1 Introduction to the Nonprofit Economy

2 Outline Definitions and size of the sector Development of the sector Challenges, opportunities, trends, and risks Introduction to social entrepreneurship

3 What’s in a Name? Nonprofit organizations Nongovernmental organizations Nonproprietary organizations People’s organizations Community organizations Independent sector Third sector Civil society The commons The charitable sector The voluntary sector

4 What Is a Nonprofit? Tax & regulatory definition: an organization that –Enjoys special tax status –Faces a nondistribution constraint (profit=0) Functional definition: an organization that forms to –perform “public tasks” environmental protection, social service provision –perform tasks for which there is demand but no supply from for-profits or governments religious activity, art museum –influence the direction of public policy political party, issue organization 4

5 International Facts U.S. is very large –represents more than ½ of all nonprofit activity worldwide ($600b) –has 45% of all world’s nonprofit employees Rich nations tend to have more developed nonprofit sectors than poor nations –Government social spending is positively correlated with nonprofit sector size

6 International Comparisons Source: Salamon, et al. 1999

7 Size of the Nonprofit Workforce Holland Ireland Belgium Israel USA Australia UK France Germany Spain Austria Argentina Japan Finland Peru Colombia Brazil Czech Republic Hungary Slovakia Romania Mexico Percent of employees

8 NPO Types in the U.S. 34 types: 501(c)(1)-(27), 501(d)-(f),(k),(n), 521(a), (c)(3): public benefit organizations –Religious, charitable, educational, scientific, literary, amateur sports promotion, prevention of cruelty to animals or children –Private schools, houses of worship, social welfare charities, hospitals, libraries, etc. 501(c)(4): mutual benefit organizations –Local civic leagues, social welfare organizations, employee associations –Volunteer fire departments, homeowners’ associations, social clubs, festivals, etc. 501(c)(6): Trade organizations –Business leagues, chambers of commerce Ref.: Section 501, IR Code

9 Nonprofits Are Proliferating in the U.S.

10 Health Organizations Dominate the Sector Source: IRS 990 data, 2003

11 Revenue Sources Vary a Lot by Subsector

12 Health Organizations Tend to Be Huge Source: IRS 990 data, 2003

13 All Subsectors Are Growing (but Health is exploding) 13 Source: Independent Sector 2002

14 Outline Definitions and size of the sector Development of the sector Challenges, opportunities, trends, and risks Introduction to social entrepreneurship

15 Early Stages Stage 1 –Few corporations exist—agrarian economy –Government cannot grant corporate status Stage 2 –Government devolves services to private economy (banking, medical societies) –“Nonprofits” begin to spring up (e.g. teachers’ institutes, professional associations) –Class tension over nonprofits Pre-Civil War in the U.S.

16 Middle Stages Corporations grow in status in the industrial revolution Certain organizations (e.g. universities) increase ties to business Charitable deduction for individuals often enters tax code “Countervailing nonprofits” –Universities, hospitals, libraries, orchestras –Unions, fraternal organizations in U.S.

17 U.S. Comparison: 1917 and 1999

18 Intermediate Stages Rise of foundations Elite family philanthropy Popular suspicion of foundations Private-sector alternative to socialism? 1920-WWII in U.S.

19 Late Stages Corporate deductions enter tax code to promote philanthropy Governments begin to expand social programs through nonprofit economy with subsidies Philanthropy expands to middle class Class antagonism in nonprofit sector diminishes WWII-present in U.S.

20 Outline Definitions and size of the sector Development of the sector Challenges, opportunities, trends, and risks Introduction to social entrepreneurship

21 Main Challenges at Present Money Competition Demonstrating effectiveness Technology Trust Human resources Public-sector relations Ref. Salamon 2002

22 Main Opportunities at Present Demographic shifts New philanthropy Heightened awareness of sector Increased social welfare spending through sector –Entitlement expansion –Welfare reform Ref. Salamon 2002

23 Main Trends at Present Explosive growth (144% in U.S.) Attention to marketing and management movements Commercial ventures Development of umbrella organizations and formal education Effectiveness in competing economically and politically Ref. Salamon 2002

24 Main Risks at Present Identity loss, “mission creep” Industry concentration Pressure on managers for results Loss of public trust Ref. Salamon 2002

25 Outline Definitions and size of the sector Development of the sector Challenges, opportunities, trends, and risks Introduction to social entrepreneurship

26 An Entrepreneurial Revolution 1 million new ventures a year in U.S.1 million new ventures a year in U.S. 85% of the new jobs in small and start-up firms85% of the new jobs in small and start-up firms Product/service introduction rate higher than ever beforeProduct/service introduction rate higher than ever before Rate of wealth creation explodingRate of wealth creation exploding And it’s a global revolutionAnd it’s a global revolution

27 What Is Entrepreneurship? Process of creating value by bringing together a unique package of resources to exploit an opportunity

28 The New Buzzword: Social Entrepreneurship So, is entrepreneurship basically entrepreneurship regardless of the context? Or is “social entrepreneurship” something truly different?

29 What Is Social Entrepreneurship? Nonprofits making money

30 What Is Social Entrepreneurship? Nonprofits making money For-profits doing things to show they are not evil

31 What Is Social Entrepreneurship? Nonprofits making money For-profits doing things to show they are not evil Process of creating value by bringing together a unique package of resources to exploit an opportunity, in pursuit of high social returns

32 The only big difference between commercial and social entrepreneurship: Denomination of the returns Social and commercial entrepreneurship have most of the same characteristics

33 The Process of Social Entrepreneurship 1.Find an opportunity 2.Develop a business concept 3.Figure out what success means and how to measure it 4.Acquire the right resources 5.Launch and grow 6.Attain goals

34 The Main Difficulty: Measurement What is profit?What is profit? How do we count it?How do we count it? What is “social return o n investment” for venture philanthropists?What is “social return o n investment” for venture philanthropists? Can we compare investments?Can we compare investments?

35 Three characteristics Social entrepreneurship meets needs unmet by commercial markets and (usually) the governmentSocial entrepreneurship meets needs unmet by commercial markets and (usually) the government Social entrepreneurship is motivated by social benefitSocial entrepreneurship is motivated by social benefit Successful social entrepreneurship usually works with, not against, marketsSuccessful social entrepreneurship usually works with, not against, markets

36 Case 1: Housing Opportunities Made Equal (H.O.M.E.) ServicesServices –Core services in housing disputes and fair housing advocacy in Virginia –Special projects and lawsuits Opportunity: Educate people on fair housing before-the-fact, instead of fixing situations after-the-factOpportunity: Educate people on fair housing before-the-fact, instead of fixing situations after-the-fact Enterprise: Start fair housing training InstituteEnterprise: Start fair housing training Institute Returns: More housing for the disadvantaged, fewer complaintsReturns: More housing for the disadvantaged, fewer complaints

37 Case 2: Boaz & Ruth Opportunity: Underused human capitalOpportunity: Underused human capital Endeavor: New businesses using former inmates in an aggressively faith-based settingEndeavor: New businesses using former inmates in an aggressively faith-based setting Social returns: Young people not returning to jail, peaceful neighborhoodSocial returns: Young people not returning to jail, peaceful neighborhood

38 Forces on Social Entrepreneurship

39 Social Entrepreneurs “Look” Like Any Other Kind of Entrepreneur

40 Risk + Innovation High risk aversion Low risk aversion Highly- innovative DreamerEntrepreneur Not innovative StuckGambler

41 Opportunities vs. Threats Opportunities for social entrepreneurs look like threats and tragedies to others

42 Myths about Social Entrepreneurship Social entrepreneurs are anti-businessSocial entrepreneurs are anti-business The difference between commercial and social entrepreneurship is greedThe difference between commercial and social entrepreneurship is greed Social entrepreneurs are nonprofit managersSocial entrepreneurs are nonprofit managers Social entrepreneurs are born, not madeSocial entrepreneurs are born, not made Social entrepreneurs are misfitsSocial entrepreneurs are misfits Social enterprises usually failSocial enterprises usually fail Social entrepreneurs love riskSocial entrepreneurs love risk