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Public Management Program

 

Public Management Initiative (PMI)

Social Entrepreneurship Conference (March 7-8, 1997)

Overview

It was a familiar sight at the Stanford Business School as CEOs of million-dollar companies, community leaders, venture capitalists and entrepreneurs mingled with students, challenging one another on provocative ideas. But the topics under debate were not so usual: venture philanthropy; how nonprofits launch for-profit enterprises; innovative corporate/nonprofit partnerships; and how income can be generated from corporate social responsibility. These topics were all part of a daylong series of panels for a new breed of entrepreneur at the GSB Conference on Entrepreneurship in March 1997.

One of several conference "tracks," these sessions were organized by leaders of the GSB's Public Management Program to address a simmering revolution in the social service sector that has everything to do with building value and competitiveness, and coupling rigorous business principles with attention to the public environments in which business takes place. Audiences were standing room only.

Nonprofits Launch For-Profit Ventures

In response to the changing economic and political environment, many nonprofits are finding it increasingly difficult to raise money in the traditional manner. So some social organizations are exploring cutting-edge strategies to extend their mission-driven initiatives into for-profit enterprises. This transition was the subject of the first session. Attendees were interested both in strategies for starting revenue-generating enterprises and in the effects for-profit venturing could have on a nonprofit's core mission.

Based on a modified venture capital model, Keystone Community Ventures provides financial, technical and management assistance to nonprofit groups starting enterprises. Panelist and KCV Director Cynthia Gair began by saying that nonprofits should recognize several dangers in establishing new ventures. First, Gair claimed, the new business must have some connection to the nonprofit's mission and reflect the core competencies and values of the organization. Second, nonprofits must begin to reconcile the implications of their two "bottom lines." Balancing the two takes innovative, retrained leadership—optimally with business experience.

Co-panelist Gary Mulhair founded Pioneer Human Services in 1962 in Seattle to provide rehabilitation, job training, housing and jobs for clients with a history of unemployment, substance abuse and criminal activity. He put together his 501(c)(3) based upon a patchwork arrangement of foundation grants and donations that are a familiar way of life for most nonprofits.

Faced with closing his doors as charitable grants dried up, however, Mulhair reengineered his organization to create more jobs for clients and independence for the organization by forging into the competitive industrial manufacturing and service markets. Mulhair recalled, "We discovered that if we stopped spending all our energy explaining why we should be given a grant and instead earned it, we could do real well."

PHS developed a two-pronged approach: a set of social service housing and treatment programs paid for by PHS funds and fee-for-service government contracts; and eight very successful businesses including an $8 million a year subcontracting agreement with Boeing, several corporate and wholesale food services, printing/mailing operations, and some property management. His clients are "recovering alcoholics and addicts, coming mostly out of jails; moms with crack babies; folks who never went to school. Our job is to create opportunity for them, recognizing the limitations these folks bring to the table."

As of 11 years ago, PHS became completely self-sustaining, taking advantage of its access to low-cost resources, labor and tax breaks. Mulhair explained how, "paying scrupulous attention to the law," PHS "ruthlessly exploits its nonprofit status" using tax shelters, forming corporate partnerships, raising worker performance and gaining FICA payroll exemptions competitors cannot. So PHS now employs 700 people, has a $35 million annual budget ($20 million from enterprises, $15 million from fee-for-service contracts), and is expanding its programs thanks to a $2.5 million profit.

Also on the panel were Aleyne Larner, executive director of Food from the Hood, and one of its high school student entrepreneurs, Ray Lucas. Funded as part of the Rebuild LA initiative, FFTH is a grass-roots microenterprise originally founded as a quarter-acre student-managed organic garden at Crenshaw High School in Los Angeles with a mission to raise students' self-esteem and renew the surrounding community.

In five years, FFTH grew into a self-sustaining $4 million operation. Students and past graduates also now run businesses that license and market their own salad dressings, apple sauces and merchandise. Their entrepreneurial ventures train and pay student workers, fund higher education scholarships, and return a quarter of the proceeds to the community.

Innovative Partnerships

The second session explored the nature of partnerships between private companies and nonprofits that create profit and social value. Sarah Williams, assistant director of corporate philanthropy at Pfizer, emphasized the need for such partnerships to be based on "common ground" and long-term relationships. Most companies, including Pfizer, prefer to become actively involved in a social cause rather than just write a check.

Assessing potential partnerships, Pfizer looks for programs that help the corporation reach a key audience or meet a corporate objective. For example, Pfizer has worked with a children's health nonprofit to develop health guidelines for pediatricians. The distribution of the guidelines was handled by Pfizer because it provided a helpful "in" for the salespeople.

The Timberland Company's Vice President of Marketing and Social Enterprise, Ken Freitas, discussed Timberland's commitment to City Year, echoing the sentiment that a position of social responsibility can be a wise business decision. Timberland approaches its partnerships with the philosophy that "There are no right answers. There are only beliefs. You have to get behind those beliefs with everything you have and get your business to understand it," Freitas said.

This philosophy has led Timberland to develop a broadened definition of sustainable value that is applicable not only to shareholders, but also to employees, consumers and communities. Timberland's partnership with City Year involves much more than donating money; it is about exchanging knowledge and ideas, and sharing experiences and opportunities. Timberland has used cause-related marketing, issued joint product lines, encouraged employee involvement in the partnership—and valued the "identity" of their boot almost as much as the boot itself. Frietas noted that Timberland has achieved remarkable value in its brand name largely because of the company's emphasis on themes of social responsibility.

"Customers are more loyal, employees are more devoted, and the company sets itself apart," Freitas explained. "We've created an identity that sticks with the consumer because it connects a pair of boots to something larger that the consumer really cares about." And, in so doing, he says, Timberland sells more boots to more repeat customers with better service and fewer employee conflicts than ever before. Frietas even cited improvements in self-confidence among sales clerks at Timberland stores since the company adopted its aggressive social responsibility position. These themes pervade the entire company, from human resource policies granting leave time for community service, to a corporate partnership with the City Year youth service corps, to marketing campaigns combating racism.

Catherine Milton is executive Director of Save the Children U.S. Her personal mission is to build institutions that support people who build communities. She believes that nonprofits should actively seek partnerships with companies while remaining true to their mission and core competencies. (She offered a bit of advice about mission statements: "If you can't fit your mission on a T-shirt, it's too long.") Milton is beginning to take advantage of STC's greatest resource: its focus on children. The organization is licensing its logo for a variety of consumer products, and in the process is building partnerships and management expertise with private companies.

Venture Philanthropy

Afternoon discussion turned to the elements necessary for a successful social enterprise, and whether it is possible to identify a single set of models that can be applied by business and nonprofit managers to address social needs.

Third session panelists debated the merits of philanthropic giving and whether there might be a way to improve results if the focus of a foundation were more like that of a venture capitalist.

Christine Letts, a Kennedy School professor, recently co-authored a study in the Harvard Business Review comparing the practices of charitable foundations and venture capitalists. Theoretically, she argued, because both are in the business of "sponsoring new value," their business practices should be similar. What she found was that the practices of the venture capitalist are not just significantly different, but also more successful. Venture capitalists, Letts explained, become equity holders in the enterprise, and act as partner, coach and guide to the new business. This also means long-term risk sharing and investing in organizational capacity.

Foundations, according to Letts, fail to do this effectively, often investing haphazardly in new ideas, without sufficient follow-through, organizational support or accountability. Most significantly, grant makers never cross from the role of a "funder" to the role of "partner," and thus do not internalize the risks of the enterprise. The result is inadequate investment in organizational capacity, unreliable support for the nonprofit and, ultimately, less than stellar success rates for many charitable foundations.

GSB Lecturer John Glynn, a specialist in venture capital, elaborated on the core practices that make practitioners in his field successful— including investing in (and creating climates that retain) good people; taking steps up front to hedge and then internalize the risk taken by VC investees; and becoming a coach and networking resource. "I'm usually in the position of defending venture capitalism, also known as vulture capitalism," joked Glynn. "So I want to thank Christine Letts for putting us in a good light!"

Sterling Speirn, director of the Peninsula Community Foundation, responded by saying that what Letts reports is "all too true...The wheel is spinning but the hamster is dead." Speirn specifically identified what he calls the Achilles heel of the sector: Exit strategy, or lack thereof. And, he said, "I would argue that very few people come knock on our door with a risky idea. Funders love new ideas, but one a year is pretty lucky. Boards sit up and take notice, which suggests to me Christine is right. We are not funding the organizational capacity of our mainline organizations to have the time to even think of new ideas."

Speirn also emphasized that community foundations are the best positioned to adopt Letts' model and achieve results—because community foundations have such expertise within the communities they fund: "We are definitely not at arm's length." Speirn also noted that, while not exactly funding organizational capacity, community foundations love to give grants for technical assistance (hiring consultants), and the PCF is now considering funding fundraising.

Future of Social Entrepreneurship

The final panel featured Heather McLeod, founding editor of Who Cares magazine; Derek Brown (MBA '91), a vice president and senior manager at Ashoka; and Jed Emerson, executive director of the Roberts Enterprise Development Fund. McLeod discussed the difficulty nonprofits face trying to maintain focus on core mission when they are funded by an array of charitable sources with a lot of strings attached. Accountability, paperwork, lack of operating funds and tailoring to the expectations of grantors demand too much of a nonprofit's precious resources.

Brown concurred, reporting that the problem is exacerbated overseas. Brown's organization, Ashoka, supports and funds "public entrepreneurs" working on innovative projects all over the world. Non-governmental organizations (NGOs) are growing rapidly in number, Brown added, even though charitable funds are not always as easily available as they are in the United States. This means that individuals working internationally to address social needs are being forced to become more entrepreneurial in their approaches.

Brown suggested that public organizations concentrate increasingly on local resource mobilization strategies, and avail themselves more as a resource for private organizations. Many profit-driven international companies in developing nations depend upon the advice and guidance of NGOs to reach markets and gain access and credibility. On the other side of the coin, Ashoka partner McKinsey & Company has set up a consulting operation in Brazil specifically to provide management consulting to NGOs. McKinsey uses this opportunity to do management consulting with a larger social purpose to attract and retain top talent in the management consulting field.

Emerson then sparked a debate about whether any single "business franchise model" could be used by all social entrepreneurs. He shared observations on the growth of the field of social enterprise, which he points to as a rich opportunity for MBAs to bridge the gap between the social worker and the venture capitalist—by combining practical business skills with community knowledge and consciousness.

Having worked with the Roberts Foundation for seven years, Emerson now heads the Foundation's Enterprise Development Fund and its initiative to make "deep" investment commitments to ten Bay Area nonprofit businesses. The idea is to apply the approach of the venture capitalist, share in the risk, create revenue and ultimately, use the power of the market to create social change for people "at the margin" by pulling them into the economic mainstream.

Taking a historical perspective, Emerson spoke of how the change-the-world consciousness of the 1960s turned into a focus on self and "footing the bill" in the '70s and '80s, until now, in the '90s, people are returning to more meaningful social objectives pioneered thirty years ago—only this time, with money to give and enough business experience to attempt powerful new solutions to old problems.