Bianca Desjardins Gittens Toronto Metropolitan University Prof. Russ Ford March 29th, 2024
SOCIAL ENTERPRISES AND NON PROFITS
Abstract
This paper will analyze the role Social enterprises (SE) play in the viability of Non-profits and their sustainability. It will discuss the function of SEs, the roots of their emergence, and their impact within the Non-Profit Sector. It will also elaborate on the factors that influence the effectiveness, benefits, challenges, potential downfalls, and risks of this approach. The research will be supported by demonstrating successful implementations of SE. Through this analysis, the goal is to provide recommendations based on existing frameworks of SE integration into Non-Profit’s financial infrastructure, and strategic goals.
Defining a Social Enterprise Historical Context and Definitions
To thoroughly analyze the implications of SE in the Nonprofit sector, it is required to deconstruct the origin and meaning of SE. While used in the late 1970s, the term social enterprise was officially coined by the 'Social Audit - A Management Tool for Co-operative Working' (1981) published by Beechwood College to describe worker cooperatives and commercial organizations that implement Social Accounting and Audits as a form of annual planning and performance measure (Spreckley, 1978). These practices initially introduced by the European Union's DG VII Employment and Social Affairs Commission, have since expanded on a global scale (Spreckley, 1978). While no unified definition of SE exists to this day, according to the Government of Canada, it is broadly defined as a “revenue-generating organization whose objective is to have a social impact” (Government of Canada, n.d.).
Classification of Social Enterprises
According to Shelley Williams, who wrote The Three P’s: Philosophy, Process, and Practicalities, a Social Enterprise is defined as “A venture/business/activity within a nonprofit organization providing financial and /or social benefits that further its mission” (Williams, S. 2005). She breaks down social enterprises into three categories, “the business model (profit-based only), the social service model (need-based only), and, the hybrid model (profit- and social need-based)” (Williams, 2005). SEs have been considered part of the third sector, titled, the voluntary sector, but an emerging trend sometimes refers to SE as the Fourth Sector which incorporates charitable missions, a corporate organizational structure with a social and environmental focus, merging traditional business and philanthropy models, as illustrated in Figure 1 for Spectrum of SEs in Canada (Williams, 2005). The fourth sector occupies a unique space that toggles between the constraints of the for-profit sector to create value for its shareholders, and the nonprofit world, which lacks the market efficiencies of commercial enterprise (Carter, 2009). The Many Roads to Revenue Generation paper by Besharov (2019), explains SE’s emergence in the early 2000s and offers new variances of resource providers SOCIAL ENTERPRISES AND NON PROFITS 3 looking to support Nonprofits that create both financial and social returns. “By the early 2010s, even traditional charitable foundations began pursuing impact-investment strategies” (Besharov and Litrico, 2019). This marks a great shift in the Not-for-Profit sector and a new way to meet their operational needs.
Non-for-Profit Sector and Challenges Impact of COVID-19 on Nonprofits
Currently, as discussed by Brian Emmett, (2016) Chief Economist for Canada’s Charitable and Nonprofit Sector, the Nonprofit sector faces substantial challenges maintaining growth due to external pressures, such as technological advancements, aging demographics, the blurring of boundaries due to rising competition from the private sector competing for government service contracts, and the rise of hybrid SEs. “Nonprofit organizations have limited funding, which makes building a business model difficult, especially a long-term business model.” (Bhusal, 2020 as cited in Olawoye-Mann,). Also, many organizations are struggling to sustain their operations due to cultural and demographic shifts, and global economic downturns caused by world events such as the Covid 19 Pandemic. A study published by the Canadian Journal of Nonprofit and Social Economy states “Out of 1,089 charities surveyed in November and December 2020, eight percent had temporarily suspended operations, 77 percent had made short-term operating modifications, and 15 percent reported running their pre-COVID-19 operations” (Lasby, 2021 as cited in Olawoye-Mann, 2021). The result, Emmett explains (2016), is a substantial decrease in funding from both donations from individuals and the government SOCIAL ENTERPRISES AND NON PROFITS 4 (Emmett, 2016). Not only has COVID-19 put a strain on their stakeholders, clients, and employees, but also on the ability of Non-Profits to meet increasing demands for services and needs of the beneficiaries. Therefore, the sector is heavily dependent on external forces to upkeep operations, which may undermine their positioning in reaching their organization's mission.
Funding and Operational Challenges
Currently, the sector's funding models generate capital through memberships, goods and services, grants from governments for programs, and donations from individual households and businesses (Emmett, 2016). Of this pool of funding, the federal government accounts for 15% of the total income for the core charitable sector and 13% derives from donations, which are also diminishing as presented in Figure 2 (Emmett, 2016). By large, the sales of goods and services, account for the largest portion of funding with 41.6% of the sector’s income in 1997, increasing to 45.1% in 2008 (Emmett, 2016). With the global challenges continuing, the sector’s future viability and dependence on these limited resources further puts the sector at risk. There are clear disadvantages in operating successfully in the civic sector. Emmett, (2016) elaborates on the difficulty for social organizations to adapt to changes efficiently. He says: “Social organizations are slower to adapt since their revenues are less sensitive to changes in demand, need, and performance, and their market is often seen to be their funders rather than the constituencies or causes they serve. Funding models are based on avoiding risk rather than experimenting with new approaches that might increase effectiveness. Fresh ideas SOCIAL ENTERPRISES AND NON PROFITS 5 emerge through the creation of new organizations, but they enter a crowded marketplace and are often unable to demonstrate convincingly their superior efficacy. For established organizations, technological innovation is frequently viewed more as a problem than as a source of creativity.” (Emmett, 2016) Additionally, Canada depends heavily on the civil sector. Lalande elaborates: “The charitable and non-profit sector is critical to three key areas at the core of Canada’s future growth and prosperity supporting newcomers to thrive and prosper, building equitable and inclusive systems, and setting up the next generation for success” (Lalande & Srinarayanathas, 2022). Therefore, sustaining the Non-Profit sector is critical to the infrastructure of the entire country, emphasizing the need for immediate structural reformation. Social enterprises represent an opportunity for non-profits to address these challenges, and embrace technology while maintaining operational autonomy. As described by Reficco, (2021): “NPOs struggle with two connected issues, the first being underfunding, stating that philanthropy and public subsidies are unable to maintain pace with the exponential growth in NPOs. Secondly, they struggle internally to scale their operations sustainably. As a result, Business model innovation (BMI) has provided the much necessary support to alleviate these challenges, by positively impacting the NPO’s financial outcomes” (Weber & Kratzer, 2013 as cited in Reficco, 2021). For nonprofits to survive the evolving market, they must be resourceful and fill the gaps, implementing innovative solutions to their infrastructure while maintaining balance with their stakeholder relationships as defined in Figure 3. This adaptation is essential to a sector but also SOCIAL ENTERPRISES AND NON PROFITS 6 affects a nation's success. Overall, Social enterprises provide the Nonprofit sector with tangible frameworks and solutions to the challenges they face as elaborated in the following sections.
Strengths and Opportunities of Social Entreprises Alternative Fundraising Models
SEs provide an alternative and innovative approach to traditional fundraising models by diversifying the income sources, allowing for more capital to be allocated towards the organization's beneficiaries. The rise of SE models therefore represents a shift towards socially responsible and sustainable practices to address societal challenges. They can effectively alleviate the limitations of the voluntary sector in adaptation. There are many benefits to this approach, as listed by Novovic, (2022), including but not limited to enhancement of stakeholder relationships, increase in public outreach, alignment with the NGO social missions, diversification autonomy of finances, and growth in funding base (Novovic, 2022). The SE model tactfully joins the financial goals of traditional businesses with the social missions of nonprofits. Leveraging the for-profit market gives SEs the ability to freely operate under fewer limitations than governments and nonprofits must navigate under conventional strategies for social change. It therefore presents an opportunity to reach financial autonomy and agency for organizations, offering new ways of public outreach, fostering a community and businesses founded on sustainable development and corporate social responsibility. It also challenges the top-line thinking approach of Non-Profits versus the bottom-line thinking of For-Profit businesses. Williams (2005), interprets Bottom-line thinking as the belief that to create revenue/ SOCIAL ENTERPRISES AND NON PROFITS 7 profits, money must be expended first whereas Nonprofits approach revenues as a determination of future costs and investments in programs and services. This disparity creates challenges for the SE model, nevertheless offering Non-Profits an avenue to focus on bottom-line thinking (Williams, 2005). Social Enterprises as Market Disruptors Moreover, the academic discourse around social enterprises often revolves around their potential to provide innovative solutions to social problems that are scalable and sustainable. Mair and Marti (2006) highlight the role of social entrepreneurship in filling the gaps left by the market and state, offering new models for social change that are grounded in market realities. Without SE as a form of external funding, Nonprofits, alternatively, navigate these challenges with Marketized philanthropy. Angela Eikenberry, a Scholar in Philanthropy describes Marketized philanthropy as “a model that no longer works to counter inequality created in the private sector but, on the contrary, legitimizes private-sector focus on consumption over well-being” (Novovic, 2022). She describes the potential conflict of interest and corruption between Nonprofits and For-profits. Novovik, (2022) describes the risk of how profit’s financial involvement in the sector and their questionable practices can undermine the Nonprofits' overall mission and values, prioritizing donor preferences over community needs. SEs have coincided with the increase in initiatives such as “funding programs, publications, networking organizations, and annual conferences for social and nonprofit entrepreneurs” (Gannitsos, 2002).
Technological Adoption and Innovation
SOCIAL ENTERPRISES AND NON PROFITS 8 Additionally, SE provides the necessary resources and roadmap to invest in innovation of the same caliber as the for-profit sector. Gao, Barbier, & Goolsby, (2011) encourage technology as a tool for sustainability, and that leveraging social media has enabled more outreach in crowdfunding during times of disaster. More ways to enable crowdfunding, such as virtual mediums, have to be encouraged. One way the Non-Profit sector has benefited from this technological shift is through the integration of virtual services and organizational systems offerings. This virtual integration comprises fundraising events, stakeholder meetings, volunteering, and administrative activities provided through the SE model (Lachance, 2020 as cited in Olawoye-Mann, 2021). The reliance on SE to foster innovation and the use of technology has allowed much-needed support for fundraising activities, enabling organizations to stay afloat through social and economic hardships (Lachance, 2020 as cited in Olawoye-Mann, 2021). Litrico & Besharov’s research concluded non-profits who implement the SE model maintain alignment with their social mission defying the presumption that it would cause the opposite. As stated in the following passage “Non-profit organizations interested in developing commercial activities learned, over time, how to integrate them more deeply with their social goals” (Besharov and Litrico, 2019). Overall, SEs hold an important space facilitating alignment between social missions and addressing the challenges the Nonprofit sector must overcome to sustain operations.
Risks and Threats of Social Enterprises Financial Risks and Sustainability
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The Nonprofit sector faces many obstacles in maintaining sustainable growth while attaining its social missions. While SEs provide an opportunity for growth by leveraging the market advantages of the for-profit sector, it is not without its challenges. According to Archambault & Song, “Social enterprises are risky and nonprofits need to do detailed planning and assess both potential risk and impact on the bottom line. Business survival rates for small businesses are low 98% survived the first year, 63% survived after five years, and less than half (43%) survived after ten years” (Archambault & Song, 2018). There are complex processes in establishing a SE within or as a wholly owned subsidiary of the nonprofit (Sandoval, 2021). However, SEs must carefully navigate their activities to ensure they are reinvesting in social and environmental initiatives all while maintaining a sustainable economic model for growth. Government and Donor Relations Another issue is the risk of SE fueling government withdrawal of financial support for the Civic sector. Williams asks “What is the message we are giving to the government when we continue to find ways to fund ourselves for services that are publicly demanded and essential to society?” (Williams, 2005). This self-reliance could allow governments to withdraw their involvement in the sector as a result of the failure to meet the needs of their population. This can also affect funders' willingness to donate, demonstrating a higher expectation for organizations to generate SOCIAL ENTERPRISES AND NON PROFITS 10 capital through enterprise. (Williams, 2005). Another weakness within the SE model, Williams (2005) highlights, is they are driven by profit as a measure of success, thus creating variable outcomes in mission and intent. Their contributions to the third sector could driven by the sole purpose of doing good for the community, as a public relations strategy for image, or to directly incentivize their consumers to spend their dollars towards them as a marketing and sales tactic (Williams, 2005). Ultimately, they must navigate between this carefully to avoid the sidetracking of their organizations mission and goals. Shuman’s typology of legitimacy article (1995), describes this phenomenon as the evolution of social enterprise creating conflicting dynamics of moral legitimacy. It suggests that moral legitimacy intersects with “neoconservative, pro-business, and promarket political and ideological value” (Suchman, 1995 as cited in Dart, 2004). Shuman’s analysis aligns with Williams, (2005) consideration that profit-driven and market-driven strategies within social enterprises might conflict with or tamper with their moral legitimacy.
Maintaining Mission Alignment
Finally, another consideration is the negative response from the private sector, business, and industry. Williams, explains, “Nonprofits and charities are granted certain municipal and federal tax advantages. Some business owners within the private sector have taken exception to nonprofits competing for market share in a way they consider unfair” (Williams, 2005). It brings to question the ambiguity in the standards of corporate social responsibility and the lack of regulation for SE could become problematic to their triple bottom line. Ultimately, Nonprofits must navigate these challenges carefully to see their Social enterprise ventures succeed. The SOCIAL ENTERPRISES AND NON PROFITS 11 following section provides a breakdown of successful SEs that have leveraged a hybrid model of integration, and incorporated technology and innovation to the benefit of the Non-Profit sector. They have successfully navigated the challenges of integrating Social enterprise ventures without compromising the moral legitimacy of their philanthropic goals.
Case Studies Beam Impact: Concept and Strategy Beam Impact is a for-profit social enterprise that has leveraged consumerism as a means towards philanthropy. The platform infrastructure seamlessly combines mission-led brands with consumers to enable donations for high-impact non-profit organizations. Beam Impact's implementation of technology has allowed a forward-thinking approach to reaching non-profit target donors while creating value for their beneficiaries. Consumers are more inclined to purchase goods and services from companies that have a social and environmental impact, incentivizing user engagement, and a culture centered on circularity and sustainable development . Beam is currently partnered with more than 500 nonprofits (TechCrunch 2022). This dynamic provides value not only to consumers and Nonprofits, allowing greater access to transparent impact reporting, but also to brands who can implement practices that assume corporate social responsibility.
Re.Stance: Concept and Strategy SOCIAL ENTERPRISES AND NON PROFITS 12 The startup, Re.stance, is an online advertising platform, that facilitates donations by connecting consumers to charitable initiatives in exchange for promo codes from sustainable fashion/beauty brands. As part of the Social Venture Zone Member at TMU incubation cohort, this subject matter is crucial to the success of the startup. This research permitted a SWOT analysis, illustrated in Figure 5 and the Pitch deck, of how Re. Stance will navigate as an SE in the Nonprofit sector. Understanding how social Enterprises function for the benefit of nonprofits is essential to the success of this venture. Recommendations Moreover, the following recommendations are based on three approaches developed by Enterprising Nonprofits (ENP) on merging revenue strategies with an organization's social mission. Their research, conducted over a decade of analyzing nonprofit organizations and social-business hybrids concluded the three approaches: “They are the customer model, in which integration occurs through who is served; the employee model, in which integration occurs through who is hired; and the product model, in which integration occurs through what is sold” (Besharov 2019). The three models of approach characterize how Nonprofits can integrate revenue generation through commercialization. Here, Besharov, (2019), underlines that these models are most effective through a hybrid intersection where commercialization is intertwined seamlessly within the organization’s mission goals. Also, using tools as presented in Figure 4 “Locus of Integration and Logic Centrality” is useful for contextualizing the scale to which SEs SOCIAL ENTERPRISES AND NON PROFITS 13 find equilibrium between their social missions with commercial strategies (Litrico, and Besharov 2019). For instance, one strategy SEs are employing to diversify their revenue stream mechanism is called equity debt. This financial vehicle allows SE to incur capital beyond donors' role as equity holders.“A quasi-equity debt security is particularly useful for enterprises that are legally structured as nonprofits and therefore cannot obtain equity capital” (Litrico and Besharov 2019). Furthermore, Olawoye-Mann, (2021) emphasizes that a Non-Profit's sustainable structure depends on its ability to adapt to technological shifts by leveraging the user engagement of Social media platforms, and online crowdfunding. Additionally, Besharov, (2019) suggests that they should tactfully choose strategies and approaches for SE that rely on the organization's current resources and capabilities, which leverage their strengths rather than detract from the overall mission. Taking into account all these considerations would allow Non-Profits to fully maximize the value provided by SE Models. Conclusions To conclude, the findings in this paper considered the benefits challenges, and risks of SE for Nonprofits. This analysis is essential to providing viable recommendations on successful SE implementation. The challenges presented are nevertheless worth the investment, outweighing the risks of SEa. “To be effective in the long term, any shift toward commercialization must be consistent with the organization's social mission and use its core capabilities ” (Besharov and Litrico 2019). Ultimately, to see Non-Profits benefit from the SE model must consider the following variables. SE must demonstrate alignment of mission with commercial activities, and SOCIAL ENTERPRISES AND NON PROFITS 14 effective management of the shift from traditional nonprofits to SE models through extensive market analysis, financial management, and strategic planning. Finally, Nonprofits must create equilibrium between commercial and Social Objectives, mitigating risks through impact reporting and transparency, and establishing clear communication strategies with Stakeholder involvement. SOCIAL ENTERPRISES AND NON PROFITS 15
Figure 1 Spectrum of Social Entreprises in Canada SOCIAL ENTERPRISES AND NON PROFITS 16
Figure 2 Donations from Households Decline Note. Data adapted from Emmett, B. (2016, October). Charities, sustainable funding and smart growth. Imagine Canada. Retrieved from https://www.imaginecanada.ca/sites/default/files/ 2019-08/imaginecanada_charities_sustainability_smart_growth_2016_10_18.pdf SOCIAL ENTERPRISES AND NON PROFITS 17
Figure 3 Non Profit Sector Relationships Note. Arundel, 2022, adapted from Clutterbuck & Arundel, 2018. SOCIAL ENTERPRISES AND NON PROFITS 18 Figure 4 Locus of Integration and Logic Centrality Note. “This image displays a conceptual framework that's typically used to analyze hybrid organizational forms, especially in the context of social enterprises” (Besharov and Litrico, 2019). SOCIAL ENTERPRISES AND NON PROFITS 19 Figure 5 SWOT analysis for Re.Stance as a SE for Non Profits Note. As a semifinalist of the Hult Prize challenge 2023, Re.stance was picked from 25000 teams. “The Hult Prize is the world's largest student social entrepreneurship competition. Run in partnership with the United Nations, student teams from universities from across the world compete to solve a pressing social issue by developing a scalable, sustainable social enterprise. - Named by Time magazine as one of the “top five ideas that are changing the world for the better” and dubbed the “Nobel Prize for students” the Hult Prize is a key milestone on the journey of any aspiring social entrepreneur” (N.D, 2023). Link to Canva Pitch Deck https://www.canva.com/ design/DAF5gEfuKgI/0RhNFjRgS_xEatBohqZZKA/edit? SOCIAL ENTERPRISES AND NON PROFITS 20 utm_content=DAF5gEfuKgI&utm_campaign=designshare&utm_medium=link2&utm_source=s harebutton. References Bugg-Levine, A., Kogut, B., & Kulatilaka, N. (2012). A new approach to funding social enterprises. Harvard Business Review. https://hbr.org/2012/01/a-new-approachto-funding-social-enterprises Besharov, M., Litrico, J., & Kislenko, S. (2019, Fall). The Many Roads to Revenue Generation. 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