The NGO Entrepreneur: Nonprofit in Purpose, For-Profit in Approach

Recognizing the Limitations of Current Donor Funding, NGOs Are Developing Alternative Strategies to Generate Local Resources Through Self-financing Enterprises.

by Lee Davis & picture by Emil Shukurov

The question of how to financially sustain and support the activities of nongovernmental organizations (NGOs) has been one of the most recurrent challenges for nonprofit leaders around the world. There is an increasingly urgent need to address this fundamental question for NGOs in the Newly Independent States (NIS) as NGOs expand and diversify, struggling to fill the gap left as the role of the public sector recedes.

Diversifying NGO Resources

As the diagram (next page) illustrates, there are three sectors from which NGOs can derive their resources: the private sector, the general public and the government/public sector. Resources from each of these sectors can originate from both "external" sources (i.e. international) and "local" (i.e., domestic or municipal public and private donors). One area which is often overlooked are those resources generated from "internal" sources (i.e., self-generated income from fees, sales or investments).

The most "sustainable" financing strategy consists of diversifying sources of income and thus minimizing dependency on any single source-reducing vulnerability to shifts in fund availability or donor preferences. A sustainable approach to NGO financing is an approach that avoids dependency on any one source of revenue, whether external or internal. It is impossible to prescribe any formula for the percentages that need to be derived from various sources to constitute a "financially sustainable NGO." However, a balance between externally and internally generated resources is necessary in order for an organization to meet its operating and administrative expenses while maintaining the freedom to determine its programmatic priorities and projects, irrespective of donor preferences. A rule of thumb is that an NGO try to raise sufficient funds from internal sources to cover its basic operating costs but approach external donors for its program costs.

Most NGOs in the NIS (as in many regions of the world) remain heavily dependent on the external financial assistance of foreign, primarily Western, donors. The support provided by international donors accounts for the single largest source of NGO funding in the region. This has presented a two-part problem for local NGOs. First, the level of international funding is unstable. Resources for NGOs have not been as forthcoming as had been anticipated in NIS countries, and many donors have shifted their attention to other priorities-more needy, politically expedient or publicly popular regions of the world. Second, existing international donor funds in the region are often earmarked for particular projects or for limited project cycles. Donors often attach very specific limitations on how money can be spent, designating particular issues or themes or supporting only programmatic expenses. This has made it tremendously difficulty for NGOs to raise adequate support for their ongoing, operational expenses. The current donor enthusiasm for project-based funding puts the focus on the activities of NGOs rather than on sustaining the organizations themselves. In practice, institutional or organizational development remains a lower priority. NGOs are forced to "go where the money is" regardless of whether the project priorities identified by a perspective funder suit the long-term strategic plans of the NGO. This approach has led NGOs into an endless cycle of resource dependency.

Meanwhile, the local sources of NGO funding in the NIS-from local or national agencies, private sources or public donations-have not yet developed to a level sufficient to meet demand. The poverty, corruption and social unrest in many NIS countries present major obstacles to local philanthropy. The discretionary income of the general population is generally not high enough to support philanthropy, especially given the lack of a recent local tradition of private charity. Therefore, while the development of a local philanthropic base for NGO initiatives may represent the most preferable solution to NGO financing problems in the NIS in the long-term, this is a process which will take years of cultural, social and economic change.

The New NGO Entrepreneur

Mounting frustration with the current funding status quo and the desire to avoid donor control has led many NGOs to examine the entrepreneurial principles of the private sector. NGO leaders are defining a completely new breed of "entrepreneur" to stimulate the creation of a larger, sustainable pool of resources for NGO initiatives. Going beyond traditional donor-grantee relationships, they have created a new organizational "hybrid"-nonprofit in purpose and for-profit in approach. These new NGO entrepreneurs have developed unique strategies for creating sustainable funds for their activities by employing creative and sometimes lucrative "self-financing" enterprises. Self-financing activities include both mission-related and non-related ventures-direct for-profit, resource-generating activity conducted to create new resources for the NGO. Some forms of self-financing are identified in the box at the left.

NGOs around the world have already begun to employ creative and sometimes lucrative self-financing strategies-albeit with mixed success. The Organizacao de Ajuda Fraterna, a center for street children in Brazil, covers all of its annual expenses from the sale of furniture and hospital equipment, while simultaneously providing job training and income for its constituents. Ekocenter, a coordinating body for environmental NGOs in Yugoslavia, is using publishing and an organic wine project to generate income. Child Relief and You (CRY), in India, generates nearly 50 percent of its annual income through the sale of greeting cards, office paper products and children's toys in India and the US. FUNREDES, in the Dominican Republic, covers over 70 percent of its operational expenses by offering internet and website design services to for-profit companies. The Lotus Foundation, a Czech environmental NGO, has succeeded in generating about a third of its annual operating budget through its desktop publishing services for NGO and for-profit clients. Also in the Czech Republic, the environmental NGO Adonis has started a for-profit tourist office to attract eco-tourists to the region. These are but a few success stories of NGO entrepreneurs who are attempting to shift from purely resource consumers to resource creators.

Obstacles to NGO Self-Financing

It would be unrealistic to assume that NGOs in the NIS region could solve all of their financial problems overnight by utilizing self-financing strategies. Self-financing is not a panacea. If typical success rates of small businesses are any indication, then the majority of NGO enterprise efforts are destined to fail. Meanwhile, critics point to philosophical and practical problems with NGO self-financing. Some fear the "commercialization" of NGOs, believing that self-financing approaches will "contaminate" NGO initiatives with market philosophies and distort NGO mission-related activities in favor of profit-making priorities.

NGOs and community groups face a nember of important problems in developing the human, financial and institutional capacity necessary to effectively implement self-financing approaches. Several philosophical and practical obstacles may exist within organizations. First, some may find accepting private-sector, market-oriented approaches to generating NGO resources unethical or even antithetical to NGO values. Second, most people working in NGOs lack the necessary business and financial management skills necessary to effectively run a for-profit enterprise. Third, NGOs face difficulty in allocating their internal resource capacities-both financial and human-to undertake the business activity and continue their nonprofit work. Fourth, determining the most effective structure for management and accountability is critical. NGOs must choose carefully between managing the activity within the existing organizational structure, through a separate department or team, or establishing a completely separate subsidiary or other legal entity to manage the venture.

Other obstacles to NGO self-financing are external. Access to the necessary financial capital to launch or expand self-financing activities is a significant problem for NGOs, which are often denied access to traditional small business loan funds from private banks or other lending agencies. Using internally generated funds, donor funds, in-kind donations and contributions from staff, members, boards, or friends is often the only alternative. Second, NGOs need to be concerned about public perceptions of NGO enterprise. Poorly marketed or misunderstood intentions can bring unwanted negative public opinion that the NGOs are evading taxes or "cashing in" on the poor or the environment. Particularly in countries of the NIS where corruption scandals are common, NGOs need to be transparent in their financial transactions and instill confidence in the public by establishing clear and rigorous self-regulatory and ethical standards. Third, there is wide variation from country to country regarding the legal and tax treatment of economic and commercial activities of NGOs, as well as to the levels of monitoring and enforcement of these regulations. One for-profit enterprise of an Azerbaijani NGO found the lack of clarity in nonprofit law and commercial regulation so frustrating that it was forced to register as a nonprofit organization in the United States. Fourth, in some countries, private small-businesses have raised objection to the entrance of NGOs into local markets, saying they enjoy "unfair" competitive advantages in the form of tax exemptions, etc. As self-financing activities among NGOs increase around the world, the potential competition and/or conflict between NGO and for-profit entrepreneurs has the potential to increase as well.

Conclusions

While not new, NGO self-financing is relatively unknown to many in the NGO community. A great deal more attention needs to be paid to how best to facilitate this alternative revenue generating strategy among NGOs in the NIS and other regions of the world, as well as to its overall effectiveness as a self-sustainability strategy. There is a significant need to document, analyze and assess self-financing initiatives. Little is known about the prevalence of self-financing among NGOs, the types of self-financing strategies used, and the impact of self-financing on the missions, internal management and values of NGOs. An assessment of the wide range of fiscal, legal and tax policies affecting self-financing is needed to encourage NGO entrepreneurs and to educate donors, policymakers and the public about its benefits and costs. Successful NGO self-financing cases need to be documented and promoted to illustrate the benefits of shifting from short-term, project-based funding to long-term "investments" in organizational development. This is especially necessary in regions like the NIS where international donors are beginning to exit or reduce their commitments and are searching for ways to lay the foundation for long-term NGO sustainability.

NGOs themselves must begin by questioning their growing dependence on international donors for both its practical limitations and philosophical consequences. Donors and international intermediaries must work to help stimulate viable local funding alternatives by providing flexible resources, information and capacity-building to foster NGO self-financing initiatives. NGOs require assistance to develop appropriate management strategies, staff capacity and skills, organizational and legal structures, start-up funding, financial and accountability mechanisms, business planning and marketing strategies.

Collectively, such efforts can help NGOs move beyond well-intentioned discussions of "sustainability" toward the development of concrete alternative strategies-like self-financing-and from resource dependency to greater autonomy and self-reliance.

Lee Davis is co-director of the Nonprofit Enterprise and Self-sustainability Team (NESsT) and visiting lecturer in the Department of Social Change and Development at Johns Hopkins University's Nitze School of Advanced International Studies (SAIS) in Washington, DC. Many of the ideas presented in this article first appeared in his study "New Directions in NGO Self-Financing" (John Hopkins SAIS, September 1997).