The following article was published by BC Business on July 3, 2012.

Traditional sources of revenue for charities are drying up, but putting society’s biggest issues in the hands of socially minded entrepreneurs is a tricky business.

On the cheery, yellow walls of the Downtown Eastside’s Potluck Café are the faces of several of its customers, captured in a black-and-white instant. Their complicated eyes and the deep lines in their faces tell sad stories of life on the Downtown Eastside as they preside – surprisingly hospitably – over the current clientele. In the last decade, the café has served 300,000 nutritious, free meals to the area’s residents.

Sitting in the 30-seat café between mealtimes, Heather O’Hara is absentmindedly shuffling a vase of fresh tulips around the table. A prairie import, O’Hara has been executive director of Potluck Café and Catering, the street-front operation of Potluck Café Society, a registered charity, for seven years. “We’re a bit of a backwards animal,” she says with a patient smile, explaining that the busier the café gets, the more it costs to keep it running, a financial burden that’s relieved by revenues from the catering side of the operation.

Potluck’s catering business, which hires Downtown Eastside residents, is booming, growing at 20 to 30 per cent each year by serving up antipasto platters and other tasty foodstuffs to more than 40 corporate clients, including SAP, Bell, Shaw, Vancity, the City of Vancouver and Mountain Equipment Co-op, as well as an increasing number of local weddings. In 2011, the catering business earned $1.2 million in revenues, about $500,000 less than O’Hara’s ideal operating budget for Potluck Café, but enough to keep the café, which she explains serves “a really important community function,” afloat. The business plan is Robin Hood-esque in its vision, digging into deeper pockets to aid those in need.

“Unlike so many charities that are morphing into social enterprises right now, we’ve always been one. There’s always been a business component to this and we’ve always been entrepreneurial, since day one,” says O’Hara.

The social enterprise business model works like this: a community-focused business or service gets the predominant percentage of its revenue via earned income through a market service, while the remaining percentage is generated through more conventional charitable means (such as fundraising, grants and donations). The goal for most social enterprises is to one day be entirely self-sustaining.

Forms of social enterprise have existed for decades. The YWCA, for example, generates revenue to shelter the homeless by running fitness centres. The model has been called by other names (such as philanthrocapitalism or non-profit), but legislative, economic and social changes have increased the urgency with which social enterprises – organizations that apply a business model to the values and missions of the non-profit sector and result in value for both the consumer and the community – are popping up around B.C.

In March this year, changes to the Business Corporations Act were introduced in Victoria that, if passed, will allow for a new, hybrid type of company: the community contribution company, which combines socially beneficial purposes with a restricted ability to distribute profits to shareholders. Effectively another form of social enterprise, the degree of accountability would be higher than for ordinary companies. Corporate reorganizations would be restricted to ensure that payout caps aren’t circumvented and that, upon dissolution, the company would be subject to an “asset lock,” capping dividends on the company shares to further ensure community benefit remains priority number one.

If the act is passed it will be a progressive move for B.C., says Derek Gent, executive director of the Vancity Group of Companies Community Foundation, which Gent describes as a “public charity” created for the purpose of amalgamating community resources that will be poured back into that community.

“Canada’s charity law is based on Elizabethan principles of the alleviation of poverty and the protection of widows and orphans,” comments Gent, “but we’ve moved far beyond that, so there’s a lot of work that needs to be done at federal and provincial levels to catch up with reality and to encourage more of this.”

A community-based organization at its core, Vancity was an early adopter of the social enterprise model. It established its foundation over 20 years ago to better fill the gap between business models that don’t quite meet the need, philanthropy that doesn’t quite meet the need and government funding grants that are drying up. “The more we lean into community and the more we put the needs of people and the planet first, the better we do financially,” says Vancity CEO Tamara Vrooman. “People say to me all the time, ‘It’s a trade-off, it must cost you something to do these things for the community,’ but our experience has been the exact opposite.” She goes on to say that Vancity has just enjoyed its third consecutive year of record earnings. “We attract the best and brightest staff, we’re able to be more creative and innovative and be a market leader, so it’s been a very good strategy for us from a business point of view.”

In October 2011, Vancity established a new philanthropic venture: the $13-million Resilient Fund. Clients make guaranteed, long-term deposits into the fund, which Vancity invests in social entrepreneurs, and social enterprises pursuing a community or environmental mission. The Royal Bank of Canada announced a similar Impact Fund in January, committing to a $20-million investment in social finance, half of which will go to new ideas and projects with social and environmental values (such as environmental sustainability and water resource management), the other half into Socially Responsible Investment funds.

Despite the growing support for social enterprise from government, banks and communities, the specifics of what characterizes a social enterprise still aren’t universally etched in stone. “One of the risk factors is drawing lines around what is a social enterprise and what isn’t, and that’s where the policy folks get interested,” notes Gent. “If they’re going to create incentives or tax it, where do you draw that line?” (He believes that if a social enterprise is generating significant revenues and has to pay taxes, that’s a good problem to have.)

Post-secondary institutions are picking up on the trend, as well, with B.C. universities offering an increasing number of social-enterprise-related programs at both the undergraduate and graduate level. SFU’s Beedie School of Business offers a certificate in Corporate Social Responsibility and, in March, announced a new social venture accelerator program, specifically designed for entrepreneurial students with social impact ideas and an interest in helping others launching social ventures. UBC’s Sauder School of Business has been developing its Social Entrepreneurship 101 program since 2006, a three-week course where students from UBC and Nairobi’s Strathmore University are paired and taught to write business plans and identify funding sources for projects. It claims to have launched several businesses as a result of the program. Though, no school in B.C. has yet committed so completely as Oxford University in the U.K., whose Skoll Centre for Social Entrepreneurship is leading the way in fostering the advancement of social enterprise.

Carolyn Egri is the William J.A. Rowe EMBA Alumni professor at SFU’s Beedie School of Business. She has researched and published on corporate, social and environmental responsibility in Canada and internationally since the late ’80s. “You could call B.C. the wild west of social enterprise. Just like any new venture, the definition is going to be shifting all the time,” she says. Traditions of philanthropy, corporate and individual giving are quite different in the U.S. than in Canada, she points out, citing stronger tax incentives, a much larger population and an increased need for private giving driving the States’ charity models. Canada and other western economies, such as Scandinavia, have historically had more government funding for public services, so there’s been less need for private intervention. But that’s changing, says Egri. “We have growing inequality, so there’s a bigger gap and need for more directed social enterprise. One of the trends we’re seeing is more creativity in terms of organizational forms to deal with these issues.” She explains that it’s usually corporate headquarters that make the big commitments to philanthropy, but B.C. is, in large part, a province of branch offices and subsidiaries. However, while we may have a shortage of head-office donors, we at least partially compensate by “trying new and different things and being active environmentally and socially.”

“I’m in the business of philanthropy,” says Carmen Ruiz y Laza, executive account manager of Karma Exchange, a Vancouver-based firm that partners with local merchants to market social causes. Essentially an offshoot adaptation of the social enterprise model, it works in much the same way as RED, the philanthropic AIDS-elimination mission that U2’s Bono has passionately backed for years: a retail outlet sells certain consumer products, and a percentage of that sale goes to the desired charity.

While it has several merchant partners, at the moment Karma’s exclusive charity project is West Vancouver-based non-profit Create Change, which funds the building of wells in small communities in Ghana so that young women are freed from water-fetching duties to attend school. It also funds the girls’ tuition fees. This year, Create Change was chosen by Richard Branson to be a contender in the Virgin Air founder’s international Screw Business As Usual Competition, designed to find businesses around the globe that are flying in the face of a strictly for-profit-at-any-cost model to “give back to the world.” (Unfortunately, while it made the top 10 finalists, Create Change didn’t take home the grand prize.)

Ruiz y Laza cites Create Change founder Shannen O’Brian, saying her dream was to be “the charity-driven Groupon, but you need numbers for that. So we’re using the model of the RED campaign for Vancouver because we don’t need a subscriber base for that; all we need are merchants and local awareness.”

Early Vancouver-based adopters of Karma’s program include chef David Hawksworth’s Bel Café, Vida Spa and the American Cheesesteak Co., which jumped on board for four months offering a percentage of sales from its best-selling sandwich, called the Cowboy. The sandwich costs $12, of which Karma gets $1. “They give us about $1,000 a month, and putting a girl in Ghana through one year of high school is $200, so that money goes a long way. The model works,” says Ruiz y Laza, though she emphasizes that society hasn’t seen the end of the Rockefeller charity model yet.

“Look at Jacqui Cohen. She raises a million bucks a year, but that’s her cronies. They come from L.A. and she’s got the movie stars and that works.” Ruiz y Laza adds that Cohen’s daughter, Kasondra, is doing the same thing for her generation. “They’re a different level of society, right? The rich will always be rich and those kind of events are geared towards them so they can give to charity,” she quips. She goes on to explain that the model based on donating a percentage of retail sales to social causes opens the opportunity to “donate” to a much broader socio-economic spectrum: “Give Mrs. Charity Gala or a regular Joe the opportunity to buy something they already want, whether it’s a cup of tea or a massage, and a portion of that sale goes to charity. It’s no big deal, no big commitment. It’s passive giving.”

Managing a social enterprise comes with unique hurdles, most notably scarce resources. Any money a social enterprise makes is targeted for its community mission first, with such luxuries as new computers or public-relations staff taking second priority. Among other challenges, Potluck’s O’Hara cites older equipment and vehicles, small offices and little-to-no cash for marketing or communication. “It’s a sector that’s sexy and interesting right now, but there’s a shortage in skilled leadership, as well as potential for burnout because it’s a really tedious job,” she says.

Vancity’s Vrooman says that the credit union is responding by taking a comprehensive role among the social enterprises it backs, aiding in everything from advocating for policy and tax changes to sharing its own human-resources staff.

Corporate and private donations are critical for a healthy bottom line at Dress for Success, a Manhattan-based non-profit with a B.C. chapter, which provides interview suits and career development to low-income women. But Deb Twocock, executive director of Vancouver’s Dress for Success branch, says that tapping into a corporation’s expertise as a whole – not just the volunteer hours of its employees, but its business intelligence and space to hold workshops and mock interviews – is becoming increasingly important for her organization’s survival. Twocock is quick to assert that “social enterprise is the wave of the future,” but says that while she’s seeing other charities and non-profits go that route – including some Dress for Success affiliates – she’s hesitant to jump on the bandwagon. “I believe that non-profits must look to social enterprise as at least part of their plan to be self-sustaining. Maybe we should be having our clothing make money for us, but I hate the idea because I know how much work is involved,” she admits.

Going the social enterprise route not only involves more work, but also more risk; the potential for failure is inevitably higher when an organization is considering new business models and filling different niches. “The pressures become different,” explains Vancity’s Gent. “One of the things that can happen is that organizations try to be fiercely protective of what’s called ‘mission creep,’ where you start, perhaps, serving the business objectives more than the original community objectives.”

O’Hara has first-hand experience with the pressure of the balancing act. “There’s a sweet spot in this stuff like any other business,” she says. “There’s the three-to-five-years startup window, then you reach your sales numbers, you get money in the bank and you hope to maintain this level. It’s really hard to do it. You can’t make cuts and just let people go if business is down; you have a legal obligation to accomplish your mission.”

SFU’s Egri believes that overall, social enterprises are a positive addition to society, and that they fill a niche being handled ineffectively by the public sector as society evolves. But she cautions that “when you privatize the provision of these community essential services that’s all fine, but they’re vulnerable. And there are certain basic services that need the continuity that governments can provide. When we’re talking about basic social services, as a society, can we really afford to have these subject to boom-and-bust cycles?”

She adds that critical mass is another key factor. The population density in Vancouver, Victoria and the Lower Mainland can support social enterprises, but what happens in northern B.C.? “There are serious issues up there but you don’t have as many people to support these ventures,” she says, concluding that a combination of public and private is the best solution.

Additionally, the social enterprise model simply doesn’t work for every business. For several years Vancity has held a public event called Social Enterprise Dragons, which sells out to several hundred people. Modelled on the CBC’s Dragons’ Den, it invites budding social enterprises and social entrepreneurs to pitch their business cases to community leaders in hopes of securing a funding grant. Last year the event attracted 40 applicants from academic institutions including UBC, SFU, Emily Carr University of Art + Design and BCIT, each hoping to win one of three $90,000 prizes.

According to Vrooman, the event is “more Puff the Magic Dragon than fire-breathing. But we see, particularly young people, working in the social services sector and saying, ‘This is the way; everything has to go this way.’ Well, not everything has to go that way. We have to be disciplined.”

Regardless, she adds that social enterprise in Vancouver is “growing and expanding.” Certainly the concept is gaining acceptance in the mainstream business sector and the mainstream philanthropy sector. And, combined with the power of social media as an effective and economical marketing tool, social enterprise has the power to effect positive change.

“It’s not a panacea and it’s not a saviour,” O’Hara summarizes. “This said, it can be an advantage, because we’re not trying to make leaps. We’re no longer trying to fit a square peg in a round hole.”