Small Business Labs

Are Non-Profits the Future of Business?

The Rise of Anti-Capitalism is a fascinating essay by economist Jeremy Rifkin. He predicts the non-profit sector will play an increasingly important role in the world’s economic future. 

This is not the first time Rifkin has suggested this. His 1995 book End of Work also suggested that non-profits were the future of business.  Here's Wikepedia's synopsis of the book:

In 1995, Rifkin contended that worldwide unemployment would increase as information technology eliminated tens of millions of jobs in the manufacturing, agricultural and service sectors. He predicted devastating impact of automation on blue collar, retail and wholesale employees. While a small elite of corporate managers and knowledge workers would reap the benefits of the high-tech world economy, the American middle class would continue to shrink and the workplace become ever more stressful.

Sound familiar?  While Rifkin's dire forecasts have not come true (at least yet), the polarization of jobs, automation replacing humans and the decline of the middle class are happening.  

In his essay Rifkin repeats his book's thesis that the non-profit sector is going to become a key source of jobs in the future.  Key quote from the essay:

The answer lies in the civil society, which consists of nonprofit organizations that attend to the things in life we make and share as a community. 

Rifkin also points out that the global non-profit sector is both large and growing.

In dollar terms, the world of nonprofits is a powerful force. Nonprofit revenues grew at a robust rate of 41 percent — after adjusting for inflation — from 2000 to 2010, more than doubling the growth of gross domestic product, which increased by 16.4 percent during the same period. In 2012, the nonprofit sector in the United States accounted for 5.5 percent of G.D.P.

We've long covered the non-profit sector. In the U.S. non-profits employ almost 11 million people and was one of the few economic sectors to grow during the Great Recession.  

But despite these numbers and Rifkin's arguments, we're not quite ready to throw capitalism under the bus.

In fact, we feel for-profit but socially oriented businesses are more likely to be the future of business than pure non-profits. This point of view is echoed in the recent trends report by the Center for the Future of Museums.  

Trends like the rise of the sharing economy, the growing number of socially oriented for-profit companies and the increased interest interest in social entrepreneurship all indicate firms mixing for-profit methods and business models with social objectives are becoming more popular.

Despite the size and growth of these sectors - non-profits and socially oriented for-profits - they are often overlooked by companies serving small businesses. They shouldn't be.

The Rise of Ethical, Sustainable, Slow Fashion

The collapse of the Rana Plaza building in Bangladesh's garment district earlier this year killed more than a 1,000 garment workers.  It also highlighted the ethical issues associated with the global fashion industry.

In response to this disaster - and broader fashion industry environmental and human rights problems - a number of new retailers and fashion labels that focus on social and environmental responsibility are springing up.

A good example is BeGood Clothing in San Francisco. They are predominately an online retailer of ethical and sustainable fashion, but they also have a retail store (pictured below).

BeGood is targeting the growing number of "conscious consumers" - people who want to know and minimize the environmental and social impact of their purchases.  Nielsen, the large consumer research firm, reports this is a large and growing share of global consumers.

According to an article in Triple Pundit, Fast Fashion Has to Slow Down, this is another step in the broader slow money movement, which has its roots in the growing trend towards local, organic, sustainable food. 

Slow fashion is also part of the broader shift towards local, handmade and/or artisan goods.  We've long covered the rise of the artisan economy and the growing number of goods being produced using sustainable and artisan methods - which includes everything from bikes to distilled spirits.

It's exciting to see the fashion industry becoming more sustainable. In addition to the environmental and social benefits that will accrue, this shift will also create new opportunities for small fashion businesses and artisans.  

Aquaponics: Sustainable Urban Fish Farming

Fascinating article in IEEE Spectrum on aquaponics, which is a sustainable food production method that combines aquaculture (in this case, raising fish in tanks) with growing plants.

Aquaponics creates a sustainable, synergistic food growing system. Fish waste from the fish tanks feeds the plants. The plants also clean and filter the water, which is then returned to the fish tanks.   

Making this even cooler, aquaponics farms are starting to sprout up in old warehouses and industrial buildings in the upper midwest.  Key quote from article:

The concept seems especially appealing in the upper Midwest of the United States, which has a surfeit of abandoned industrial buildings, a short growing season for high-value, highly perishable crops like arugula, baby lettuces, herbs, and microgreens, and an overburdened Great Lakes fishery. Large indoor aquaponics farms such as The Plant and FarmedHere in Chicago and Sweet Water Organics in Milwaukee have sprung up in the last five years.

Aquaponics taps into the growing demand for local, organic and fresh food. It also potentially takes advantage of the large number of empty industrial buildings and warehouses that exist in many major American cities.

While the economics are not yet fully proven, it's an exciting addition to the small farm and urban farm scene.

The video below provides a short introduction to aquaponics.

 

There's even an aquaponics trade association, which has more information on this growing field (very bad pun intended).   

The Fourth Sector - Social Businesses

Good article on Social Earth describing the emerging fourth sector of socially-oriented businesses.  These are firms, both for-profits and non-profits, that are driven by a social mission but employ for-profit business policies and practices. 

This is in addition to the traditional sectors - the private sector, government and traditional non-profits. The chart below, from the article, does a nice job of listing the various types of social businesses.

  

We cover social entrepreneurs and recently posted on alternative legal structures social businesses can use. This is clearly a growing sector and attracting more attention.

Non-Profits vs. For-Profits for Social Change

Rieva Lesonsky's ReadWriteWeb article Why Starting a Non-Profit to Create Social Change is a Bad Idea covers the various for-profit organizational options available to social entrepreneurs.  

The key quote comes from Geri Stengel, the founder and president of Ventureneer:

your “first choice when starting a company to create a social impact should be afor-profit business,” because she says, the “revenue streams are more reliable, and there are more dollars available (both debt and equity) for starting and growing.”

The article goes on to describe several of the for-profit legal structures that can be used to accomplish a social mission, including B Corps and Low Profit Corps (LC3s).  

We agree and would add even a plain old C corp or LLC can also be used to accomplish social missions. The founders simply have to include these in their articles of incorporation (or add them later).  

The non-profit sector has been a growth sector over the last decade.  According to the Urban Institute:

Between 2001 and 2011, the number of nonprofits has increased 25 percent; from 1,259,764 million to 1,574,674 million today. The growth rate of the nonprofit sector has surpassed the rate of both the business and government sectors.

But the last few years have been tough on non-profits. Donations are down, foundation funding is harder to get and there is a growing concern that there are too many non-profits chasing too few funding sources.  

For-profit social enterprises, because they aren't as reliant on donations or grants, are often better positioned to thrive and accomplish their social mission.

Alternative Legal Structures for Social Entrepreneurs

Social entrepreneurs create organizations that operate like a business, but with a social mission. 

This makes them different from the traditional non-profits, with the main difference being they attempt to create organizations that scale and become financially self-sustaining instead of relying on a non-stop stream of donations.

It's an exciting, growing field and a key reason the non-profit sector managed to grow through the Great Recession.  

The Wall Street Journal has a good article covering the different legal structures social organizations can use to better accomplish their combined mission of social good with business practices. 

These include the L3C, the Benefit Corporation (referred to as the "B Corp") and the Flexible-Purpose Corporation.  Because of the legalities involved, I'm referring you to the article for more details. 

Also, you should consult a lawyer or accountant prior to deciding what type of legal structure you want to form. 

The growing availability and use of socially-oriented legal structures is a clear signal that social entrepreneurship continues to be on a growth trajectory. 

Non-Profit Sector Added Jobs During the Great Recession

Non-profits were hit hard by the Great Recession.  But despite the negative impact of the recession on grants, donations and other sources of funds, the overall sector managed positive job growth from 2008 to 2010.

The chart below, from the Johns Hopkins Non-Profit Economic Data Project, shows that while non-profit job growth slowed, the sector way out-performed the for-profit sector of the economy.

 

The non-profit segment is large, employing 10.5 million U.S. workers in 2010.  This is roughly the same size as the oil and gas industry.  About 50% of non-profit employees work in health care, with education (13%) and social services (11%) also large sectors.

Few non-profits are large (more than 500 employees) and these are mostly hospital chains and universities.  The vast majority of U.S. non-profits have less than 20 employees and the growth of social entrepreneurship helped lead to this increase in jobs. 

See our Overview of the Non-Profit Sector for more details. 

What are Social Enterprises?

A social enterprise, according to Wikipedia, is "an organization that applies capitalistic strategies to achieving philanthropic goals. Social enterprises can be structured as a for-profit or non-profit."

Duke University's Center for the Advancement of Social Entrepreneurship says social enterprises create "social impact through the thoughtful adaptation of business expertise."

But my favorite social enterprise description comes from non-profit Inveneo, itself a social enterprise.  They say:

"we operate like a business with a social mission." 

By this they mean their business approach allows them to scale and become financially self-sustaining instead of relying on a non-stop stream of donations. 

Inveneo provides information communications technology (ICT), such as computers, telephony, and Internet access to people and organizations in rural and highly underserved communities of the developing world.  They go on to say:

"Our business model, based on both earned income and grant funding, is rooted in our belief that market-based strategies and relationships help to maximize social impact, sustainability and scale by aligning the interests and commitments of all stakeholders."

Over the last few months we've interviewed dozens of social enterprises. 

It's an exciting, growing sector and almost all social enterprise are small businesses.  And making it even more exciting is seeing these firms ignore traditional methods and instead embrace market-based approaches to solve social problems. 

We'll be blogging more about this in the coming weeks. 

Mobile Computing Empowering Social Entrepreneurs

Social Edge, a blogfocused on social entrepreneurship from the Skoll Foundation, has a post on 3 mobile computing trends empowering social entrepreneurs.  These are:

1.  Mobile technology is expediting the reporting and response to human rights violations.

2.  Providing access to essential data to level the playing field in terms of access to opportunities and  knowledge.

3.  Giving communities new ways of addressing issues and contributing to the health of the community.

The post provides examples of each trend and further explanations of the trends.

Social Entrepreneurs = Entrepreneurs

Social Entrepreneurship Revisited is a fascinating article in the Stanford Social Innovation Review. It describes research on social entrepreneurs by NYU professor Paul Light.

What really jumped out at me about this article is the description of social entrepreneurs is almost exactly the same as most descriptions of private sector entrepreneurs.  Key quote:

Social entrepreneurs appear to make quite deliberate decisions to solve social problems, rather than simply stumbling into their work by accident or circumstance. They are often quite sober about their decision to attack a social problem, and they usually understand the consequences of challenging the status quo. I also find that social entrepreneurs are driven by a persistent, almost unshakable optimism. They persevere in large part because they truly believe that they will succeed in spite of messages to the contrary. This optimism can border on overconfidence, but is essential to their 24/7 commitment.

Sound familiar?  The article goes on to describe 5 or so other attributes of social entrepreneurship that sound pretty much the same aprivate sector entrepreneurship.

This doesn't surprise me.  It makes sense that the same type of person that pursues regular entrepreneurship is also the type to pursue social entrepreneurship.  And most of the great private sector entrepreneurs I've known have been driven in large part by a desire to change the world. 

But what is really interesting is that this is listed as a new insight in the article.  This seems to suggest that it is only recently that social entrepreneurship has attracted the type of entrepreneurs that are common in the private sector. 

We've recently started a deeper dive on social entrepreneurship.  Many of the experts and social entrepreneurs we've talked to feel we are entering a golden age of social entrepreneurship.  There are many reasons for this (more later).  But the key reason is simple - the sector appears to be attracting many more true entrepreneurs than in the past.