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Starting a Nonprofit Business

By Carol Tice | Entrepreneur Magazine

Catherine Rohr was a 27-year-old UC Berkeley graduate with a thriving career in venture capital when, at a reception in 2004, she heard an ex-convict speak about the successful construction business he started after leaving prison.

For Rohr, it was a life-changing moment. She realized former drug dealers and gang leaders had entrepreneurial skills: They knew how to manage people, make a profit and handle competition. Using her finance-world connections, she could recruit CEOs to teach ex-convicts to use those skills to start legitimate businesses.

That same year, Rohr started Prison Entrepreneurship Program, and today, it has a $700,000 budget funded primarily with donations from CEOs and foundations. Nearly 100 percent of the 250 convicts that have participated in PEP are employed on release. Less than 5 percent of participants have returned to prison.

Rohr hopes to eventually see her program expand to prisons nationwide. “This is the hardest I’ve ever worked in my life,” she says. “But I can’t imagine going back to having my goal just be to make money. This is the most rewarding thing ever. I have a passion that won’t die for these guys.”

Most entrepreneurs strive to create for-profit businesses, hoping to make a fortune. Entrepreneurs like Rohr have a different goal: to make a difference.

Nonprofit professionals say young businesspeople at all stages are increasingly drawn to the emotional rewards of nonprofit work. Business-school students frequently approach Jeffrey Schwartz, a consultant in Chevy Chase, Maryland, for advice on starting nonprofits. “They say, ‘We don’t really want to work in business, because it’s soul-stifling instead of soul-stirring,’” he says.

The nonprofit sector may be personally fulfilling, but it’s not a snap to succeed in. The attrition rate for nonprofit startups is as steep as it is for businesses. There are already nearly 1 million nonprofits nationwide, and tens of thousands are launched annually. Many eventually go bust.

“In my experience, 50 percent of the nonprofits being created are redundant,” says Elizabeth Heath, founder and executive director of The Nonprofit Center of South Puget Sound in Tacoma, Washington. “It’s easy to start one, but there is not a clear understanding of what it takes to sustain one.”

Lofty goals or not, successful nonprofits employ business basics just like their for-profit counterparts. If the idea of creating a nonprofit appeals to you, consider these pointers to launch one successfully.

Nonprofit defined: A crucial difference between starting a nonprofit vs. a for-profit is that you’re creating an asset you will never own, Heath notes. A nonprofit essentially belongs to the community, so you will never be able to sell it. If it goes bust, its assets will be distributed to other nonprofits. “That ownership concept is a struggle for many businesspeople to let go of,” she says.

Under the IRS rules that govern nonprofits, no individual can benefit from a nonprofit’s activities in any way except through his or her salary. But that doesn’t mean you don’t have to make a profit. “The truth is, you can’t be sustainable unless you raise more than you spend,” Heath says. “You need reserves for rainy days and for growth.”

The business of charity: Behind every successful nonprofit is a well-thought-out business plan. First, make sure there isn’t already a nonprofit with a similar program in your region. Efficiency is crucial. Before launching their urban, college prep boarding school, The SEED School, in Washington, DC, co-founders Eric Adler, 42, and Rajiv Vinnakota, 35, applied their experience from major management-consulting firms to concoct numerous financial plans, which they then bounced off experts. Even then, the pair had to regroup when expenses outstripped their forecast

A former private-school teacher, Adler was frustrated with the way scholarship students from tough neighborhoods often floundered. His idea: board students, providing a safe, quiet place to study and mentors to keep students focused on college.

Started in 1998, SEED has since seen two similar concepts on the East Coast fail. Key to SEED’s success is a model that requires only modest ongoing fundraising—about $400,000 of its nearly $11 million annual budget. Most of their finances come from state and federal charter-school funds.

Buoyed by graduation rates substantially higher than the district average, the pair hopes to open two more schools in the area within three years.