The fourth sector

The fourth sector

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V. Cautionary tales

A key assumption behind impact investing and social ventures is that business and nonprofits can harness the power of the market for social benefit. From the nonprofit perspective, market-oriented initiatives can also help shore up a shaky business model. “The nonprofit model is  a very running-by-the-seat-of-your-pants proposition, because it does rely on charitable goodwill toward your mission,” says Jim White, executive director of the Nonprofit Association of Oregon. For years nonprofits have pursued so-called “earned revenue” strategies — setting up affiliated stores or cafes, for example — to help sustain operations, he says. But those efforts can go awry. The recent implosion of Evergreen International Airlines in McMinnville is a case in point. “Things got a little too blended,” White says. At issue was whether the company’s affiliated nonprofit enterprises, including the Evergreen Air and Space museum, deserved its property-tax exemption — especially since the museum’s water park is the star attraction. The Oregon Department of Justice also investigated possible mingling of funds between the for-profit aviation wing and the nonprofit entities, which is prohibited under Oregon law.

The legal restrictions on nonprofits complicate the evolution of blended models. Fueled by new technologies, such models could also pose a new threat to cash-strapped nonprofits. The rise of crowdfunding, for example, allows people to donate to private businesses as if they were a charitable organization. “What’s unique about these kinds of events is there is no return on investment,” White says. Instead, “people are looking at these businesses as a community asset.” He raises an intriguing question: In the future will nonprofits have to compete with social-enterprise startups for donor dollars?

Elements of the nonprofit sector “can’t and shouldn’t be monetized,” White says. “There are people economics leaves behind in our society; that’s the reality.” Looking ahead, he anticipates “confusion and probably court testing” around hybrid organizations. Despite the unknowns, the fourth sector holds powerful promise. As White observes: “It’s a fascinating topic.”