October 31, 2022
Cold Hard Cash, or Change Agent? Charities and the For-Profit Revenue Model
In the world of charitable giving, profit is a dirty word.
Most charities rely heavily on donations as their primary source of income. Charities and businesses are divided, not only by their aims, but their revenue streams. Yet, in the bustling city of Kathmandu, I came to question the conviction of this dichotomy.
The Center for Disabled Children’s Assistance (CDCA) lies on a rocky hill in the village of Kapan. The main goal of the organization is to support physically impaired orphans with housing, healthcare, and education.
During an interview with the head of the organization, I learned that donations did not represent their sole source of income. Rather, the CDCA has created two internal businesses to help fund its cause. The first business involves the production and sale of garments made on site; the second business is a travel guide company called Dalima Tours and Travels, owned and run by the President of the CDCA. A project associate of the charity estimated that 30% of their revenue stream comes from these businesses.
The advantage of charities having their own businesses can be shown by way of comparison. Visiting Mountain Children Home, which supports a family of more than 30 orphans, I had a first-hand view of the unreliability of donations as a sole source of revenue.
The orphanage, which rests in a beautiful jungle near Kathmandu, raises children with strong morals and high values. However, its efforts have been severely thwarted by unreliable and insufficient donations. After the Nepal earthquake in 2015, organizations that help with food supply completely stopped their efforts. Moreover, when the COVID-19 pandemic began, funds for medical treatment and education were cut.
Charities, like the CDCA, which have their own internal businesses, enjoy advantages, including greater prosperity, protection against unexpected shocks, dignity, and independence. Of course, Mountain Children Home is not the only charity that relies solely on donations. Some major charities are also exclusively donor-funded such as Animal Haven.
Why don’t more charities have businesses? In some cases, charities seeking to innovate will face difficulties with logistics, time, and – most importantly – capital. For example, the Mountain Children Home has substantial untapped potential (and a handful of bright individuals over the age of 18 living on site), but year after year they spend every penny that comes in, often even borrowing small amounts to afford food purchases.
However, for many charities, a more important constraint is psychological: as a society, we just don’t think of charities chasing profit-generation. Not only is the idea of an internal business unusual, but the concept of charities making a profit is often actively demonized.
Looking past such psychological constraints, we may ask a broader question: are there other useful elements of the business world that charities have underestimated?
Some answer affirmatively, who advocate towards closing the dichotomy between business and charity. One prominent example is author, entrepreneur, and humanitarian activist, Dan Pallotta, who elaborates on the widespread misconception of for-profit thinking in the non-profit sector.
The first disadvantage that charities have compared to the for-profit sector is its failure to attract the most highly qualified personnel.
Pallotta makes note of a survey done by Business Week Online, which looked at compensation packages for MBAs 10 years out of business school. It found that the median compensation for a Stanford MBA, with a bonus, at the age of 38, was 400,000 dollars. Meanwhile, for the same year, the average salary for the CEO of a medical charity worth over $5 million in the US was 232,000 dollars, and for a hunger charity, only 84,000 dollars.
So why would the best and brightest citizens of the United States be willing to make so much less than what they could be making? As Pallotta points out, the issue is psychological:
“We have a visceral reaction to the idea that anyone would make very much money helping other people. Interestingly, we don’t have a visceral reaction to the notion that people would make a lot of money not helping other people.”
A second element from the profit sector that charities should learn from is advertising. However, people generally have an extremely negative mindset towards non-profits spending money on advertisements. As Pallotta states:
“We don’t like to see our donations spent on advertising for charity. Our attitude is: I don’t want my donation spent on advertising; I want it to go to the needy.”
This way of thinking is completely incorrect. Investing money into advertising increases the possibility of bringing in larger sums of money, which can be spent helping even more people.
Another area in which the non-profit sector should adapt is risk aversion. Charities are highly risk-averse in comparison to businesses.
This is because donors in the charity space have little to no grace when it comes to failure. While in Nepal, my guide was Adam J. Sulkowski, a law professor at Babson College and author of Extreme Entrepreneurship. From Sulkowski, I learned how crucial risk-taking is. In one interview he said:
“Progress and solving problems depend on taking risks. The whole idea of both bringing a valuable innovation to the market and to making wealth in the process relies on taking risks. And we should be more scared of staying where we are than taking a risk and maybe making progress.”
Overall, there are several ways in which charities could greatly benefit from imitating rather than shunning elements of the for-profit sector. However, the argument is not that all charities should become more business-like. Rather it is that both “pure business” and “pure charity” are outdated categories – neither, in the 21st century, should exist, at least not as the primary models of organization.
In Nepal’s neighbor, Bangladesh, Nobel Peace prize winner Muhammed Yunus developed one model that seems to defy the divide between charities and businesses.
Yunus Social Business is a project that acts to address social issues, rather than, as a central motive, to generate a profit or dividend. Yunus originally put this idea into practice at Grameen Bank, which makes small loans to the impoverished without requiring collateral.
Investors in this company do not expect profit, but they do expect to receive the repayment of their initial investments – surprisingly, Yunus finds the loan repayment rate among low-income groups to be extremely high, between 97% and 98%.
The charitable business projects that Yunus creates are all self-sustaining: they generate their own revenue reducing reliance on donations. Yunus Social Business has been extremely successful and has helped lift 50 million people in Bangladesh out of poverty.
The opposition to the idea of a so-called “social business” is again psychological. If I told an investor that if they invest one million, they would receive the same one million back, the investor would be unlikely to join. However, philanthropists give millions of dollars to charity with no hope of ever receiving that money again.
Why would giving money away for free be more appealing than receiving back the money? The answer is the extremely ridged dichotomy between business and charity in our society. In reality, investing one million in charitable enterprises will provide charities with an opportunity to create self-sustaining (for-profit) revenue streams; receiving that money back interest-free is an incredible way of doing philanthropy.
Ultimately, I believe that the future calls for a breakdown in the division between charities and businesses.
By combining the powers of the non-profit and for-profit sectors, charities can finally become self-sustaining, while repaying their generous investors.
Major social issues can be solved and no charitable organization would ever have to depend on unreliable and heavily conditional donations. These self-sustaining charities would yield high dividends; only this time, the dividends would go to the people who need them most.