The Nonprofit Entrepreneur: Creating Ventures to Earn Income

THE GROWTH OF, AND RATIONALE FOR,
NONPROFIT ENTERPRISE

Introduction

Until recently, the term nonprofit entrepreneur was an oxymoron. Two such disparate words could hardly coexist. Nonprofits were charitable organizations that worked without profit motive. Indeed, for many, profit was a dirty word. Entrepreneurs, on the other hand, were businessmen for whom profit was both the cardinal reason for existence and the sole definition of success.

What is Nonprofit Enterprise?

Nonprofit enterprise exists along a spectrum of activity starting with traditional fee-for-service charges and extending into full-scale commercial activity. According to the Urban Institute's Nonprofit Sector Project, approximately 15 percent of nonprofits actually engage in commerce, but more than 70 percent now earn some money through fees and service charges. It is this larger cluster of organizations for whom this book is relevant, since many organizations that charge fees for service commonly operate in a businesslike, market-sensitive manner. They are poised to expand into product or service marketing if they have not already done so. Indeed, examining and updating fee-for-service policies and practices is one starting point for a move into enterprise.

What are the Benefits of Enterprise?

Nonprofits willing and able to earn a portion of their income can benefit in several ways. First and most basic is the ability to increase the organization's income in order to return the profits to program activities. In some cases the revenue stream will be substantial; in others it will be small relative to the operating budget of the organization. In either case, if the cost to the organization is less than the attendant benefits, then the net of the venture will be positive.

A second financial advantage is the enhancement of the organizations' health. Earned income helps to diversify their revenue base, providing a cushion against changes in the funding or contracting climate. Indeed, changes in governmental funding may lead to corresponding shifts in corporate or foundation funding, whose priorities may be altered in order to deal with the consequences of governmental withdrawal. To the degree that nonprofits can diversify their revenue streams, they can insulate themselves from the consequences of changed policies.

Nonprofits that pursue earned income activities often improve their management capabilities as well. Business demands constant, concerted attention to bottom line considerations. Policy choices of nonprofits become informed by dollar considerations, which when prudently introduced, often improve the quality of decision-making. Moreover, new staff may be hired to attend to the commercial aspects of the organization, and the businesslike approach can rub off on other employees. Further, management information systems are often created or upgraded. Experience has shown that when management spends more time on the financial consequences of its activities, it is generally more rigorous and realistic when making programmatic decisions as well. Thus, the introduction of enterprise brings with it a new mindset within the organization — one that is more calculating and skilled in directing the course of the agency.

A further, related benefit is the introduction of new financial discipline within the organization. For example, the creation or expansion of enterprise may involve borrowing funds or selling equity to an investor. The reporting requirements of lenders or investors usher in a new vigilance on the part of nonprofit executives. Decisions are made with better information, and may happen more quickly than previously. Even though the organization may not always appreciate dealing with bankers or investors (or suppliers), expansion into the market economy often leads to an enhanced management capacity.

Another positive result, in general, occurs in the area of fund-raising. Foundations and corporations are increasingly pressing their grantees to find ways to pay for programs that have a limited funding life. If earned income can be used to at least partially replace charitable dollars, funders will be more responsive to funding requests from nonprofit organizations. Individual contributors also appear to respond favorably to nonprofit enterprise. Success in enterprise, particularly in a well-publicized area, seems to imply that the organization is successful in all its service areas. Whether or not this is always true, funders, both individual and institutional, like "winners." Anecdotal evidence supports the view that organizations with a successful earned income component have enhanced their appeal to foundations and corporations.

Finally, successful earned income ventures can increase the visibility of the organization undertaking them. In the highly competitive world of grantsmanship, good press can translate into increased financial support by enabling the organization to present its case in an appealing way and in a variety of forums.

To be sure, earned income activities present pitfalls as well. When poorly planned or executed, they can endanger the financial and program stability of the nonprofit, distract it from its exempt mission, engender destructive competition for scarce resources, hurt staff morale, and hinder fund-raising efforts. Thus, nonprofits must enter the entrepreneurial arena well prepared for serious, hard, and relentless activity. Enterprise, even under the best circumstances, is a difficult endeavor. Those who begin in an unprepared or blithe manner are bound to fail.

HOW TO THINK ABOUT ENTERPRISE

What are the key issues involved in developing an entrepreneurial venture? What risks must be taken? For what long-term reward? Each nonprofit organization must confront these questions and answer then for itself, in order to determine whether the products and services it wants to bring to the marketplace are commercially viable.

Relatively few nonprofit organizations approach entrepreneurship convinced that they can succeed. A more common feeling is caution, often laced with anxiety, as to whether and how to proceed. Every opportunity presents both enticements and hazards. One thing is sure, however; ventures should never be started for the wrong reasons.

Thinking About Venturing

The only "right reason" to move into enterprise is this: the anticipated financial reward is worth the risk. All other concerns, including the current and projected financial strength of the organization, the "ethical" appropriateness of the venture, and the availability of managerial talent, can be studies under this risk-and-reward framework. By evaluating risk and reward, an organization can judge whether staff is capable and supportive, whether financing is available, and whether the likelihood of success is worth the effort.

Some venturing ideas, of course, are preposterous, while others skirt the line of legality or appropriateness. They can be dropped without a second thought. Assessing risk is an analytic task, not a metaphysical judgment. Occasionally one encounters nonprofit executives, board members or their constituents who almost viscerally react to the prospect of enterprise. Some argue that it will "taint" the organization or drive it away from its exempt mission. This is a valid concern. Where the compromises are too great, the organization should not proceed, and, in many instances, the taint is simply too obvious to ignore. Yet the answers to these ethical concerns are not always clear. Most earned income activity does not ipso facto compromise an organization's mission, and most will not taint it.

The risk to the organization can also be measured by comparison with other venturing or even fund-raising possibilities. For example, a nonprofit organization might have $100,000 (or $10,000 or $1 million) available to earn more money. It has several options. One possibility is to deposit the funds in a local savings bank and earn interest. Another is to purchase an insured certificate of deposit. Passively earning steady income at a fixed annual percentage, with virtually no chance of loss, may offer a less risky and more desirable alternative to investing in an earned income venture. Another option is to use part or all of the funds for a fund-raising benefit that might net several hundred thousand dollars. The point is that every organization has several income-earning alternatives encompassing several levels of risks, and that enterprise is only one of these options. Further, each option can be weighed against the others in terms of potential for payback.

Risk also has a time dimension. The longer it takes to reach specific financial goals, the greater the likelihood of increased problems and failure. Furthermore, the longer it takes to achieve financial success (all things being equal), the less the value of the money when it finally is in hand. For example, a fund-raising event or a direct mail solicitation might consume six months, but the return will be immediate and clear. On the other hand, creating a successful venture might take several years — and the financial results might be no greater than those of the fund-raising event, which might be presented several more times before the venture pans out. The time value of money, then, is an important calculation (not to speak of inflation), for it may be better to earn a smaller amount sooner than a larger amount later.

The concept of proportionality is also a valuable one in these early assessments. The size of a venture should correspond in some proportionate way to the size of the organization. In general, smaller organizations should seek smaller-size ventures and take very modest risks to achieve financial reward. Small nonprofits have fewer cash reserves and human resources, and are likely to be financially more vulnerable than multimillion dollar organizations. Larger organizations may have greater flexibility to choose the size of their venture, although for them the smaller the enterprise, the lower the relative return — and the less attractive the payback. For large organizations, small ventures may not be worth doing.

Early in the venture conceptualization process, key executives and board members should agree upon a dollar amount the organization should earn over time. The decision might be, "We'd like to earn $25,000 annually after a fifteen-month start-up phase, and double that amount by the third year of operation." Another response might be "We want to be in the black immediately, and to make 10 percent of our operating budget by the second year." This agreement on the financial target of an enterprise can help do two things: first, it can establish a collective vision that will enhance communication and diminish misunderstanding over expectations, and, second, it can let the executives dispose of inappropriate or impractical proposals as being outside the target reward.

Four Basic Questions

There are four questions to ask. The answers will determine whether the rewards will be worth the risk.

What are the risks involved and can we afford to take them?

The first question is a logical extension of the foregoing discussion of risk. The risks come in several forms, including financial, organizational, and reputational; there is also risk to the overall morale of the organization.

The financial risks have several aspects. The first is that the venture may cost more to plan, start, and operate than the organization is willing or able to commit. While several earned income activities may have developed almost as an afterthought (such as a book, videotape, or new use for an old product), these activities are usually the exception to the rule. They commonly have value because the marketplace demands them in precisely the form in which they were developed.

All long-term, market-driven enterprises have some development and planning costs. As noted, these costs must be assessed at the earliest possible point, and from two vantage points. The first is the dollar cost of the contemplated venture. This is the more narrow viewpoint, and it is spelled out in a business plan. The second is the opportunity cost, i.e. where the money might otherwise be spent.

Financial risk may involve seeking additional resources through loans or through the sale of equity to investors. Long-term relationships with bankers or even shareholders means less control for the nonprofit over its assets since they have the right by previous agreement to call in or sell their investment at a particular time. If the venture loses money, it may damage the ability of the organization to fulfill its exempt purposes.

A second area of risk is organizational. The new venture may demand constant attention from numerous staff members, particularly in its start-up phase. The development director, the public relations professional, and the senior program staff may be called on to pitch in. It may well be hard to know where the enterprise fits, or to position it easily, and the greater the attention the venture receives, the greater the stress may be on the organization itself. The risk is that the venture competes for time and money with activities closer to the exempt mission of the organization.

A third area of risk is in the area of reputation. For many nonprofit leaders, this is one of the most important (and least measurable) concerns. The nonprofit organization has a "persona" which speaks to its board, its clients, its local community, and its funders. Entrepreneurial ventures often raise fears that the reputation of the organization will be damaged, that it will be seen as a grasping, acquisitive sell-out and that this characterization will apply whether or not the organization earns money.

In part, good planning can deal with some of this risk. Surveys can do much to clarify what the relevant constituencies think about the organization and whether venturing will be greeted favorably. Presentations to key constituents can improve understanding and gain support. A nonprofit can blithely move into earned income activity in a consequential way without being sure that its traditional friends will remain faithful to its cause. Bankers and funders, for example, may become more resistant to supporting the organization if it appears to be financially reckless in the use of its assets.

Conversely, successful venturing can measurably enhance the reputation of the nonprofit. Successful ventures may not only earn income for the organization, but they may also enhance its image as a talented, creative, and market-oriented winner. Bankers and funders, communities and constituents, all like winners.

A final risk involves morale. For some nonprofits, the exempt mission is all. The purity of the cause binds staff and board and focuses their attention on service delivery. An entrepreneurial venture may engender resistance by staff and board who may, whether the venture is successful or not, feel sold out. Indeed, in some organizations, the greater the financial success, the greater the potential for this feeling.

What are the resources, skills, and knowledge required, and can we supply them?

The resources, skills and knowledge are often expensive to acquire. They need not be a permanent part of the organization; consultants, volunteers, or board members may supply them, for a fee or pro bono.

Say a hospital wants to establish a gift shop. Its executives, board members, doctors, nurses, and other staff have spent their careers providing health care, not in running a retail venture. The first thing required is knowledge of the retail industry, with a particular focus on gift shops. The organization may conclude that the knowledge does not exist in-house and must be acquired. Other kinds of knowledge are also needed in design and planning, marketing, financial management, etc. The organization must assess the knowledge it possesses in-house and decide how to add the missing information.

One reason why so many businesses start small is that it may be costly to acquire skills and knowledge in all of these areas at once. Organizations should consciously choose to calibrate their level of effort and the size of the enterprise to the talent they have available. This is why proportionality is so important. Disproportionate amounts of consulting assistance suggest that the venture may be too large for the organization to manage well. They also imply that at some point the resources, skills, and knowledge must be institutionalized at a substantial cost.

An organization must assess its needs in venturing. It should evaluate whether the resources, skills and knowledge are available, and, if not, the cost of acquiring them. Many of these needs are identified in the planning process, through a feasibility study, and, ultimately, through a business plan.

How do our values, goals and attitudes differ from those required to support the Venture, and can we adapt?

For some nonprofit organizations, this is the key question.

The value system in nonprofit organizations commonly rests on an important concept of service and public participation. As a result, staff and board members may be more interested in fulfilling their exempt mission and providing service than in earning money for the organization. Their attitudes toward enterprise may reflect those values. For some, earning money has a distinctly untoward or offensive character. For others, work satisfaction compensates for higher salaries derived from earned income. For all these persons, enterprise may not be an easy flag around which they can rally.

As greater numbers of organizations start their own earned income activities (or joint venture them with for-profit corporations), the resistance to the idea of entrepreneurship diminishes. This is not to argue that venturing is appropriate most of the time for most nonprofit organizations, but that familiarity and understanding, informed by financial pressures and opportunity, have greatly diminished the resistance to earning money.

Resistance deriving from value conflicts must be dealt with seriously. If the value system (and corporate culture) is totally unyielding, venturing should not be pressed. Doing so can produce serious internal conflicts, morale problems, and perhaps even diminished service capability. On the other hand, if a willingness exists to discuss the issue of venturing, there are several useful approaches.

First, the idea can be introduced in forums that are receptive. Proponents of venturing like all new or controversial ideas must choose their audience and build support for their projects. Small groups of interested board members or staff might be a more appropriate setting for research and discussion of venturing until the specific business plan is ready to be unveiled.

Second, examples of enterprises in the service field of the organization can be provided; for example, in the arts or health and human services. They indicate the viability of venturing among comparable organizations. Visits and on-site discussions can be arranged.

Third, expectations of financial gain can be kept at a modest level. Entrepreneurship trumpeted as financial salvation for the organization only asks for trouble. Finally, the positive financial contributions that the enterprise can make to an organization's programs should be discussed, to underscore the link between financial reward and program enhancement.

To be sure, the employees of an organization may give lip service to a venture while choosing not to support it. This passive sabotage will gradually erode a venture and is a risk to be assessed in the planning process. For the fact is that in some nonprofits the attitudes toward risk (the lower the better) and enterprise (the less the better) may be so strong as to predispose it away from enterprise and toward alternative approaches to income generation.

Where are the timing requirements for launching the venture, and can they be met?

The success of a venture opportunity may hinge on the speed by which it can be introduced and expanded. This timing question has two facets: the demand of the external marketplace and internal capacity of the organization to satisfy it.

The external marketplace may be ripe for a new product or service. The number of potential entrants may be large. For example, growth in the home health care market, and its case management submarket, has opened up real opportunity for human service organizations and private vendors. At the same time, the marketplace in any particular locale or neighborhood may be limited in size and rapidly saturated. This puts pressure on an organization to act quickly, to garner a substantial market share, and to expand upon its position before competitors enter the field.

The nonprofit should assess the competitive environment, actual and projected, and the expected duration of the entry opportunity. It also should determine, in its business plans, the market share it wants and the expense that will be involved in garnering it. It should then assess its internal capacity to enter the marketplace.

The Champion and the Planning Team

The champion need not be the chief executive officer of the organization. However, the person should be visible and close to the locus of influence. The person's position might be that of chief operating officer, vice president, senior program director, or even board member.

At some point, generally as a venture opportunity begins to require development funds and a time commitment from more than one key person, the champion, if he or she is not the CEO, must win the leader's support. Furthermore, the closer the venture gets to actual start-up, the greater the need to increase the circle of participants through a planning team. This team will share the analytic task and create internal support for the enterprise.

The planning team need not be large. Two or three persons may be sufficient, depending on the available and planning needs. The team should be appointed and work under the authority of the CEO, or possibly that of a special planning group of board members. The team should have specific tasks to accomplish in specific time frames. Experience has shown that lackadaisical planning efforts are rarely successful, and that once a decision is made to proceed with a venture, it must be tracked and moved with dispatch.

In a sense, the planning team must become the "owner" of the venture concept. Although planning team members may have no personal financial stake in the project, they must be personally committed to producing results in a timely manner. Ultimately, the planning team may become the collective champion of the venture.

The team may choose to hire consultants to address various aspects of the venturing concept. Consultants can inject knowledge, skills and resources into the planning process. It is important to use them sparingly, however.

The planning team should never give up ownership of the idea to a consultant. Specialized outside help is best used when the tasks are finite and clear and when they are well supervised by the planning team. The greater the delegation of analytic tasks to outsiders, the lower the venture's chance of success, since full-time staff members must ultimately be responsible for starting and operating the venture itself. They need to be actively involved from the beginning.

Financing the planning activities may be costly. Substantial ventures imply a considerable dollar outlay — itself a risk to the organization. In general these early costs will have to be paid for with internally generated funds. The earliest stages of venture planning are the most difficult to finance. Banks are unlikely to lend for this purpose, even if current relationships are strong. Venture capitalists enter the process much later, if at all, as do likely vendors and potential customers. Still, there are several places to look for planning money.

The first place to investigate is the operating budget of the organization. Rarely is there no cash for in important project. If no planning dollars can be made available, this is an indication of the importance of the venture to the nonprofit. The organization that is strapped for cash at this stage must wonder whether it will ever have the resources to commit to an enterprise.

The nonprofit should prepare a budget for the planning phase. It may choose to dip into its fund balance, or keep a position or two unfilled temporarily and use the funds that are saved. It might take an unanticipated gift or bequest and earmark it for venture planning. There are numerous paths to internal finance, as the creative executive knows.

Two other sources, less common, are also plausible. The first are members of the board who may choose to contribute money, individually or collectively, to the investigation of an enterprise. Board members set up a pool of money or even make a challenge grant to be used for this purpose. The second source is the foundation community, which may be receptive to a proposal to fund the planning process. Although foundations are generally reluctant to make grants for this purpose, a few, particularly those that are long-time supporters of the organization, may be receptive to the request.

As the venturing idea works its way towards actual operation, increasing amounts of time of the chief executive officer will be absorbed in planning the enterprise. If the venture involves little risk, if it is small relative to the budget or the resources made available, the involvement of the executive may be modest. But for a venture that involves substantial risk (in dollars, value changes, and scarce resources, etc.) the CEO may expect to spend between 20 percent and 50 percent of his or her time for several months attending to problems inherent in the planning.

Thus a key question for the organization is whether the CEO (and/or key staff) can be detailed to devote a substantial amount of time to the early stages of venture development. The CEO who is in over his head with financial and program issues cannot be expected to champion a risky entrepreneurial venture. Furthermore, as a practical matter, the CEO cannot be expected to spend time and use all his "chits" with colleagues and board members (who are themselves absorbed in other concerns) to get them to attend to enterprise.

THE VENTURE PLANNING PROCESS

First, enterprise demands knowledge of a set of business skills that must be implemented in a systematic, disciplined fashion. For nonprofits unused to dealing in a market economy, where success is governed by bottom-line considerations, the pitfalls are numerous. For example, nonprofits may have to deal with brokers, bankers, or factors; manage cash flow on a regular basis; borrow prudently; and repay promptly. If they are in a retail venture, they may have to price competitively, take markdowns, slash inventory, and offer premiums. Business is different from nonprofit service delivery, and mastery of how it runs is the irreducible core of success.

Second, the reputation of the organization for good works is seldom sufficient to sustain a business venture. At best, customers will buy a product or service once on the strength of the standing organization's reputation. If the quality of what they buy is inferior, all the good will in the world will not induce them to purchase again. There would be no Girl Scout cookies, and a much diminished Girl Scout organization, if the product were not consistently superior.

Third, the world of business is ever changing. Day-to-day operating problems constantly threaten to upset even the best-laid plans. Orders don't arrive; bills do. Poor weather drastically cuts traffic and sales. Key employees get sick or move on to better jobs and must be replaced immediately. Creditors press for payment. The headaches and pleasures of commercial venturing, large and small, are constant and often unforgiving. Accordingly, nonprofits have to be ready to learn their business and work at it constantly in order to successfully play in the marketplace.

The Eight Stages of Business

Stage 1: Defining the Business. No venture can succeed without a clear articulation of the business. This is commonly done through a written business plan.

Stage 2: Creating the Organization. The organization should reflect the conception of its founders and it should accurately mirror their purposes. It should link the board and staff of the nonprofit organization in a way that serves them as well as the venture.

Stage 3: Raising Capital. The venture — start-up or ongoing — needs money to run it. Capital has two important facets. First is the absolute amount of dollars, say $ 250,000 in working capital loan. Second is the timing of the money, i.e. when it is available for use.

Stage 4: Creating and Maintaining the Market Niche. This is the market analysis and marketing strategy component of the venture. By segmenting, targeting, attracting and retaining customers, the venture's position in the marketplace can be identified, maintained and enhanced.

Stage 5: Hiring and Retaining the Management Team. Management is the crucial ingredient. Especially in nonprofit organizations, where business skills are commonly in short supply, the caliber of management will make or break the enterprise.

Stage 6: Marketing the Enterprise. Every conceivable cost-effective vehicle for putting the venture before the targeted audience should be utilized.

Stage 7: Expanding the Business. When the venture has become a serious presence in the marketplace and has been integrated into the organization, it must ultimately move to secure its position by expanding its product or service line, or its clientele.

Stage 8: Course Correcting. All aspects of the enterprise should constantly be reviewed, and action taken when projections are not met. Re-calibration is the rule, not the exception, since no business, from day one, works as planned.

Finding the Business that is Right

The first option is the easiest to accomplish. It is closest to what the nonprofit already does well. The more familiar and institutionalized a product or service is to an organization, the less trouble it will have creating a business with it. Institutional familiarity is an asset to be respected, and nonprofit organizations should focus here first for guidance and inspiration.

There is often an unstated bias toward creating a new product or service. People often assume that newness is attractive and that attractiveness is easy to sell. It is seldom so simple, however. In many cases, especially where the customers are not used to purchasing, a new product or service is very hard to market.

The fourth option is the most risky one — to create a new product or service for an entirely new market. This is vastly different from trying to find a new source of customers for old products or services, or developing a new product or service for old customers.

The nonprofit dance company that has discovered a way to construct modular housing for low-income citizens, and tries to do it, is asking for trouble. The organization for the physically or emotionally disabled that tries to run its own retail outlet with its own clients is on shaky ground. A useful principle, then, for for-profit corporations as much as for nonprofit organizations, is to do what one does best. The greater the departure from established ways, the greater the problem in achieving commercial success.

The most important consideration for the nonprofit organization contemplating enterprise is to minimize risk. Contrary to much conventional wisdom, risk can be measured rather precisely, and one function of preparing a business plan is to identify and squeeze out all unnecessary risk. Equally, the potential reward can also be measured. Every nonprofit organization should balance off the risk and reward of the contemplated enterprise, and then place the calculation in the context of its exempt mission, before it proceeds full-speed ahead.

The Internal Audit

Obviously, the answers to the checklist are complex, and some may be easier to derive than others. What exactly does trustee support mean? How flexible is the budget? What contracts will really be helpful? Although there is some unclarity in every response, it is imperative that the organization be as precise as possible in its responses. It may be useful to answer every sub-area of every section with a one-page statement, enumerating the specifics of each strength and weakness. Upon completion, each statement can be used to focus on corrective actions.

Some organizations will score well in one or two areas and show pronounced weakness in others. The tendency in most organizations is to ignore the weak spots and expect, or hope, that the venture's momentum will carry the organization along to success. This is an erroneous belief. Efforts must be made to deal with internal problems before they negatively affect operations.

Some audits will take weeks to complete. Obviously, too, the exercise has uses beyond establishing the internal viability of a venturing idea. For one thing, it can provide a reasonably accurate profile of the organization's overall health and suggest areas that need strengthening. The paramount point as it affects entrepreneurial activity, however, is that if any part of the investigation comes up irretrievably negative, the organization can drop the venture idea before a costly commitment is made.

Project Identification and Idea Refinement

It is useful to think of the venture creation process as a big funnel. Everyone and everything starts at the top, at a level of much raw data and plenty of ideas. The venture development process is little more than working many good ideas down through the funnel until the very best one drops out, is selected, and a strategy for its implementation is designed. It is the channeling process that is vital to evaluating the risks involved in proceeding. At each step, the organization can decide to continue the endeavor, choose another enterprise, or drop out altogether.

MARKET RESEARCH

The involvement of the board cannot be taken lightly. Some organizations have highly competent, engaged board members, whose participation should be welcome. Others are burdened with amateurs, some of whom may also have poor judgment. A useful rule of thumb is not to involve any more trustees than are necessary, and not to depend on them for the success of the planning process. Board members who stalwartly press a venture on an unwilling or unprepared organization are especially dangerous.

On the other hand, consulting with trustees and getting their assistance can be a useful strategy in analyzing the venture's prospects, and in coalition building for the project. Ventures are likely to take months (or years) to execute, and they will need all the support they can get — particularly in an organization facing competing demands for scarce resources. Furthermore, trustees can often bring contacts, expertise, and money to encourage a venture along.

If the organization decides to set up a planning team, staff members should predominate. It may choose to hire a consultant to assist with various analytic and project management tasks, but if it chooses to do so, it must be crystal clear about what services it expects to receive. As already noted, organizations that leave it to the consultants to prepare and deliver the final business plan will have great difficulty operating a venture. If the organization does not involve itself in the project from the beginning, it will not be competent to "own" it later.

Market research is an essential step in the channeling process. Research is done through primary and secondary sources to uncover every piece of relevant information on the way such a business operates.

Market research is a foreign concept to many nonprofit organizations. Many feel it is costly and time consuming. Used to identifying a need, and then providing a service or product to fill it, many nonprofits seldom ask the most important marketing question of all: "What does the marketplace want?"

The marketplace will pay for only what it wants. It is not at all obvious that people will purchase the best books on placing relatives in nursing homes, the most nurturing day care, or the most interesting avant-garde plays. In fact, it is not obvious that the marketplace wants the highest quality product or service. Market research is focused on finding out what the potential consumer base wants, what it will pay for, and what price it will pay.

Secondary market research pulls together already-existing materials. For example, a nursing home (or labor union or private school) may own a parcel of land and buildings that it currently uses as a summer camp for its patients and staff. The executives of the home have reasons to believe that they could create a year-round conference center on the property, which will serve corporations and other nonprofit organizations located in the area.

The nonprofit planning team's secondary research would include a review of the literature on creating and running conference centers. Further, it would investigate directories of centers for their location, size, amenities, and price. It would research industry studies to comprehend trends in the conference center business, and key factors to successful management of them. There probably exists a conference center association whose function it is to distribute volumes of information about the conference center business. There also are house organs, brokerage house reports, magazines and newsletters in the field, and perhaps even stock-offering filings that will reveal the inner workings of the conference center business.

After completing secondary research, and sometimes overlapping it, the planning team does primary research. Primary research focuses on acquiring new information, often unavailable in the literature, which fills out the really important details of the conference center business. Personal interviews, focus groups, and survey are the most common form of primary research, although analyses of newspaper stories, computation of available data, and direct observation ("window shopping") are also involved. Certainly several visits to nearby and/or successful centers are imperative for the organization contemplating a conference facility. Whom would one go to for interviews on the conference center marketplace or its history and trends? Among the people are retired conference center executives, association directors, journalists, stock brokers, local area merchants, potential vendors, corporate users, and even center directors themselves. In general, people like to talk about what they do. Interviews should be direct, tactful, and time limited. To be sure, not all the information one would like to have will be obtained, but a good deal will be.

Researchers must marshal the data they collect in order to answer the following representative market-research questions:

• What is the specific business I want to enter? Is it for all potential conference center consumers or just, say, for senior corporate executive? Or for fellow nonprofit executives? Or perhaps a center just for the disabled?
• Is the market niche clear?
• Is it viable? Is the marketplace large enough and fluid enough to accommodate a new player?
• Is the market for conference centers growing, stable, or contracting? Which customer segments provide what proportion of sales in the business? What are the long-term prospects for growth?
• Is market entry easy? Is it costly? What grade of facilities and what amenities are crucial to attracting a share of the marketplace? What capital improvements will be needed to enter the marketplace?
• Who is the competition? How entrenched is it? How do they market and sell their services? What are their prices and profit margins?
• How does the business market its services? Who are the people that must be attracted to buy? Directors of training? Vice-presidents for human resources? CEOs?
• Does the business rise and fall with inclement weather? Seasonally? Are there geographical factors that affect the success of the operation?
• Are there particular labor issues likely to cause problems? Is unionization a factor? Can part-time staff be used, and are they available?
• How long will take to get the facility up and running? How far in advance are conferences booked? What kind of marketing is necessary to attract the targeted market? How costly is marketing?
  

This list of questions, by no means exhaustive, lies at the heart of the research. Yet the answers — complete answers — are still of limited utility. They will have meaning to the organization only when measured against the results of the internal audit. Successful entrepreneurial ventures result when thorough, high quality market analysis matches the internal capability to execute the findings.

Nonprofits can discern market opportunities that are outstanding, yet be so internally weak and disorganized that the likelihood of success is minimal. Other nonprofits may be internally strong and capable of starting an earned income venture, only to find their market research reveals a venture of only marginal possibilities. Both findings must be strongly positive in order to proceed.

What kind of internal questions need to be answered? They are the ones that grow out of the internal audit, which the organization has performed earlier. Some of them are:

• Does the venture fit comfortably within the exempt mission of our organization?
• Will our funders, staff members, contributors, and clients look favorably on it?
• Do our trustees support the venture?
• De we have enough staff to plan for and execute the venture?
• Is our financial condition strong enough to try this venture? Is our long-term support assured? Will other programs suffer from this new activity?
• Does our management (especially our chief executive officer) have the depth and expertise to carry off the venture?
  

The market research phase is an extensive one and could involve several months and numerous staff people. At its conclusion, a written report should be prepared, describing the findings of the research and recommending specific actions to the executive director and the board of trustees.

The Feasibility Study

The feasibility study is a formal investigation of a venture. It clearly defines the opportunities and the risks to the organization if it decides to enter a business. It is usually done from a skeptical point of view, from the vantage point of why the idea can not work. It is designed to reveal any "yellow blinking lights" on the road to the venture start-up.

Marketing

Based on the market research, the organization should delve further into how the product or service is commonly marketed, and what the organization can do to match or improve upon the usual approach. For example, some products are introduced by large amounts of advertising; other succeed by word of mouth. Some products and services are marketed with premium or special introductory prices to attract customers; others are priced high and kept scarce. Some are focused on a limited geographical area; others reach for the largest possible audience. Some are sold directly through salespersons, others through direct mail, and still others through passive displays in prominent locations. This phase of marketing scopes out the specific marketing channels and approaches and offers a sense of the workload needed to accomplish the task.

Organization

Some businesses are military and vertical, while others are more flexible and horizontal. The feasibility study fills in how similar businesses are conducted and managed, through start-up and post-start-up phases. It lists the types of positions that need to be filled, reporting relationships and the kinds of overhead support important to succeed. The study does not include names of persons who might be employed in the business, or their positions, or their specific responsibilities. It is a skeleton, which accurately depicts the way the business should be organized.

Finances

The financial analysis gives an accurate profile of similar businesses in the field, the size of the investment that may be needed for the venture, profitability ratios of similar ventures (if it is running well), and rough expense breakdowns. It reveals how close or far away the analyst is from having the capital to start and prevail in the venture. It does not describe how this particular business would be run or its revenue, expenses, profits, and losses.

All markets change, and some change more rapidly than others. A feasibility study must be based on the most up-to-date statistics and constantly rewritten to reflect changes in the marketplace. Accordingly, the study should be done with some dispatch. It is not the job of a part-time intern or a distracted executive director. It is not uncommon for the study to take three to six months.

The feasibility study will conclude in a formal written report recommending a go or no-go decision. It should persuade the chief executive officer and board members that this is the business for the organization. If they approve, the nonprofit has taken a long step forward toward producing the final document, the business plan.

A review of the steps that precede the business plan makes clear that enterprise cannot be taken lightly, no matter how much of a "winner" the organization is convinced it has. Every step is taken for a reason, with appropriate resources devoted to meet the particular task. Since many nonprofits exist in chronically scarce environments, they need to constantly trade off opportunities to achieve their charitable end. An earned income activity can become a competitor for scarce resources and, accordingly, must be analyzed both on its own terms and within the context of the charitable programs of the organization. Because enterprise can threaten the financial stability of the entire operation, and jeopardize the capability of the organization to perform its exempt mission, it should be undertaken with deliberation and skill.

The process of venture analysis may also have a side benefit — a better understanding of the way the organization functions and how its staff communicate. Exercises such as feasibility studies can tell senior executives a good deal about their operations, not only whether an earned income activity might fit comfortably within the nonprofit, but also how healthy are the organization's communication patterns, morale, and working environment.