1 Introduction to the Nonprofit Economy. 2 Outline Definitions and size of the sector Development of the sector Challenges, opportunities, trends, and.

1

Introduction to theNonprofit 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

Country Revenues from

government Revenues from

philanthropy Earned revenues Argentina 20% 8% 73% Australia 31% 6% 63% Austria 50% 6% 44% Belgium 77% 5% 19% Brazil 16% 11% 74% Colombia 15% 15% 70% Czech Republic 39% 14% 47% Finland 36% 6% 58% France 58% 8% 35% Germany 64% 3% 32% Hungary 28% 18% 55% Ireland 77% 7% 16% Israel 64% 10% 26% Japan 45% 3% 52% Mexico 9% 6% 85% Netherlands 59% 3% 38% Peru 19% 13% 68% Romania 45% 27% 29% Slovakia 22% 23% 55% Spain 32% 19% 49% U.K. 47% 9% 45% U.S. 31% 13% 57%

Source: Salamon, et al. 1999

7

Size of the Nonprofit Workforce

12.6

11.5

10.5

9.2

7.87.2

6.2

4.94.94.54.5

3.73.53

2.42.42.21.7

1.30.90.60.4

0

2

4

6

8

10

12

14

Holla

nd

Irela

nd

Belg

ium

Isra

el

USA

Aust

ralia

UK

Fra

nce

Germ

any

Spain

Aust

ria

Arg

enti

na

Japan

Fin

land

Peru

Colo

mbia

Bra

zil

Cze

ch R

epublic

Hungary

Slo

vakia

Rom

ania

Mexic

o

Perc

en

t of

em

plo

yees

8

NPO Types in the U.S.• 34 types: 501(c)(1)-(27), 501(d)-(f),(k),(n), 521(a), 527• 501(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.

Number of nonprofits

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

1975 1980 1985 1990 1995 2000

10

Health Organizations Dominate the Sector

Health, 35.91%

Education, 14.03%

Human Services, 4.96%

Grantmaking, 4.90%

Arts, 2.15%

Member Benefit, 1.67%

Other, 7.13%

Unknow n, 29.10%

Source: IRS 990 data, 2003

11

Revenue Sources Vary a Lot by Subsector

Subsector Portion of nonprofit sector1

Total revenues1

Government funding2

Private donations2

Earned income2

Education 18% $119.7b 19% 16% 65% Social welfare 12% $79.8b 52% 20% 28% Health 49% $325.9b 42% 6% 52% Arts 2% $13.3b 10% 44% 46% Religion3 12% $79.8b 0% 84% 16% Total 100% $664.8b 33% 20% 47% 1. Source: Independent Sector (2002) 2. Source: Salamon (2002) 3. This category only counts sacramental activity

12

Health Organizations Tend to Be Huge

$0

$5,000,000

$10,000,000

$15,000,000H

ealth

Mem

ber

Ben

efit

Sci

ence

Edu

catio

n

Inte

rnat

iona

l

Soc

ial S

cien

ce

Gra

ntm

akin

g

Pub

lic B

enef

it

Em

ploy

men

t

Hum

an S

ervi

ces

Foo

d

Crim

e

Env

ironm

ent

Art

s

Hou

sing

Com

mun

ity

You

th

Ani

mal

s

Civ

il R

ight

s

Spo

rts

Pub

lic S

afet

y

Rel

igio

n

Source: IRS 990 data, 2003

13

All Subsectors Are Growing(but Health is exploding)

13 Source: Independent Sector 2002

0

50

100

150

200

250

300

350

Health Education Religion Socialwelfare

Arts andculture

Subsector

Bil

lio

ns

of

19

97

do

lla

rs

1977

1987

1997

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

• 1865-1920 in U.S.

17

U.S. Comparison: 1917 and 1999

1917 1999Percent giving 0.30 0.46Amount given $18.56 $577.50

Income $20,137.56 $33,666.60Taxes paid $0.47 $2,918.24

Children 2.53 1.41

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% 1977-97 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 An Entrepreneurial RevolutionRevolution

• 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 85% of the new jobs in small and

start-up firmsstart-up firms• Product/service introduction rate Product/service introduction rate

higher than ever beforehigher 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 What Is Entrepreneurship?Entrepreneurship?

Process of creating value by bringing Process of creating value by bringing together a unique package of together a unique package of

resources to exploit an opportunityresources to exploit an opportunity

28

The New Buzzword:The New Buzzword:Social EntrepreneurshipSocial Entrepreneurship

So, is entrepreneurship basically So, is entrepreneurship basically entrepreneurship regardless of entrepreneurship regardless of the context?the context?

Or is “social entrepreneurship” Or is “social entrepreneurship” something truly different?something truly different?

29

What Is Social What Is Social Entrepreneurship?Entrepreneurship?

Nonprofits making moneyNonprofits making money

30

What Is Social What Is Social Entrepreneurship?Entrepreneurship?

Nonprofits making moneyNonprofits making money

For-profits doing things to show For-profits doing things to show they are not evilthey are not evil

31

What Is Social What Is Social Entrepreneurship?Entrepreneurship?

Nonprofits making moneyNonprofits making money

For-profits doing things to show they are not For-profits doing things to show they are not evilevil

Process of creating value by bringing together a Process of creating value by bringing together a unique package of resources to exploit an unique package of resources to exploit an

opportunityopportunity, in pursuit of high , in pursuit of high socialsocial returns returns

32

The only big difference between The only big difference between commercial and social commercial and social

entrepreneurship:entrepreneurship:

Denomination of the returnsDenomination of the returns

Social and commercial Social and commercial entrepreneurship have most of entrepreneurship have most of

the same characteristicsthe same characteristics

33

The Process of Social The Process of Social EntrepreneurshipEntrepreneurship

1.1. Find an opportunityFind an opportunity

2.2. Develop a business conceptDevelop a business concept

3.3. Figure out what success means Figure out what success means and how to measure itand how to measure it

4.4. Acquire the right resourcesAcquire the right resources

5.5. Launch and growLaunch and grow

6.6. Attain goalsAttain goals

34

The Main Difficulty: The Main Difficulty: MeasurementMeasurement

• What is profit?What is profit?• How do we count it?How do we count it?• What is “social return o n What is “social return o n

investment” for venture investment” for venture philanthropists?philanthropists?

• Can we compare investments?Can we compare investments?

35

Three characteristicsThree characteristics

• Social entrepreneurship meets Social entrepreneurship meets needs unmet by commercial needs unmet by commercial markets and (usually) the markets and (usually) the governmentgovernment

• Social entrepreneurship is Social entrepreneurship is motivated by social benefitmotivated by social benefit

• Successful social Successful social entrepreneurship usually works entrepreneurship usually works with, not against, marketswith, not against, markets

36

Case 1: Housing Opportunities Case 1: Housing Opportunities Made Equal (H.O.M.E.)Made Equal (H.O.M.E.)

• ServicesServices– Core services in housing disputes and fair Core services in housing disputes and fair

housing advocacy in Virginiahousing advocacy in Virginia– Special projects and lawsuitsSpecial projects and lawsuits

• Opportunity: Educate people on fair Opportunity: Educate people on fair housing before-the-fact, instead of housing before-the-fact, instead of fixing situations after-the-factfixing situations after-the-fact

• Enterprise: Start fair housing training Enterprise: Start fair housing training InstituteInstitute

• Returns: More housing for the Returns: More housing for the disadvantaged, fewer complaintsdisadvantaged, fewer complaints

37

Case 2: Boaz & RuthCase 2: Boaz & Ruth

• Opportunity: Underused human Opportunity: Underused human capitalcapital

• Endeavor: New businesses using Endeavor: New businesses using former inmates in an aggressively former inmates in an aggressively faith-based settingfaith-based setting

• Social returns: Young people not Social returns: Young people not returning to jail, peaceful returning to jail, peaceful neighborhoodneighborhood

38

Forces on Social Forces on Social EntrepreneurshipEntrepreneurship

Environmental factors• Social climate conducive to social

entrepreneurship• Political climate that facilitates

social innovation

Availability of financial and nonfinancial resources

Perturbation of the environment• Political change• Cultural change• Economic change

Entrepreneurial personality traits

Preparation to exploit opportunities

• Education• Experience

Social entrepreneurshipprocess begins

External forces

Internal forces

Environmental factors• Social climate conducive to social

entrepreneurship• Political climate that facilitates

social innovation

Availability of financial and nonfinancial resources

Perturbation of the environment• Political change• Cultural change• Economic change

Entrepreneurial personality traits

Preparation to exploit opportunities

• Education• Experience

Social entrepreneurshipprocess begins

External forces

Internal forces

39

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

EntrepreneurEntrepreneur

Innovativeness

Education and experience

Achievement orientation

Independence

Sense of control over destiny

Low risk aversion

Tolerance for ambiguity

Entrepreneurialorientation

Community awarenessAnd social concern

Socially-entrepreneurialorientation

Innate characteristics

Innovativeness

Education and experience

Achievement orientation

Independence

Sense of control over destiny

Low risk aversion

Tolerance for ambiguity

Entrepreneurialorientation

Community awarenessAnd social concern

Socially-entrepreneurialorientation

Innate characteristics

40

Risk + InnovationRisk + Innovation

High risk aversion

Low risk aversion

Highly-innovative

Dreamer Entrepreneur

Not innovative

Stuck Gambler

41

Opportunities vs. Opportunities vs. ThreatsThreats

Opportunities for social Opportunities for social entrepreneurs look like threats entrepreneurs look like threats

and tragedies to othersand tragedies to others

42

Myths about Social Myths about Social EntrepreneurshipEntrepreneurship

• Social entrepreneurs are anti-businessSocial entrepreneurs are anti-business• The difference between commercial and The difference between commercial and

social entrepreneurship is greedsocial entrepreneurship is greed• Social entrepreneurs are nonprofit Social entrepreneurs are nonprofit

managersmanagers• 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