Changing the Way that Charity Changes the World.

Tag: social enterprise

Rest in Peace, Serena Connelly (1970 – 2020)

This week, as my dear friend Salah Boukadoum wrote here, our community lost its most ardent champion for social innovation … for equity … for humanity in its most basic form: unfiltered, unselfish, unquestionable LOVE.

Serena Simmons Connelly, beloved wife, mother, daughter, and sister, died on April 22, 2020 in Dallas, Tx at the age of 50. “

The Dallas Morning News’ Obituary

I was texting a friend that Serena’s loss carved a big hole in our community. (See my prior blog on her work here.)

My iPhone autocorrected ‘hole’ to ‘hope.’

I like to believe that Serena took over Siri for that second.

May we each honor her legacy as she would challenge us to do: by putting our shoulder to the wheel of justice, and pushing as hard as we can.

Rest in the most beautiful peace, Serena Connelly. My life, my work, and my community are better and brighter because of you.

How to Start a New 501(c)(3) Nonprofit

Image via Creative Commons (Tobias Begemann)

Image via Creative Commons (Tobias Begemann)

Countless times over the past decade or so, I have received the following basic email/phone call/LinkedIn message:

“I recently met someone who wants to start a nonprofit. They are incredibly passionate about their cause and would be great at it, but they need some help with raising money. Could you speak with them and tell them how to get started?”

I almost always accept the call, because there are few people I enjoy meeting more than social entrepreneurs (and yes, I know this is a heavily debated term, but I mean it here simply as someone who wants to start a business whose primary mission is social impact instead of financial return). These are people who care enough about others to pour their time, talent, and treasure into launching a venture dedicated to improving the world. They are, without a doubt, some of the best conversations I have ever had.

And yet, they are also some of the hardest. I have nicknamed myself “The Dream Crusher,” because I am honest with them about my opinions on their ideas. And I am shocked at how few of them have given any thought to the following ….

The most important question to ask:
Why does the world need another nonprofit?

According to the National Center for Charitable Statistics (NCCS), there are more than 1 million public charities in the U.S. alone! There are also another 368,000+ other types of nonprofits, such as chambers of commerce, fraternal organizations and civic leagues.

Whatever your idea is … there are probably hundreds, if not thousands, of other established organizations trying to do the same thing. That doesn’t mean that you don’t have an innovative idea that could do a better job. But, there are some alternate paths to explore before going through the pains (and expense) of launching a new 501(c)(3) nonprofit.

(But, if you are dead set on doing so, check out this informative article, “How do I start a nonprofit organization?,” via GrantSpace.)

So, you wanna start a nonprofit?

First of all, thank you for giving a damn. That’s the common thread amongst the many people with whom I have had the conversations above. They all want to make the world a better place. If we had more people like you … perhaps we wouldn’t need a million nonprofits to meet society’s challenges?

Second, understand that “starting a nonprofit” is NOT your goal. Delivering your mission is the goal (e.g. helping kids who are exiting the foster care system … or supporting veterans returning from war … or whatever it is that drives you to pursue this venture).

And there are many ways to deliver your mission WITHOUT starting a 501(c)(3).

Here are the questions I always ask people like you:

  1. Is there an existing organization with whom you can partner to simply expand their work into a geographic/programmatic area they do not currently address?

For example, you want to open an after-school program in your neighborhood. Could you instead partner with Boys and Girls Club, YMCA, Camp Fire, or another after-school provider to bring their programs to your area? Or maybe you have such programs in your area but they are not delivering the programs the way that you believe they should. Could you explore collaborating to help them improve their work, expand their offerings, etc.

Whether you want to serve kids, seniors, veterans, the homeless, or anyone else … there is almost certainly an established organization dedicated to doing the same thing. In the same way that franchising is often an exponentially easier to open a for-profit business, partnering with one of these providers to raise money to expand their work is a much more more efficient way to meet your mission. Starting a 501(c)(3) nonprofit involves significant expenses — like hiring a CPA to handle your annual tax filings and to conduct an annual independent financial audit; setting up an administrative office to handle payroll, accounting, etc.; launching brand new fundraising efforts that compete with those of existing organizations; etc. — all of which are avoidable by partnering with an existing organization.

NOTE: Almost every serious donor you would approach to fund your new venture will ask you this question. You need a better answer than, “Yeah, but I want to do it my own way.” The only way that I can interpret that response is that you care more about being the one helping people than actually ensuring that people get the help they need.

  1. If the answer to #1 is “no,” is there a way to incubate the new nonprofit as a program of an existing organization so that you can avoid all the administrativia cited above?

Doing so would also leverage some of the existing organization’s financial credibility in terms of administration, which is a major barrier to securing funding.

This doesn’t even have to be a related charity (though it helps). While it would be odd for a new pet shelter to be incubated as a program of a prep school, it would certainly be easier than setting it up as a stand-alone organization. There also are “umbrella” organizations whose broad missions could feasibly encompass the incubation of such ventures, like your local United Way.

It is more complex than scenario #1, because the incubating organization has to setup some internal controls and likely run separate financials for the program, but there are also some practical benefits to this scenario that you don’t receive in the ones below:

  • Administration is already setup and running smoothly — so you don’t need to worry about bookkeeeping, annual tax filings/audits, payroll, liability insurance, etc. This is the greatest advantage.
  • Employees would be a part of a larger workforce, which could result in better health benefits, access to more human resources options, and potentially a better work environment (even if they don’t work in the same office, they might be able to participate in activities organized by employees of the incubating organization).
  • The board for your venture would only need to be an advisory board, and not have to worry about being a governing board with legal and fiscal responsibility for the organization (which can make it easier to recruit high-power advisors, since many wealthy/well-connected people are hesitant to expose themselves to the liability of being a governing board member for a startup charity).

There can be some challenges with fundraising, particularly in the area of foundation grants (e.g. if your program is a strong fit for a grant from a foundation that already donates to your fiscal sponsor, that scenario has to be explained very clearly so that the two requests are not seen as coming from the same organization … which could result in neither getting funded). However, all of this can be cleared up with a simple MOU (“Memorandum of Understanding”), or similar document, that outlines the fiscal arrangement between the organizations.

(There is a really detailed article about fiscal sponsorship here that includes links to the Fiscal Sponsor Directory, “a tool created by the San Francisco Study Center to help connect community projects with fiscal sponsors.” One such foundation that does this is the Edward Charles Foundation.)

  1. If the answer to #2 is “no,” could you set it up as a fund of a community foundation to achieve similar objectives?

This is how I first established Executives In Action, which operated for years as a fund based out of the Communities Foundation of Texas. In North Texas, The Dallas Foundation also has a specific program for this outlined here.

  1. In any of these cases — including proceeding with launching your own 501(c)(3) — focus on collaborations whenever possible.

That helps to leverage the credibility of existing orgs — even if you just use their curriculum or consider them program advisors — to avoid the very valid criticism of, “why do we need another nonprofit?!”

  1. Please, for the love of God, follow Peter Drucker‘s advice: do one thing well. Demonstrate results, prove outcomes, then go to market to raise money based on that successful model.

Too many social entrepreneurs launch with a scattered vision of solving all of the world’s problems. I understand that your dream might be to operate a green homeless shelter that is entirely off the grid and that includes an organic farm in which the residents can secure living wage jobs producing vegan, gluten-free foods while also learning to speak English, manage their addictions, save 50% of their income, and launch their own tech startup.

But start with one of those. Offer an ESL program for the homeless in one of your community’s existing shelters. Prove that you can help them to learn English. Then, help them to use that skill to secure jobs and track how you can help them to improve their self-sufficiency. Then, you can consider adding the financial education component … and once it is successful, then expanding to include the other things … culminating in the grand opening of your great green dream.


Written by Jeremy Gregg, the Founder of Gregg Partners. 

A New Model of Social Enterprise: Master Franchising

IMG_1745-0.JPGAt the Prison Entrepreneurship Program, we just announced one of the most significant milestones in our organization’s recent history … the acquisition of a master franchise for the entire state of Texas by our for-profit subsidiary, the Communitas Auto Group.

(Read more here)

Over the next twenty years, we will develop around 20-30 automotive repair shops under the brand of The Auto-Lab Complete Car Care Centers. These shops will provide hundreds of living wage jobs (many of which will be for graduates of PEP); by 2023, we anticipate they will also grow to provide around $1 million per year in revenue to support PEP’s mission.

Those facts alone are worth celebrating. But there are two aspects of this initiative that get me even more excited… because they are far larger than just PEP.

First, this effort represents a seismic shift in the franchising world. There are fewer than 100 franchise stores that are owned by nonprofits; most are in the food services arena, like Ben & Jerry’s, Nathan’s Famous, Annie’s Pretzels, etc. And in the majority of cases, nonprofits only own a single store.

Through our subsidiary, PEP owns the rights to the entire state of Texas for The Auto-Lab. Within a few years, we will likely own more franchise stores than any other nonprofit in the country.

This will be a game-changer for nonprofits, because we will prove the value that nonprofits can bring to the franchising community as BUSINESS PARTNERS. After all, here are some of the assets that PEP brought to the table that most typical franchisees lack:

  • A robust governing board and advisory board structure that includes 50+ experienced business leaders whose expertise we can tap to guide the venture’s growth;
  • Immediate access to a qualified and motivated workforce of strong potential employees and store managers (i.e. our graduates);
  • Thousands of active relationships with potential customers in multiple cities across Texas (i.e. our volunteers and donors, not to mention our graduates and their families).

The latter is particularly valuable for franchisors. Once we open a store in Houston or Dallas, we will have thousands of people in those markets who already know about PEP and who would be willing to give our store a try. And for a new entrant to the market, that is an invaluable asset to tap.

Further, within each of those three groups above, we have not only potential customers and employees … but potential investors. And more importantly — potential franchisees.

Yes, this venture will provide jobs for our graduates and revenue for PEP.
But the broader impact will be on how we can transform the way
that the franchising community looks at nonprofits.

Thankfully, the remarkable leaders at The Auto-Lab had the vision to see what we could offer. Yet throughout this process of securing a franchise, we encountered a high degree of skepticism from other franchisors about working with a nonprofit (let alone one that worked with felons!). The success of Communitas Auto Group will force other franchisors to take notice … and, we hope, become much more open — indeed, eager! — to engage nonprofits as franchisees.

That is the first reason why I am excited.

But the second makes me even more so.

To fund this initiative, we pioneered a new financial model that we believe could serve as a template for how to finance social enterprises and earned income initiatives owned by nonprofits. Thanks to the guidance of our board and some very wise counsel from one of the preeminent Houston corporate law firms, we have built a model that allows the Communitas Auto Group (“CAG”) to harness the power of private equity while maintaining PEP’s long-term ownership of the venture.

In brief, CAG is incorporated as a for-profit company. As explained in the link at the top, CAG was capitalized with an initial investment from Mike Humphrey of Houston, Texas. Mike is now the majority owner of the venture, but PEP was granted a sizable carried interest in CAG at essentially no cost. There is a mandatory distribution to PEP of $50,000 per year from CAG, and a scheduled buy-back of the equity from the initial investors through the profits generated by the business. This will allow PEP to fully own the company within approximately ten years, if CAG grows in line with our conservative financial models.

Once that occurs, we anticipate that CAG will be contributing approximately $1MM per year in unrestricted revenues back to PEP. That is the equivalent of building a $25-30MM endowment for the organization … only this is one that creates hundreds of jobs along the way for our graduates.

All without relying on philanthropy.

THAT is what is really sexy about all of this. We are blazing a new trail in how mission investors can complement their charitable giving with strategic investments that create both market returns AND social benefits.

And when we can do that … we exponentially multiply the amount of funding that we can access. After all, just look at the world of grant-making foundations. They distribute, on average, 5% of their assets in the form of grants. But the other 95% is held in investments.

By tapping into that 95% … we effectively multiply the base of support available by a factor of 19X.

That’s no different for major donors. However generous they are, the vast majority of major donors have more money in their investment budgets than in their charitable giving budget. By tapping into those far larger pools of capital, we dramatically expand the percentage of “wallet share” that can be tapped by the social sector.

And THAT is something that our team will be very proud to leave as part of our legacy.

Onward!

Thoughts on the Closing of The Demeter Project

My second office. Image via Eater Dallas.

A tiny crack appeared in my heart when I first heard the rumor that one of Dallas’ preeminent social enterprises, The Demeter Project, would be closing along with their “It’s a Grind” coffee shop in Deep Ellum.

For the past three years, this company has endeavored to provide a living wage with benefits, vacation and flexible hours to employees who could not traditionally access them. Then, today, I received emails from Serena Connelly confirming that the venture was closing its doors.

But then, an amazing thing happened. Rain did not pour through that little crack that had appeared in my heart — instead, sunlight burst forth from it.

This is not a day of mourning, I realized. This is a day of celebrationalbeit a different celebration than we’d like. After all, for three years, Serena Connelly reshaped the discussion around poverty in our community. She focused many of these conversations on the issue of “living wage,” a concept that is radically different from minimum wage and that changes the dynamic of the employer-employee battle for prosperity.

I say that this is a victory because the ripple effect of her work has “bent the arc of the moral universe towards justice,” as MLK might say.

Yes, this one business is closing. Part of the problem is that her commitment to social justice was expensive, right at a time when the economy was taking a huge dip — and a $4 cup of coffee suddenly became much more of a luxury than it was before.

But look at what she has done:

  • Provided a living wage, benefits, flexible hours…. and dignity to a workforce that might otherwise find it hard to secure employment, let alone the self-respect that comes with being able to provide for your family. Here her talk about it on KERA’s “Think” show here.
  • Secured significant media coverage for their venture, exposing thousands of people to their ideas. Like here and here and here. Oh, and here. And the podcast on the bullet above.
  • Bolstered the hopes of countless other social entrepreneurs. I know that Soap Hope, Chooze Shoes, Banner Theory and many others were inspired by her work… and much of their future success will be paved down trails that Serena and the Demeter Project team all blazed for them.

Personally, I also know that this coffee shop provided an amazing venue for conversations about these issues and a great environment for the local nonprofiteers, social entrepreneurs and do-gooders to gather. Indeed, for the first few months after I left the Center for Nonprofit Management to start Executives in Action, I was virtually officing out of their coffee shop!

I often joked that “Norm had Cheers, and I have It’s a Grind.” So, I will confess, it will be harder to enjoy my morning coffee without It’s a Grind’s amazing employees there to provide it for me. I will no longer have a “go-to” meeting place for my gatherings with my fellow nonprofiteers.

And yet today, my heart is full of joy and gratitude for this amazing venture and all that it added to my life and to our community over the past three years. Thank you to Serena and everyone at the Demeter Project for throwing such a large rock into the pond of economic justice — may the ripples of your work create a wave that raises the tide for all boats!

(UPDATE:  Serena passed away in April, 2020. See Salah’s beautiful goodbye letter here. See her obituary here.)

Management Advice from Patrick Esquerre

Hannibal the Great

Hannibal the Great

I recently had the chance to enjoy a lunch with Patrick Esquerre, the founder of La Madeleine Country French Café. Over a delightful meal of mussels and lamb at the impeccable Salum, we discussed Patrick’s career as an entrepreneur and philanthropist.

Patrick offered an interesting analysis of the three types of people involved in any successful venture:

  • Steppers: The majority of the workforce, which is capable of doing exceptional work but requires strong management to help them see which steps to take next. Their backs are strong but their necks are bent to look at the ground in front of them, not the road ahead.
  • Bridgers: Those who can see the opportunities ahead, but who tend to be head in the clouds. They are more focused on the future … without necessarily how to take the steps to get there.
  • Bridger-Steppers: Those rare leaders who can both see the future as well as the steps that it takes to get there.

On the latter, he cited examples such as the brilliant military commander, Hannibal the Great, who not only envisioned a way to beat the Romans by leading his war elephants over the Alps, but had the capacity to motivate his armies to do so.

In the world of social enterprise and nonprofit management, we need more “bridger-steppers” who are capable of balancing the relentless pressure of today with the focus on improving the situation tomorrow.

This is no small feat. While our peers in the private sector can rely on executive leadership, we generally must rely on legislative leadership (as discussed eloquently by Jim Collins in his brief but wonderful volume, Good to Great for the Social Sectors). This is quite a challenge, particularly when most nonprofits are saddled with the burden of a constantly rotating volunteer governing board whose members are largely uninvolved in the organization’s daily operations (particularly fundraising). Worse, they are largely unaffected by their own poor performance compared to their peers on for-profit boards (whose incomes will be affected if their company under-performs).

Add to this the pressure of under-resourced staff teams and the chronic impoverishment of the philanthropic “annual recapitalization” financial model, and you can see why most leaders capable of being “bridger-leaders” either go into the corporate sector … or, increasingly, just start their own private venture. Entrepreneurship is a noble pursuit with its own immense challenges, but what our world needs is for more of these talents to be harnessed by the social sector. Only then will we see large-scale progress against poverty, illiteracy, disease and a faltering sense of genuine community among people at all levels of wealth.

Or, as Collins might say, we need the great to focus on the good.

Good is the new “Cool”

I missed out on Elvis’ domination, and wasn’t around to see Beatlemania. I am grateful I was not alive during the disco era, and am still a little angry that I was not around for punk rock’s emergence. By the time I was old enough to appreciate music, the world was in throes of 1980s hair rock and piano keyboards… so, I tuned out.

But then the 1990s came, and I fell in love with music for the first time. The indie rock scene was blossoming, and the grunge groups of Seattle were not yet household names.

It seemed like everyone had their favorite “unpopular” band. Indeed, fame became a curse that drove away the initially rabid fan base of many an otherwise awesome rocker. Some groups tried their best to fight appearing too “commercial,” with Pearl Jam even taking the step to boycott playing shows at venues that were in the grips of Ticketmaster.

That world no longer exists. Pearl Jam has now signed with Target to release their latest album — and people have moved from having their favorite indie rock band to making music an ongoing part of their life. Thanks to the ever-present iPods and smartphones that keep us all constantly plugged in to our catalog of thousands of songs, music has become like air — necessary to live, but unappreciated. Or, at least, no longer appreciated as a differentiator.

Having a favorite indie rock band no longer makes us unique. So now, rather than bragging to our friends about knowing a band that they don’t know, we each have our favorite charity.

Microlending. Social enterprise. Cause branding. Why is it that so many people now know this silly jargon?

Because nonprofits are the new rock bands.

In the online world, we are not people. We are a brand. Our Facebook pages and Twitter accounts become places to promote our values, to align ourselves with complementary brands and to give the appearance that we are, indeed, the person we aspire to be at our highest and best moments.

When we align ourselves with United Way or American Red Cross, that says something about us. But its like saying your favorite band is The Beatles — who doesn’t like them?

However, when I visit your Facebook page and see that you support Charity:Water or The Chiapas Project, I think, “Wow, this person is really cool.”

Because good is the new cool.

Think about it. Bill Gates was a total nerd, and everyone hated him when he became the wealthiest man in the world. And then his amazing wife convinced him that they should give it all away, and suddenly he is on the cover of TIME Magazine with U2’s Bono.

Congratulations, nonprofiteers. We are all rock stars now. And thanks to people like Robert Egger, we’re actually beginning to look the part.

Social Enterprise 2.0: The Low-Profit Limited Liability Company (L3C)???

Thanks to Stacy Caldwell for connecting me to the fascinating concept of the Low-Profit Limited Liability Company (L3C). Stacy is a Social Entrepreneur/Cultural Anthropologist/Blogger who leads the Dallas Social Venture Partners in addition to being the inspiration behind my Two-Word Strategic Plan.

Robert Lang and the L3CAnd, of course, thanks to Robert Lang of the Mary Elizabeth & Gordon B. Mannweiler Foundation for creating the concept of the L3C in the first place!

Best article I have read about this is here:
"The L#C: A New Tool for Social Enterprise"

Another good one here:
"The L3C: A More Creative Capitalism – Social Enterprise, L3C, Americans for Community Development"

A slightly touger read here, but full of lots of good info:
Americans for Community Development

—-

Key points:
  1. L3Cs are for-profit entities organized to engage in socially beneficial activities
  2. The structure is already in place to open such a firm in Vermont, and more states are following suit.
  3. This would create a vehicle for engaging the "sacred 95%" — the corpus of a private foundation that is otherwise locked away from charitable purposes — through PRIs (Program Related Investments). 
  4. Example L3Cs: carbon trading, alternative energy, food bank processing, social services, social benefit consulting and media, arts funding, job creation programs, economic development, housing for low income and aging populations, medical facilities, environmental remediation, and medical research.  

It's easy to be impressed by the innovative approach, but do not dismiss this new proposal as simply a novelty that will fade away. I am very optimistic that the proponents of L3Cs have tapped into something that will experience rapid adoption once its initial roll-out phase is complete. By the end of 2010, I think we'll see some work coming out of the L3C movement that will make us ask ourselves, "Why did it take us nearly 100 years to find an alternative to the 501(c)(3) institution?"


As one of the aforementioned articles states:

"The L3C is still in “proof of concept” form, but will be put to the test this year. Because the first L3Cs were formed in 2008, this means 2009 will be the first year that the concept will be tested with the IRS. Hopefully, the IRS will readily accept Foundation investments in L3Cs as valid PRIs. Steve Gunderson, CEO of the Council on Foundations, which supports the L3C approach says “we’re optimistic” that the IRS will also support this approach to PRI investing."

Strap on your helmets, boys and girls. The social sector is speeding up!

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