Are Unrelated Business Ventures a Good Strategy?

The revenue diversification mantra runs far and wide in the nonprofit world, and the logic is usually intuitive: diverse revenue streams help organizations protect themselves from the dramatic revenue fluctuations that can be typical in a single source. An organization overly dependent on foundation dollars, for example, particularly if they are heavily reliant on one or a few large foundation grants, may really suffer when those foundations change priorities or lose a great deal of endowment value.

But the intuition is based largely on anecdote and extrapolation, and we’ve now got our first academic study interrogating those intuitions, specifically looking at “unrelated business income” ventures and their impact on organizational effectiveness and financial health. The Nonprofit Quarterly reported last week on the new study, which found that nonprofits running income-generating businesses tend to be less efficient in their mission work. The conclusions highlight what we think is a legitimate, predictable risk of “mission distraction” when groups maintain social enterprise side businesses or other unrelated business income ventures.

It’s not clear quite what the study results mean, though. It uses program expenditures as a proxy for organizational effectiveness, for one thing, which isn’t really a measure effectiveness at all. It’s much easier to measure inputs (program expenditures), of course, but what we should actually care about are the outputs (program outcomes). Whether intentional or not, the use of that proxy is predicated on the same logic that drives the “minimize overhead expenses” mantra, which we energetically resist. Program spending doesn’t tell us much about actual impact, whether we look at overall program spending or at program versus overhead spending. If you want to understand organizational effectiveness or impact, you have to look at the impact (or impact per dollar spent), not at spending alone.

Program expenditures as a proxy also misses effectiveness over the long-term. Are organizations with more diverse revenue streams more resilient over the long haul to fluctuations in individual revenue streams even if they seem less financial sound in any particular year? Does the experience of running what amounts to a private sector side business improve the business-running skills on the mission-oriented nonprofit side of the organization? Although the study found that organizations with business ventures unrelated to the mission were more likely to be experiencing financial distress (using a liabilities-to-assets ratio), the study doesn’t really tell us anything about whether those ventures are causing the distress, are caused by it, or are unrelated to the distress altogether.

And as the study’s author (Dr. Rebecca Tekula) speculates in the Nonprofit Quarterly blog comments, “nonprofits are seeing just as much difficulty with their income-generating activities as all corporations have during the last two years.” This highlights what I think is the most important question worth asking: under what circumstances do nonprofits successfully execute business ventures? I like the inquiry, and appreciate the study as a first stab on a complicated question, but I think the real value here is (hopefully) catalyzing the inquiry as opposed to any clear conclusions about when and how entrepreneurial ventures by nonprofits make sense.

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