Sit down with any charity leader right now and the conversation will inevitably turn to money, or the lack of it.
While queues are getting longer, budgets are becoming tighter. And there’s a particular kind of unease that comes with knowing your existence depends on funding decisions made in 12-month increments.
As we lick our wounds from a recession that’s hit the charity sector particularly hard, it’s worth asking the question: If grants, donations and government funding continue to tighten, what’s next for charities?
Should they accept that long-term viability sits largely outside their control?
Or is there another way? Could experimenting with an earned-income model be worth a conversation?
A mindset shift
Treating funding as something you intentionally build versus something you apply for is quite the mindset shift.
And it may not suit every charity. After all, a trading mindset requires a different set of muscles: business-minded governance, a tolerance for commercial risk, someone with commercial discipline to lead the venture day-to-day, and the ability (and willingness) to invest time and capital before break-even point.
While passion matters deeply, leaders of social enterprises need to park that passion to concentrate on a business with a sole focus on making a profit.
Of course, when charities are already stretched delivering core services, this idea might feel unrealistic or even irresponsible. But get it right and the benefits for charities can be transformational.
Take Habitat for Humanity New Zealand, for example. Its ReStore op shops are a long-running example of earned income that’s scaled impact significantly. They built this model, complemented by other revenue streams like their home repair and tenancy management services, for the explicit purpose of underwriting their housing work.
“It’s huge because it means we’ve got an untagged income stream we can use to hit shortfalls in areas where other funding dries up or isn’t able to be used for housing,” explains chief executive, Nic Greene.
Though the ability this has given them to scale their impact is game-changing, he warns charity leaders considering social enterprise to keep an eye on scope creep.
“If you’re a charity that looks after small dogs, don’t try to become a mass-market retailer. Keep your mission front of mind.”
Qualifying risk
A simple place to start is to consider how exposed a charity really is. Not all face the same level of vulnerability. Some, like St John’s for example, are so critical that funding is less likely to be cut while others are more exposed to economic conditions and changes in government priorities.
Though even if funding has been relatively easy up until this point, it should still be right up there on a charity’s risk register.
It’s also important to consider how concentrated that funding is. Does it come from a single major funder that could be cut at any moment, or is it spread out across multiple?
Earned income doesn’t have to replace grants and donations, but it can, under the right circumstances, be an effective way to diversify income streams, spread risk and build a resilient funding mix.
5 lessons we’ve learned backing 25 social enterprises
Separate the business from the charity
The governance, strategy, business planning, start-up funding and other aspects of a for-profit organisation are very different from a charity mindset. In particular, the purpose, culture, accountability and compliance issues need to be tailored to a for-profit mindset.Involve the people your charity works to help, if possible
Consider a for-profit model that can involve your target cohort from day one. This can mean that impact is happening even before the for-profit enterprise is generating enough profit to help support the charity. Think about what the charity already does well, what they have access to and what their name can credibly sell.Put a dedicated person in charge
This person should be a business leader with zero involvement in the charity. They can have a similar passion and motivation, but it needs to stop there. Of course, this means that they will need to be remunerated accordingly which is another reason for completely separate organisational structures.Plan the path to break-even
Most ventures need more capital than can be raised upfront, so break it into stages. Define seed funding and later tranches to reach each milestone and be clear on where the money comes from before profits arrive.Stay open-minded about capital and partnerships
Some charities have enough reserves to seed fund a start-up for-profit business. Others need to look further afield so keep an open mind about where this might come from. For example, a for-profit business can be a joint venture with other shareholders who are looking for valuation lifts and dividends.
Getting the right support
If charities do decide to explore a trading idea, getting the foundations right is key. The safest way to do that is to bring in experienced commercial guidance early to make sure the business case stacks up before committing serious time and capital.
That support might come from existing networks, board members, or an external advisor who has built and run a business themselves.
For charities in need of support, All Good Ventures offers an incubator-style programme for social entrepreneurs with applications open between 1 – 31 March.
Each year, we walk alongside up to five change-makers with early stage, people-liberating business ideas offering a mix of funding, mentoring and access to specialist support.
Words by Hannah McCreery at Two Sides
Watch the webinar: Exploring social enterprise for charities
If this topic is front of mind for your organisation, we recently hosted a webinar for New Zealand charities exploring whether launching a social enterprise could help build sustainable income for their mission. In the session, we share examples of charities All Good Ventures has supported to launch for-profit ventures, along with practical considerations for deciding whether this path is right for your organisation.