Nonprofits benefit from for-profit practices

Socially minded enterprises get nimbler amid weak economy, stiff competition for donations

Seth Weinberger has built a local educational foundation into a million-dollar social enterprise serving about 30,000 underprivileged students in 15 states, proving that not every nonprofit is struggling these days.

Most of the growth has come during the past 18 months, when the Evanston foundation, Innovations for Learning, launched TeacherMate, a literacy program centered on hand-held computers equipped with special software in English and Spanish.

While new research from the University of Illinois at Chicago indicates the hand-held gadgets improve students' reading scores, the program also receives high marks for cost efficiency. By contracting with a Chinese manufacturer to produce the devices, Weinberger said, he can price the TeacherMate system at $100, which includes reading and math software for kindergarten through second grade. That's less than the cost of textbooks over the same period, he said.

Weinberger, an attorney at Mayer Brown who also serves as president of the foundation, adopted best practices from the for-profit arena to expand the nonprofit. In 2010, he plans to make the literacy software available as an iPhone app, boosting efficiencies and extending the software's reach to more children.

"If you have limited resources, then you have to get even smarter," he said.

Unlike many for-profit startups whose plans have been curtailed by the credit crunch, Innovations for Learning has had a steady stream of funding.

Besides sales to schools, the program receives about $800,000 in financial contributions from grantors and individuals, including Weinberger, who donates about $350,000 a year to the foundation. Weinberger receives a tax benefit but no equity for his contribution. In addition, JPMorgan Chase has contributed more than $300,000 a year since 2007.

Nationally, charitable contributions from foundations and individuals are down this year, according to The Bridgespan Group, a nonprofit research and consulting group. Eight out of 10 nonprofits reported funding cuts, up from 52 percent a year ago, according to Bridgespan's fall survey. Nearly half reported dipping into reserves to cope.

Competition for foundation dollars in Illinois could intensify in 2010 when a state law takes effect, allowing the creation of low-profit limited liability companies, or L3Cs. A form of LLC, the L3C structure can be used by for-profit ventures that have a primary goal of achieving a socially beneficial purpose. The law, which takes effect Jan. 1, aims to make it easier for social enterprises to attract capital, particularly from foundations interested in making program-related investments in for-profits with charitable purposes.

"There is enormous interest from both social enterprises and, more recently, foundations," said Chicago attorney and financial adviser Marc Lane of Marc J. Lane Wealth Group. "L3C has to be the hottest topic" among family foundations right now.

Still, not every social enterprise should be structured as an L3C, Lane said. "We are accepting about 1 out of 5 prospective clients," he said. When determining which structure is best for a social enterprise, "form follows function," he said, adding that entrepreneurs should seek legal counsel.

"We are definitely seeing a blurring of sectoral lines," said Liz Livingston Howard, a lecturer in the SEEK social enterprise program at Northwestern University's Kellogg School of Management. "Our definition of a social enterprise is any organization that uses business skills to further a social mission."

When deciding whether to organize as a for-profit or nonprofit, "often it comes down to the financing piece, where your money is going to come from," Howard said.

For organizations targeting underserved populations that can't afford to pay for services, the nonprofit 501(c)(3) status might be the best option because it provides a tax exemption to the organization and allows for tax-deductible contributions.

At Innovations for Learning, 20 percent of the foundation's $1.1 million budget comes from sales from TeacherMate and 80 percent from tax-deductible contributions, Weinberger said. Innovations for Learning also provides training for teachers as well as volunteer tutors for children in the program, which is in nearly 200 Chicago schools.

Teaching children trumps profits for contributor JPMorgan Chase.

"Seth is not in it to make money, which is key to making education technology accessible to the classroom," said Mark Rigdon, national director of educational grant making at JPMorgan Chase. "He is very nimble at blending his business innovations with the education needs of early elementary students and teachers."

Every year, Weinberger makes measured improvements by modifying content and professional-development support, Rigdon said.

No matter how a social enterprise is structured, it's important to use business tools to further the social mission, Howard said.

"There is an increased sophistication that has to happen on the part of all organizations because competition in the nonprofit sector has grown significantly," Howard said. "It is no longer enough just to do good. You have to do good well. You have to focus more on the management."