Have a heart, and make a profit
When I was 30, I left a career as a hedge fund trader hoping to make a more positive contribution to the world. I founded a nonprofit, Grocery ships, to tackle the lack of healthy food in our inner cities. It was successful, by many counts, and it’s a going concern. But almost immediately, I found the joy of service overshadowed by the exasperation of trying to keep a not-for-profit organization afloat.
I started searching for another way to pursue social justice work. I found inspiration from one of my mentors, Father Greg Boyle, the executive director of L.A.’s Homeboy Industries. Boyle is a pioneer in the emerging field of social enterprise, which is a type of business that employs the power of profit-making, but uses it to address our society’s most intractable problems.
At Groceryships, my best days were during our pilot program in a dilapidated bungalow at the edge of a church parking lot in South L.A. Each week, I met with seven neighborhood moms to study nutrition and healthy cooking skills. Each mom received free fresh produce, and meetings were structured as support groups, where everyone discussed emotional issues like stress, depression and childhood trauma, which are correlated with unhealthy eating. At the end of six months, our data showed incredible results: body-mass-index reductions, increases in fruit and vegetable intake, improvements in self-esteem. Soon we had a 100person waiting list.
And our problems began. Groceryships needed money to hire more staff. But most foundations won’t grant money to nonprofits until they’ve existed for several years, because the failure rate is so high. So we threw fundraisers, launched crowd-funding campaigns and asked everyone we knew for money. But it wasn’t enough, not by miles.
Our difficulties were not unusual. Of the more than 200,000 nonprofits founded in the U.S. since 1970, fewer than 150 have attained $50 million in annual revenue. Compare that to the for-profit world, where 125 to 150 U.S. companies founded each year reach $100 million in annual revenue.
To start a for-profit business, you raise capital to make a product or provide a service. As your customers pay, you cover your costs and generate profit, allowing for expansion. In the nonprofit world you also raise capital to get started. However, because your “customers” don’t usually pay you anything, you have to raise money again and again, a Sisyphean task.
Approaching one important source for nonprofit funding — foundations — is bizarrely onerous and inefficient. Start-up businesses can send the same “deck,” or pitch, to all potential investors. To secure charitable grants, however, nonprofits have to fill out byzantine applications, drastically different for each foundation, which can take weeks, even months, to complete. Once you receive a grant, you have to send regular updates, in different formats, to each foundation.
Nonprofits also struggle to attract talent. For-profit start-ups entice employees with stock options. Nonprofits have no equity. For-profit investors understand that you have to pay for skilled workers. Nonprofit donors prefer that their money goes to programs, not to salaries. This is understandable, but this rationale puts nonprofits in a bind. A longheld rule of thumb is that an organization like Groceryships should spend no more than 20% of revenue on overhead. This ratio works if your budget is in the millions of dollars. For start-up nonprofits, not so much.
The demand for nonprofit efficiency becomes even more challenging when you take into consideration the perils of volunteerism. Many people graciously offer their time, free, to nonprofits. But imagine running a business that regularly takes on new employees, trains them, and then can’t rely on them in the long term.
Back in 1992, Father Boyle understood these challenges. When he received a phone call from a Hollywood power broker who wanted to help his fledgling Homeboy Industries, he didn’t ask for a donation. “Buy me a bakery,” he said. He put former gangsters to work at all levels of a self-sustaining business. By one estimate, the economic sector Boyle helped create — social enterprise — now generates 3.5% of U.S. GDP, and employs more than 10 million people.
I was eager to do the same. In 2015, a co-founder and I started Everytable, a social enterprise that sells fresh, healthy and affordable grab-and-go meals. We use a central kitchen and small storefronts to keep costs low, and we price meals based on the average income around each store’s location. In low-income food deserts, we sell meals slightly above cost — $4 to $5; in more affluent areas, $8 to $9. Variable pricing allows us to be profitable and to get healthy food into areas that don’t have many options.
Everytable incorporated as a public benefit corporation, which allows companies to explicitly prioritize a social mission. Our board and leadership team have a fiduciary duty to advance that mission, not just maximize shareholder value. Years from now, if we are successful and choose to go public, we’ll be legally empowered to stand up to Wall Street, which often pushes companies to slash costs, fire staff or close down business lines in pursuit of increased short-term profits.
Everytable has been a revelation. At Groceryships, we struggle to raise $300,000 each year. At Everytable, investment money has poured in. After three months, we’d raised a million dollars. After six months, much more.
This capital has allowed us to hire world-class chefs, attract a vice president of marketing from a venture-backed start-up and work with leading architecture and branding firms. And personally, it feels right, a synthesis of selfinterest and the common good.
Charities are essential. Many nonprofits do work that simply has no revenue potential, such as feeding and housing the homeless. Yet because nonprofits are hard to start and sustain, where social enterprises can answer social needs, they may be the better alternative. And the proliferation of such entities could inject “disruption” and innovation into the staid nonprofit sector.
There’s an under-used type of financing that could accelerate the growth of the social-enterprise sector. Each year, charitable foundations must distribute 5% of their net assets. They usually meet that obligation by making grants to nonprofits. But foundations are also allowed to invest in social enterprises through “programrelated investments.” PRIs have been legal for almost 50 years, but only a tiny percentage of foundations employ them. In April 2016, to encourage their use, the IRS issued guidance with several examples of acceptable PRIs.
In 2015, U.S. charitable foundations distributed more than $50 billion in grants; venture capital firms invested $59 billion. It’s conceivable, then, that foundations could use PRIs to fund social enterprises as robustly as venture capitalists fund tech companies such as Snapchat and Airbnb.
All enterprises set out to solve problems. The question is, which ones?
Nonprofits tackle consequential social problems but never seem to fix them. For-profit businesses may solve the problems they set out to fix, but too often the net societal effect is to make life easier for the affluent and to make their founders rich.
Social enterprise can combine the heart of a nonprofit with the scalability and innovative potential of for-profits. With PRI funding, these hybrid businesses could usher in a boom that would bridge society’s equality gaps. Young entrepreneurs flocking to Silicon Valley or Wall Street might instead start a social enterprise — and make a fortune while making the world a better, fairer place.
The exasperation of keeping a nonprofit organization afloat can overshadow the joy of service.