Incubation is a term not often used in the social sector. Historically more common in for-profit industries such as healthcare, biotech and finance, incubators have accelerated the generation of patents, products and new ideas with supportive infrastructure, advisory services and access to venture capital for a lucky few. Recently more niche incubators have emerged, specializing in smaller industries like art, cannabis, green energy and more, offering unique expertise to launch new businesses, in newer fields.
In the nonprofit sector, support for new nonprofits has been offered under such dry terms as “fiscal agency” or “fiscal sponsorship,” the emphasis on fiscal underscoring the important function these incubators, nonprofits themselves, play in allowing new nonprofits to accept (and receipt) donations. But tax receipting isn’t the only key to a successful nonprofit business, and like other industries, the nonprofit sector needs to generate effective solutions to address the common good.
Launching a nonprofit is a little bit different than launching a business, although there are many commonalities. Charitable Ventures is a regional incubator that helps launch social innovations and new nonprofits, and provides consulting services to support existing nonprofits and foundations. In this role, we often talk to people who have a passion for social change, but are just getting started.
After 13 years of supporting start-up nonprofits in Southern California, we wanted to offer our best advice to emerging nonprofit entrepreneurs. Here are six questions you should have the answers to before you even consider starting a nonprofit.
- Do you know who else is addressing the social challenge you want to tackle? We often hear from passionate nonprofit entrepreneurs, “No one else is doing this!” And that may be true. But someone is doing something that is similar, if only in intention, and the question is: how are they doing it, is it working, and is the philanthropic market open to it? Knowing who your potential competitors and partners are is an important first step in understanding how to describe your own value to the community and to potential donors.
- Are you starting close to home? Philanthropic foundations and individual donors tend to be local in their focus, investing in efforts close to home that might scale to regional or national impact. If you are just starting out, you will most likely need to engage with your local market of investors first. Taking a new idea to a national funder without proving the concept locally will most likely not bear any fruit. A regional incubator can help you connect with these local markets.
- Do you have seed funding, or know where it might come from? If you have an idea, but have no idea who might fund it, you are not far enough along to use an incubator. Most incubators, and Charitable Ventures is no exception, ask you to come to the table with seed funding in hand. Can an incubator help you find more funds? Absolutely. But an incubator focused primarily on business infrastructure and advisory services may or may not have connections in the specific arena you are seeking to impact.
- If you have seed funding, do you have a plan to spend it in ways that will sustain your effort? The best part of landing in an incubator is that your infrastructure costs are so low. At Charitable Ventures, only 9%-12% of all funds you raise go to support administrative fees. Which means that on day one, your project has access to a comprehensive set of administrative services – HR, legal, accounting, contract management, insurance, and more – that you don’t have to invest in or build yourself. What, then, will you spend your money on? While the obvious might be salaries or people, if you aren’t using your initial funding to catalyze your efforts, raise awareness about your mission, or build effective partnerships, you’ll find you have no opportunities to replace your seed funding in year two. We always ask new projects to give us their first year budget…and it tells us a lot. Balancing the drive to make an immediate impact, with the less exciting necessity of building up infrastructure and partnerships, takes a lot of patience.
- Are you alone in this venture? Don’t be. Everyone needs a sounding board, and while an incubator can offer you a lot of support, having key advisors, subject matter experts and supporters engaged in your mission makes a world of difference – both to help encourage you forward, or to tell you when it’s time to call it a day.
- Is a nonprofit incubator the best way to launch this idea? Not every idea fits into the nonprofit model. In some instances, a nonprofit doesn’t need revenue to begin its journey of social impact, and many volunteer-driven organizations have done a lot of good in the world without a lot of cash. In other instances, an idea may make more sense as a for-profit business than a nonprofit one. A lot of people come to the social sector thinking grants and donations are a way to get “easy money,” but the real issue is that if an activity is philanthropically funded, the end result must be for public benefit. An example of an enterprise that can do a lot of good, but that may not fit this model: an app that helps connect people to community resources, but is “sold” or subscribed to for commercial benefit. It’s not that a nonprofit can’t earn income, pay taxes and still do good in the world – but a nonprofit’s activity must primarily be exempt in purpose. This is where a good tax advisor is critical to your journey.
To succeed in the challenging arena of social change, you need more than just a passion for solving a problem, because just having the passion to effect change is not the same as having a plan to bring it to reality.
Charitable Ventures, President & CEO
 A recent internal cost analysis of a project with approximately $237,000 in revenue and one staff person found that the costs to replace existing infrastructure at the most minimum levels of liability and functioning (e.g. workers comp, liability insurance, bookkeeping, legal, etc.) would cost the project between $35,000 and $45,000 annually, as compared to ~$21,000 paid on the platform. While each project is different, using an incubator tends to radically reduce start-up costs.
 Note: this is most untrue!