which in this case means money. If you want a former social worker to run your business like a program area, fine. What you will get is a new program area for your organization. If you want a venture that is economically successful, you will need managers able to deliver. They may come out of the nonprofit sector, but they MUST have the appropriate skill set to bring you the success you deserve. In order to get that experience, you may find that you will have to pay a business manager more than a program manager. This can be a difficult issue for any nonprofit to address, however it is also an important one for each organization to come to terms with. Ultimately, the goal of the social purpose enterprise is to get to a financial stage where it can pay market rate compensation to both managers and employees.

Can the nonprofit sector really create jobs in the mainstream economy?
Yes and No! The marketplace creates employment opportunities with greater and lesser degrees of success. Nonprofit enterprise is not a panacea for poverty or a replacement for the operation of market forces. What nonprofits can do is create transitional jobs for those attempting to reenter or join the economic mainstream. The nonprofit sector is ideally positioned to fill that social need in a way that the for-profit sector will never be positioned to do. In the process of creating these transitional employment opportunities, the nonprofit sector will certainly create some number of market-based, “permanent” jobs. However it would be foolish to think that nonprofits, with their social mission, increased costs of providing support services and other burdens, would ever be able to create more jobs than those for-profit businesses operating without community expectations and demands.

Where can I get money to do this?
The first step is for the nonprofit itself to use volunteer and in-kind staff time to engage in the initial assessment of any enterprise opportunity. If you haven’t invested your own resources in the effort, why should anyone else? Having done that, it may then be time to begin identifying potential funding partners to support the expanded planning effort and possible venture that might arise from it. These partners may include foundations, individual donors or governmental sources with which the organization already has funding relationships. It may also mean developing new, “investor” relationships with individuals and donors who share your vision of social entrepreneurship.

Should I bring in a consultant? How do I know when to do so?
The first rule of thumb when considering using consultants in this work is: Don’t pay for someone else’s learning curve and don’t offload your own responsibility to learn how to engage in nonprofit enterprise!

Having said that, there are some things to look for and be aware of when hiring consultants:

How much actual experience do they have in the same business you are doing?
Ask for examples of their work and references for agencies where they’ve done the exact same thing
Do they have experience in the operational side of business, not just planning?
Are they familiar with only large business or small business?

A general rule of thumb is to remember that consultants should be used to improve your knowledge of how to successfully engage in this work — not replace your efforts or act as your proxy! Regardless of the specific task at hand, you should find a consultant who is committed to a process of “knowledge transfer” whereby you learn how to engage in the analysis yourself. Remember: When your venture opens its doors you need to be the one who understands how to run it and how to overcome the challenges you confront — not your consultant!

Should I just get an MBA student to take care of this for me (to plan, give advice, etc.)?
MBA students and other interns can be a valuable resource to the nonprofit organization engaging in enterprise creation. The contribution of these folks is greater than simply that of conducting a particular project or task. In our experience, the presence of MBA students can help provide an “outside perspective” on the work. By asking questions and appropriately challenging assumptions of the nonprofit, student interns can provide a valuable contribution to the process of enterprise development and creation of an “entrepreneurial environment.”

At the same time, it is also important for nonprofits to understand the limitations of student interns. They are not a source of cheap labor. If you are not willing to invest the time and energy in providing orientation and operational information to an intern, this source of support is not for you. Furthermore, student interns are often only available for short periods of time, perhaps 10 weeks or less. The agency’s expectations should be realistic. Consider making use of an intern to manage a focused, time-specific project as opposed to being in charge of ongoing enterprise operations. Another consideration is the fact that when all is said and done, such folks are still students — they have other interests, courses and responsibilities and are not salaried staff of the organization. While they provide a significant, meaningful contribution to nonprofits, there are also challenges to integrating them into the organization in an appropriate way. How to best make use of interested students is an important issue to be managed by each nonprofit.

What organizational capacity do you need to be successful?
There is a public misconception that only large, established nonprofits have the capacity to successfully plan, launch and manage a nonprofit enterprise. In fact, large organizations, while having potential resources, also carry a greater institutional burden and culture that must be altered or abandoned in order to engage in successful nonprofit enterprise. Smaller organizations have greater flexibility to approach their work and carry less of an institutional memory that needs to be shifted in order to pursue enterprise creation. In the REDF Portfolio, some of our organizations have been in existence for over 25 years and have multi-million dollar budgets, but many have existed less than 5 years and are already significantly self-sustaining based on their earned income and enterprise activities.

What kinds of industries are the best to create jobs?
The best industries are the ones in which you can find your own market niche in which to be successful! Understanding how to pursue successful economic development strategies comes from two “sides:” first, understanding the larger, economic sectors within which one moves, and, second, having the individual and organizational capacity to capture those opportunities present in those sectors. Successful enterprise activities are a blend of both. If you are a great manager with incredible vision and superb execution, but you are selling buggy whips, you will be less successful than if you are practicing your skills in another, growing sector. By the same token, if you are a poor manager, it doesn’t matter what sector you are in — your results will still be poor.