New business models? Bring them on

I have been following the modest torrent of discussion in the blogosphere about appropriate business models for the nonprofit cultural sector. A recently published paper was useful to my own thinking about this so I’ll summarize it here and direct you to the link. The paper’s author is Peter Frumkin of the RGK Center for Philanthropy and Community Service at the University of  Texas, Austin. It was distributed to the 100 arts leaders who are part of National Arts Strategies’ CEOs Program, which convened in Austin in May and is now posted on the NAS website.

What Frumkin lays out in the paper, Changing Environment: new forms, actors, and instruments, is that there now exists a spectrum of organizational forms that are more and less appropriate to enterprises with different purposes, financial structures, and  approaches to leadership. The spectrum reaches from “entirely commercial, for-profit and market-driven” and on one end to “entirely charitable, voluntary, donative” on the other. The middle ground is “full of hybrid forms” such as social purpose for-profit enterprises, L3C’s , B Corps, and non-profits reliant mainly on earned income, among others.

In his excellent blog post blog post on the subject of business models last week, Adam Huttler (who is in the NAS program) offered up some of the alternative organizational forms that artists and cultural entrepreneurs are now using. As a teacher and researcher, Frumkin goes considerably farther, drawing a visual map for how to think about one’s enterprise through a series of three filters and then choosing the organizational form (business model) that best fits. He argues that the nonprofit model should no longer be the default.

Frumkin’s three assessments are the social value proposition (what type and amount of capital is needed and to whom will equity be dispersed), the competitive landscape (analysis of the ways of generating revenue by identifying whether customers can and will pay for the product or service directly or will third parties be needed to pay or help pay for it, which includes understanding how the product/service will be priced), and traits of the leader (how will value, power, and wealth be developed by and distributed among stakeholders). On this latter point Frumkin contrasts a cultural institution that is community- and outwardly-focused (such as one in which an entire community participates in the formation of a shared vision) to one that is individually- and inwardly-focused (such as one that is primarily serving the vision of a single artist or small group of artists).

One of Frumkin’s most interesting observations is that not only are the organizational forms shifting, with new forms emerging, but also the nature of investment in the cultural sector is changing. “New instruments are being used to finance social impact across the nonprofit sector and in the process create new ways to finance organizational growth … The funding scene has shifted over time where the impact investor, not longstanding foundation donors or individual givers, is the key trend setter. These new impact investors … have made strong demands for results and proof of impact, which have challenged charities and arts and culture organizations in particular. .. Nonprofit organizations need to appreciate that there are signs of a shift away from grants to quasi-equity investments, which allow investors in nonprofits to participate in the financial upside—and downside—of programs financed with their funds … There have also been efforts to launch social stock exchanges that permit investments in businesses that have a social purpose, and allow these firms to raise capital more efficiently than would otherwise be possible. And there are many new ideas about debt instruments for the nonprofit sector, some of which would be pertinent to larger arts and culture organizations seeking to mobilize funds for capital and other projects.”

Frumkin urges cultural entrepreneurs to study up on the possibilities that new forms of investment and new organizational forms can offer. These new possibilities are refreshing and energizing to cultural entrepreneurs and we need not view them skeptically or with fear. That’s because there are many more ways to pursue our work than was the case even five years ago. There’s growing acceptance that no one way is right or wrong.  And there are plenty of examples of vibrant organizational practice all along Frumkin’s spectrum.

New business models? Bring them on.

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