So, they approached Cynthia, who has a long history in the field of nonprofit enterprise, to investigate and figure out a strategy for responding to this sort of activity. I had met Cynthia a few months earlier and was brought in to help with the effort. Shortly after that, with funding from Pew, we initiated a feasibility study that was designed to investigate the full landscape of this kind of activity among nonprofit organizations — who was doing it, why were they doing it, and so on. That kind of survey hadn't been done for years, and the results turned out to be quite important to the field when they were published in 2002. Among other things, we learned that there was significant interest in earned-income ventures among nonprofits — nearly two-thirds of the five hundred-plus nonprofit organizations we surveyed were either already operating a business or expressed interest in doing so. Unfortunately, few of those nonprofits were actually writing business plans, many of them said they needed help in learning how to write a plan, and most of them lacked the financial capital to get started. So we designed a program, which ultimately became the the Partnership on Nonprofit Ventures, to respond directly to what we had learned from the study.

PND: The winners of the first competition, which was conducted over twelve months in 2002 and 2003, were announced in May of 2003. How did you go about evaluating the entries you received for that competition?

SB: We were totally surprised by the response to our first call for entries. We had done the feasibility study, so we knew there was an appetite out there for learning about various nonprofit venture strategies. But we were quite overwhelmed in the summer of 2002 after the deadline for entries had passed and we had more than six hundred entries on our hands. It was fabulous, but much more than we anticipated. And we received more than five hundred entries for the second competition. So we've had a tremendous response both years.

But to get back to your question, we conduct the competition in multiple rounds. We have entrants submit an eight-page executive summary, which really speaks mostly to their idea and a little about their management and the competitive market they plan to enter. At this stage, we're really interested in learning about their concept, as well as their knowledge of the demand for it. We have a large pool of evaluators to help us — in the first competition we had over two hundred evaluators who agreed to read summaries on a pro bono basis, and we doubled the number in the second competition to more than four hundred. Most of them are Yale School of Management alumni, Goldman Sachs executives, McKinsey and Company consultants, and other experts in this arena.

The evaluators help us reduce the number of entrants to eighty organizations for the second round. Those eighty organizations then prepare working drafts of their business plans — typically, thirty-page documents containing all the elements you find in a traditional business plan, including a detailed description of the venture, the competitive space the nonprofit is planning to enter, the qualifications of management, and so on. Although we rely on a smaller pool of evaluators for the second round, each plan is read by multiple reviewers — in fact, every plan is read by three outside evaluators in each of the first two rounds of the competition.

With the help of our evaluators, we winnow those eighty down to twenty for the final round. Those twenty organizations then prepare a final business plan with the assistance of a professional consultant whom we engage to work with the finalist organizations to fill in any gaps in their plans that have been identified by our evaluators. Students from the Yale School of Management who are taking a course in nonprofit entrepreneurship also participate in these consultations.

After the final business plan is prepared, a panel of seven experienced judges who have agreed to lend their expertise and time to our effort come to New York and sit in an auditorium while the finalists are given twenty minutes to pitch their idea to an audience. During the pitch, only the judges are allowed to ask questions. The judges then deliberate in a closed session and make the final decision on the winners.

PND: Before we talk about the competition that just concluded, tell us a little about the winners of the first competition.

Cynthia Massarsky: There were four grand-prize winners and four runners-up in the first competition, representing a range of nonprofit organizations running different kinds of businesses in various stages of development — although to be eligible for the competition no venture could be older than twenty-four months; the parent organization can be older that that, but not the earned-income venture. The four grand-prize winners in the first competition included an organization called CostumeRentals, an interesting collaboration between two nonprofit theaters, the Children's Theater Company and the Guthrie Theater, both in Minneapolis, that rents the costumes the two theaters have accumulated over the years to educational institutions, to smaller professional theaters, to individuals, and to anyone else who might need a costume for a short period of time.

Another grand-prize winner was an organization called CompuMentor, in California, which started a business called DiscounTech, now re-branded as TechSoup Stock, which receives donated or discounted technology products from leading manufacturers and offers them to nonprofit organizations at a deep discount.

El Puente Community Development Corporation, in Texas, was also a grand-prize winner. It's what we call an affirmative business, in that it employs clients of the parent organization — in this case, mostly Hispanic women in the sewing industry who have lost their jobs as a result of the North American Free Trade Agreement. Somewhere along the way, the folks at El Puente discovered that hospital scrubs are generally not cut to fit the typical Hispanic female hospital worker. So they decided to design as well as manufacture scrubs tailored to that market.

The other grand-prize winner was the Rochester Rehabilitation Center, in Rochester, New York. They're also an affirmative venture. They employ people that are handicapped or otherwise disabled in some way in a greeting card design and manufacturing business called Parrett Paper that features products with animal themes and motifs. Much of their distribution and marketing targets aquariums, zoos, and natural history museums across the country, and they've recently signed a contract with National Geographic.

PND: What about the second annual competition? Who were the grand-prize winners and how, if at all, were they different from the winners of the first competition?

SB: We had a diverse array of winners in this year's competition, ranging from a venture capital investment fund, to a car-and-truck maintenance business, to a retail store operation. Coastal Enterprises, in Wiscasset, Maine, was one of the grand-prize winners. They operate a $10 million venture capital fund, CEI Community Ventures, that drives capital and technical assistance resources into underserved and distressed communities in Northern New England that haven't traditionally benefited from venture capital.

Another grand-prize winner was DARTS, short for Dakota Area Resources & Transportation for Seniors, which is based in the Twin Cities. They started a business that services and maintains vehicles owned and operated by other nonprofit agencies in the Twin Cities, which we thought was a unique way to leverage their expertise to other nonprofits in the area.

Rescue Mission, in Liverpool, New York, was our third grand-prize winner. They've launched a $1 Shopper service that sells household necessities such as kitchen items, cleaning supplies, and disposable products for a dollar. Revenue from the operation, which they plan to expand to other locations in central New York, will be used by the organization to decrease its dependence on government funding and to establish more sustainable and diversified revenue streams to pay for services for the region's homeless.

The fourth grand-prize winner was VolunteerMatch Corporate, a Web-based service that's designed to manage, maximize, and measure employee volunteer programs.

So again, this all speaks to the many different ways that nonprofit organizations are thinking about generating earned income. They're looking at their assets — whether it's staff, their clients, their physical plant, their intellectual property — and thinking of ways to leverage those assets into money-making ventures.

PND: Did you learn anything from the first competition that caused you to do things differently for the second competition?

CM: Yes and no. With respect to the huge response we've received, we did a pretty good job with the feasibility study, and that included an operations plan for the competition. So we had systems in place that allowed us to handle the response. But we built a range of additional bells and whistles into those systems. For example, we created a relational database pretty early on to keep track of the entrants, but we enhanced it in year two so that we could match the particular expertise and interests of our evaluators with entrants in the competition.

Let me just add that we were pleasantly surprised by the interest we received from people we contacted to be evaluators. Yale SOM alumni, Goldman Sachs employees, McKinsey and Company consultants — they were all interested in helping us to evaluate these plans on a pro bono basis, and that made it possible, as Sam mentioned, to double the number of evaluators for the second competition. But to answer your question, a lot of the new systems and procedures we introduced this year were simply designed to accommodate the growing interest in the competition.

PND: The two of you have reviewed close to a thousand earned-income business plans over the last year and a half, covering the whole scope of nonprofit activity. What, in your view, is the most striking difference between the typical nonprofit business venture and a for-profit business venture?

CM: Well, they differ in a number of ways, but they're also similar in many ways. So let me talk about how they're similar first. They're similar in that, whether the venture is being launched by a for-profit or nonprofit, there needs to be substantial demand in the marketplace for the product or service that is being offered in order for the venture to be successful. It doesn't matter whether the product or service is marketed nationally, regionally, or locally; if customers aren't willing to pay for it, there is no business.

Second, you need strong management, management with experience and expertise in all aspects of the business. We know from talking with venture capitalists in the private sector and with investors and grantmakers in the nonprofit sector that strong management is one of the key things they look for in any startup situation. Without strong management, most startups are doomed to failure. I mean, who wants to invest resources, financial or otherwise, in a concept if there isn't a strong management team to implement it.

Now, where nonprofit enterprise really differs from for-profit enterprise is in its emphasis on and concern with mission. Nonprofits involved in earned-income ventures are, first and foremost, nonprofits; they almost always have a social-benefit mission, or an educational mission, or an arts-related mission, and the earned-income venture exists, or should exist, to support that mission. In the private sector, the raison d'etre of a business is to make money. In the nonprofit sector, in contrast, an earned-income venture almost always has a dual purpose: to earn revenue to help support the programs of the nonprofit, and to advance the mission of the nonprofit organization in one way or another. For example, we frequently see nonprofit enterprises marketing the same products and services that their nonprofit parent organizations offer for free or very little money to their clients. What the enterprise has done, in that kind of situation, is identified a target audience with the willingness and ability to pay for that product or service, and the result often is a steady stream of earned income for the parent nonprofit.

PND: We're all familiar with the concept of the bottom line as the ultimate measure of success in the for-profit world. But the benefits of nonprofit work are much harder to measure. Is there a nonprofit version of the bottom line that you use to measure the success of nonprofit earned-income ventures?

CM: That's a question we're asked all the time and yet it's one of the most difficult to answer. A lot of people have begun to refer to this as SROI, or social return on investment, and for obvious reasons the financial-return piece is the easiest to measure. You look at the revenue generated by the venture, you subtract your costs, and you get a net profit. The social benefit side is much more difficult to calculate and often depends on the type of organization and the type of business that the nonprofit parent is operating.

SB: The Roberts Enterprise Development Fund in San Francisco has done quite a bit of work on SROI and has come up with a number of different ways to measure it, as have other people. In our competition we certainly encourage people to talk about social return, but we don't require entrants to include a social return analysis in their competition materials, mainly because we feel the net profits from the earned-income venture will be returned to the nonprofit parent organization to help support its programs, which in and of itself is a social return.

CM: That's right. In terms of the competition, one of our measures of success is whether the earned-income venture will be able to meet the goals set by the parent organization. Some nonprofits expect an earned-income venture to turn a significant profit and to plough those profits back into their programs; others consider a venture to be a success if it can generate enough revenue to sustain itself and, at the same time, provide gainful employment to its clients. It really depends on the goals of the parent nonprofit and what it has established as the social benefit of the business.

PND: Much of the literature in the field cautions nonprofits to tread warily when it comes to earned-income ventures. What kinds of things should nonprofits consider before they jump into this arena? Is there a manual they can follow, or should they just wing it?

SB: Oh, no, we don't want them to wing it.

CM: We definitely don't want them to wing it. Our competition stresses — as does the literature you alluded to — that nonprofit enterprise is not for every organization. As a matter of fact, when we had our initial discussions with the folks at Pew, they made it clear they didn't think these kinds of ventures were for everybody. In fact, they hoped the competition would become a mechanism for helping people to determine whether this is the kind of thing that will work for them. What we've tried to do, in response, is to initiate an entire business-planning process that, for purposes of the competition, ends with the creation and presentation of a finished plan. That's the process we've used to help people understand that they need to take a hard look at whether nonprofit enterprise is right for them in general, and, beyond that, whether a specific enterprise is right for them and is marketable to the wider community.

That said, there are a number of things that nonprofits can and should look at to determine whether an earned-income venture is a good fit. We usually suggest that they start with an organizational audit — that is, that they take a hard look at their assets — human, financial, or program — to determine not only whether they have a product or service they could market for a fee, but whether they'd feel comfortable charging a fee for that product or service. There's a psychological piece to the equation having to do with mission versus money and whether the two can coexist in the same organization that is very, very important in the decision-making process. For some organizations it's a definite no; it doesn't feel right to staff, it doesn't feel right to the board, it's not what they're about. For others, there's no conflict at all. In any case, it's one of the first things an organization needs to settle, and I would just add that even though it's usually one of the first things an organization will consider, we frequently see it resurface as an issue over and over again throughout the business-planning process. In fact, I would go so far as to say, based on anecdotal evidence, that it is something that never really goes away, and that's because nonprofits are continually re-evaluating whether being in business is worth all the aggravation, whether it makes sense to them, and whether, in terms of mission, it's a good thing for the organization.

SB: One other key factor nonprofits need to think about when investigating an earned-income venture is whether they have the right leadership in place. We've found through our research as well as through the thousands of business plans we've looked at that, just as a venture capital fund will look at leadership and management capacity in a for-profit startup before they invest in the business, it is equally important for nonprofits to do the same. Too often in the nonprofit sector an executive director will say, "We'll just let one of our program directors run the venture in his or her spare time." Well, that's just not going to fly. Earned-income ventures need a champion; they need somebody to support and massage and nurture them through development and implementation. Without somebody like that in place, a venture doesn't have much of a chance of succeeding.

PND: Access to capital is another problem all startups have to deal with, but it's even more of a problem for nonprofit ventures. What, if anything, is being done to create or incentivize the creation of dedicated pools of venture capital in the sector?

CM: It's a difficult thing to do, and people have been struggling with the whole concept for a while now. The Partnership on Nonprofit Ventures was founded with two key principles in mind: to facilitate the sharing of intellectual capital, while simultaneously serving as a provider of financial capital to nonprofit ventures. We did not want to merely talk with people about how to do these kinds of things; we wanted to able to back them up with funds that would help them do it. We award a half a million dollars in prize money each year — four $100,000 grand-prize awards and four $25,000 runners-up awards, and we also provide many, many hours of consulting services to the finalists and runners-up. Of course, it would be terrific if there were more money available for these kinds of activities, but funders have been rather slow to jump into the arena. Still, we believe that as more data becomes available, and as that data begins to reveal the number of nonprofits that are interested in exploring this arena and the number that are succeeding at it, more funding will be made available to seed nonprofit ventures.

At the same time, nonprofits are learning that there are other ways to support their earned-income ventures besides the typical grantmaking route. At our final competition event in New York in May, we offered a session that explored different vehicles for financing nonprofit ventures — things like bank loans, particularly from community-based banks, and program-related investments, or PRIs, which are low- or no-interest loans made primarily by grantmaking foundations to nonprofit organizations and/or individuals in support of a social-benefit activity. In fact, as I'm sure you know, the number of foundations that make PRIs is growing.

Nonprofits are also learning how to access public-sector funds, whether it's small-business assistance, or minority-business assistance, or women's-business assistance, or other pools of funding. And then there are an increasing number of so-called social investors who are willing to take equity positions in nonprofit ventures with a social-benefit purpose.

SB: I just wanted to add that, while they tend to be more locally or sub-sector based, there are a couple of models for this kind of activity around the country. For example, there's a tremendous amount of social enterprise activity happening in the Pittsburgh area, where two local foundations have funded an intermediary organization called the Pittsburgh Social Enterprise Accelerator to lend and provide capital to startup nonprofit enterprises.

Social Venture Partners, in Seattle, is another one. SVP aggregates contributions from individual donors, or "partners," and invests the capital — as well as the partners' time and energy — in a relatively small number of nonprofits in the Puget Sound region. Since the organization was founded in 2000, the SVP model has been replicated in more than twenty other cities around the country. The Ms. Foundation for Women is yet another one. They have a collaborative fund that pools funds from twenty-five to thirty institutional and individual donors and provides capital and technical assistance to women's economic development nonprofit organizations, many of which operate nonprofit enterprises.

So there are models out there, if few and far between. Our hope is that as our competition becomes more visible, more and more funders will see that this activity is for real and will want to get involved and support it.

CM: I'll just add that one of the things we talk about when we talk to funders is the whole area of capacity building for nonprofits — it's something more and more grantmaking foundations are looking at closely. As Sam said, we see, as many others do, earned income as a way to help build the capacity of nonprofit organizations.

The other thing we talk to funders about is the carry-over effect that nonprofit enterprise has on the parent organization. In fact, we know from data we've collected that it's considerable. Nonprofits tell us that business planning for an earned-income venture has helped them become much more efficient in the way they operate, has helped them think more strategically about how they operate, has caused them to think about expenses and the bottom line differently, to think about leadership differently. It's a mindset that is critical to earned-income ventures but is also very, very important to the general operations of a nonprofit.

PND: You've talked about the importance of venture capital to these kinds of enterprises, but we haven't really discussed that other kind of capital — human or intellectual capital. Does the nonprofit sector have adequate human capital to sustain and build on these kinds of earned-income ventures? And how, in an increasingly competitive, globalized economy that places a premium on brain power does the sector compete with the private sector for that kind of capital?

CM: That's a good question. I think the short answer is, yes, there is a more than sufficient supply of human capital out there to meet the needs of the nonprofit sector, the private sector, the public sector. One of the really interesting things we've noticed is how many entrepreneurial people are actually managing or working in nonprofit organizations. They're the kind of people who can step up to the plate and become project champions — which, as we mentioned earlier, is one of the important factors of success in all this. But Sam can tell you and I can tell you that they're out there and that the spirit of entrepreneurship is alive and well within the nonprofit sector.

We're also seeing quite a number of people from the private sector that have decided to jump to the nonprofit sector, but in doing so want to do something that's more business-oriented. Maybe they've reached a certain point in their careers — although we're seeing more and more young people do this as well — where they don't have to worry as much about earning a living or establishing themselves and want to do something that's meaningful and important and see nonprofit enterprise as a terrific way to accomplish that.

PND: I hear you've been hard at work on a book about all this. Care to tell us about it?

SB: We'd love to. (Laughter.) It's titled Generating and Sustaining Nonprofit Earned Income: A Guide to Successful Enterprise Strategies, and Cynthia and I edited it along with Sharon Oster. It's a compilation of seventeen chapters on a range of subjects related to earned-income generation written by experts from the worlds of business, social enterprise, and government. It actually comes out of the learnings we collected at our first annual conference, in May 2003, where many of the authors collected in the book presented either master classes or workshops. So we have a chapter on leadership strategies for managing a nonprofit enterprise, and a chapter on how to target a market and develop a marketing plan, and a chapter on various techniques for pricing goods and services, and another on how to secure financial capital, and many chapters on implementation. The book really is targeted to the audience of nonprofit practitioners who have done their pre-testing, have done their feasibility analyses, and are ready to get started, or have already started, and are looking for support and tools to help them launch, implement, or, if needed, course correct. We think it's full of really good information and practical, concrete lessons for people who are interested in promoting and building this field.

PND: Do you have plans to share the business plans that have been entered in the competition with the broader public?

SB: That's a great question. We've posted on our Web site — and the book also references a Web site where they're posted — six business plans from last year's final twenty. Only one of the grand-prize winners allowed us to post its plan, and we were frankly surprised they did. This is a very tricky issue for the winners of the competition, many of whom view their ventures as proprietary in nature and are concerned about theft of intellectual property and so forth.

So we were lucky, we thought, to be able to collect six of the twenty finalists' plans from the first competition. As it turns out, the Web pages with links to the business plans are the most heavily trafficked areas of our site. Which is really fabulous from a learning standpoint — people really want to see what a good business plan for a nonprofit enterprise looks like. Cynthia has a story, though, that raises some concerns.

CM: It's a little vignette about a nonprofit organization that entered our competition and actually won, which of course entitled it to a fairly sizeable cash prize. Well, when the organization's leadership returned to its headquarters from New York, the manager of the earned-income venture confronted them with a request for a raise. For a number of reasons we won't go into, it was determined that that was not going to happen, at least not right then. So the person left the organization and started his own business, which now competes with the original enterprise.

Obviously, there are gray areas in all of this, both in terms of the proprietary nature of intellectual capital as well as the whole mission aspect of nonprofit work. By that I mean, at what point does a nonprofit put itself in danger of losing its focus and maybe even its soul? Only the nonprofit can answer that question. Now, in the example I just gave you, the nonprofit decided rather quickly that it wouldn't do anything in response to what its former employee had done because it didn't feel it would be in keeping with its mission. But it's hard to imagine a private-sector concern coming to the same decision.

PND: Maybe you'll have to include a chapter on non-compete clauses in the next edition of your book....

SB: (Laughs.) Well, we talked about that with the nonprofit in Cynthia's example. We had approached them to talk about some of the lessons they had learned, and that was one of the suggestions they had, that there are certain things you can put in place beforehand, including non-compete clauses, to prevent this kind of thing from happening.

PND: A final question: Would you like to see the competition become institutionalized? Are you pursuing any plans in that regard?

SB: Well, again, the answer is yes and no. We have a lot of exciting, multi-dimensional plans for the Partnership on Nonprofit Ventures and the competition. Unfortunately, we can't share them with you just yet. (Laughter.) But we promise you'll be among the first to know when we're finally able to.

PND: Well, we look forward to it. In the meantime, I'd like to thank both of you for speaking with us. Best of luck with the third competition, which opens on May 14 and closes to new entrants on July 16.

SB: That's right. And thank you.

CM: Yes, thanks, Mitch.

Mitch Nauffts, PND's editorial director, spoke with Samantha Beinhacker and Cynthia Massarsky in April and again in May. For more information on the Newsmakers series, contact Mitch at mfn@fdncenter.org.