Social ventures support capacity building and sustainability for nonprofits
Originally published: January 2017
A social venture or social enterprise is a business venture that prioritizes a social good along with business success. Social ventures tend to leverage their mission in their product branding. They also tend to capitalize on the marketplace, lending them the label "cause capitalism."
What are the types of social ventures?
Primary types of social ventures include:
- Hybrid nonprofit fee-for-service organizations. These nonprofit businesses have dual purposes: making money and serving the mission. Potential profits from the sale of goods or services are directed back to serving the mission. These social ventures also use their mission and nonprofit status as part of branding and marketing efforts. In some cases, a social venture may also be an expansion of a nonprofit.
- For-profit companies with missions. For-profit social ventures are driven by both mission and marketplace. These companies want to earn a profit, but they also want to help their communities. Like nonprofit social ventures, they also use their mission to set themselves apart in the marketplace.
- Social venture capital companies. These companies are sometimes called impact investment firms or cause capitalists. Instead of producing goods, social venture capital firms use investment cash to support both for-profit and nonprofit initiatives. Some work more like foundations, making grants to nonprofits (sometimes also offering leadership development and capacity building as part of their grantmaking strategy). Others make loans or investments, which might then offer some return on investment or repayment.
Each model has advantages and disadvantages. For example, a nonprofit has, among other benefits, an "aura of goodness," according to San Francisco nonprofit attorney and law professor William T. Hutton, while a for-profit has more ability to take on debt and equity and raise funds from investors. In some models, a foundation acts as the owner and operator of a for-profit business, turning profits back to the foundation to be dedicated to serving the community.
What are some examples of social ventures?
Social ventures come in many shapes and sizes.
The Grameen Bank, founded by Muhammad Yunus, offers microcredit loans. TOMS sells shoes to consumers and donates shoes to children who'd otherwise go without. Social Venture Partners operates on the model of a venture capital firm — collaborating with nonprofits and offering funding contingent on close partnerships, and then performing their own analyses and audits of the organizations they fund.
Social ventures are acquiring marketing cachet with brands such as TOMS or Ethos Water. These for-profit companies fold their social mission into the branding of their products, even using the mission as a way to increase the product's market value.
Nonprofits such as VisionSpring, a "hybrid" enterprise, participate in a marketplace while at the same time serving the mission of affordable access to eyewear, everywhere. By helping individual entrepreneurs start up their own optical shops, VisionSpring can go wherever people need glasses.
Another successful social venture is Living Goods, which offers malaria-prevention products (among other things) for sale on a door-to-door model. Living Goods fulfills a dual mission: disease prevention and economic independence for the women who sell the products.
How do social ventures support capacity building and sustainability?
If your nonprofit delivers a product or products to underserved or unserved populations, you might consider becoming a social venture yourself. Social ventures that follow a fee-for-service, self-supporting model are less vulnerable to changes in the philanthropic landscape, allowing continued service to the community with or without donors. In the Living Goods example, sales of low-cost products help cover operating costs and allow the organization to remain independent from the ups and downs of conventional philanthropy.
VisionSpring is another example of social venture sustainability. Rather than simply distribute eyeglasses ad hoc, VisionSpring chose a market model. Its mission states: "We believe that an active market (where eyeglasses are being sold and a small profit is being earned by a distributor) provides the best likelihood of creating a lasting vision solution in the community." With its optical shops selling low-cost eyeglasses, VisionSpring gets eyeglasses to people who need them and builds livelihoods for business owners—all while building sustainability into its plan. Once up and running, income from sales and service in each shop offsets some (or all) of the operational cost.
How can nonprofits raise funds from social venture capital partners?
In another model, nonprofits that aren't social ventures themselves connect with social venture firms, such as Social Venture Partners or LGT Venture Philanthropy. Such firms make grants to nonprofits doing the on-the-ground service, but they often bring the tools of venture capital to bear on the nonprofit mission.
For example, capital donor groups might commission detailed audits of potential grantees, following the model of a venture capital group investigating a start-up business. Capital donors might devise their own measures and metrics for determining whether a nonprofit is effectively and efficiently serving its mission. They might also require nonprofit leaders to participate in development and education programs.
Such funds often engage themselves with nonprofits in long-term partnerships rather than short-term or one-time grants. These partnerships also tend to be more collaborative and interdependent than conventional donor-grantee associations, with the funding partner helping to ensure accountability and effectiveness in the organizations it supports.
What about social ventures and program-related investments?
Program-related investments (PRIs) are investments or loans, rather than grants, made to nonprofit organizations. While they offer initial funding for a nonprofit project, investors expect repayment or return. Just as an organization such as VisionSpring is a hybrid between a for-profit and nonprofit business model, PRIs offer a hybrid form of investment—supporting a social mission while earning some financial return for the investor.
Traditionally, PRIs have been associated with affordable housing and community development projects. The hybrid nature of some social ventures, however, is also stimulating an expansion in the use of PRIs. Social venture funds might make the use of PRIs more commonplace as well, in cases when it is possible to receive a return on investment, or repayment with interest, while still supporting the mission of the nonprofit.
How can a nonprofit become a social venture?
Any nonprofit can become a social venture, as long as income is earned from the sale of goods or services. Consider these basic steps:
- Use your mission in your branding and marketing strategy. Companies such as TOMS, Ethos Water and Greyston combine market-driven analysis with their social mission, produce a high-quality product that achieves successful market share—and treat the nonprofit mission as a value-add.
- Tie your product or service to the mission of doing good in the world. The three companies listed above prioritize both shareholders and stakeholders. Greyston founder Bernie Glassman has famously said, "We don't hire people to bake brownies. We bake brownies to hire people." Providing jobs for hard-to-employ workers is prioritized, but making delicious brownies is what makes that priority a reality.
- Work toward sustainability through dual social mission and market model. The combination of quality and mission make for an increasingly successful marketing strategy, whether in a for-profit or nonprofit model.
This article draws on the expertise of Grace Davies, a Minneapolis-based attorney with special interest in product liability, medical malpractice and employment discrimination.
AllBusiness: Starting up: Nonprofit vs. for-profit social ventures by Diana Ransom
Cause Capitalism: What is a social business venture and is it right for you?
OnlineCollege.org: The 10 greatest social entrepreneurs of all time (2012)
VisionSpring: How we work
LivingGoods: What we do
Social Venture Partners: What we do
Cause Capitalism: 15 social venture capital firms that you should know about
Nonprofit Quarterly: Wait — what is venture philanthropy, again? by Eileen Cunniffe (2014)
Investopedia: Impact investing vs. venture philanthropy by Dan Moskowitz (2015)
GrantSpace: What is a program-related investment?