Do Nonprofit and for-Profit Social Enterprises Differ in Financing?

Background

One of the most appealing claims about social enterprise is its potential to end dependency and achieve financial self-sufficiency (Dacin, Dacin, & Tracey, 2011). Two questions are key to understanding this topic: First, what is the current financial status of social enterprise? Second, what strategies can improve financial sufficiency of social enterprise? This study aims to tackle the first question through an empirical investigation of the survey data on social enterprise. Specifically, it looks into sources of startup funding and revenues by the legal form of social enterprises.

Methods

Data used for this study is from an online survey of 109 social enterprises in the state of Illinois in 2016. Sources of startup funds and sources of revenues are the two categories of dependent variables. Sources of startup funding include grant support to parent organization, grant support to social enterprise, program related investment to parent organization (NPO), program related investment to social enterprise, endowment income, organizational unrestricted net assets, Angel investment, venture capital, line of credit and other. Sources of revenues include endowment, foundation grants, government grants, government contracts, fee for service, sale of goods, sale of services, individual donor, corporate donor, board member donor, and other. For each variable, a positive response is recorded as “1” and otherwise “0”.

      The independent variable is the legal form of a social enterprise, namely nonprofit (coded as 1) vs. for-profit (coded as 0). Logistic regression is run to examine if nonprofit social enterprises differ from their for-profit counterparts in sources of startup funding and revenues controlling years of operation and the annual budget size.

Results

The sample consists of 86 nonprofit and 23 for-profit social enterprises. Most of the social enterprises in the sample are young and small. Various sources of funding are used to start up social enterprises. Among these, grant support to the parent organization (25.7%) and grant support to the social enterprise (23.9%) are the most common types. While social enterprise is expected to be financially sufficient through profitmaking, a considerable proportion of the sample still have foundation grants (57.8%) and government grants (34.9%) as their primary sources of revenues.

      Results of logistic regression do not show differences in sources of startup funding between nonprofit and for-profit social enterprises except for direct grant support to social enterprise (p<.05). Regarding sources of revenues, results show nonprofit social enterprises are more likely than their for-profit counterparts to have foundation grants (p<.05) and government grants (p<.05) as their sources of revenues, whereas they are less likely than their for-profit counterparts to have revenues from sales (p<.10).

Conclusions

The study shows that nonprofit social enterprises do not significantly differ from their for-profit counterparts in sources of startup funding. But the types of revenues collected by social enterprise differ significantly depending on whether it is a nonprofit or for-profit. Nonprofit social enterprises are more likely to rely on foundation grants and government grants as their primary sources of revenues while for-profit social enterprises are more likely to reply on revenues through sales.