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Suddenly, nonprofits seek profits

Known for producing classic plays by Ibsen, Chekhov, and Shakespeare, the Guthrie Theater in Minneapolis didn't originally set out to put outrageous costumes on the backs of rowdy revelers at Mardi Gras or Halloween.

But costs upwards of $30,000 per year for costume storage led managers at the historic theater to think outside the box, or closet, as the case may be. Result: a three-year-old costume-rental business that not only pays for all storage costs but also generates extra cash flow for the Guthrie and its business partner, the Children's Theater Company.

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"At first, we thought maybe we'd make a little money and put it into the theaters, but not make this a for-profit business," says Maribeth Hite, special-projects manager at the Guthrie. "But we discovered we had a really good idea."

Others in the nonprofit world are discovering the same thing. For-profit side businesses that leverage unique physical and intellectual assets found at schools, museums, and charities are generating much-needed revenue in a time when few nonprofits can thrive on beneficence alone.

One contest in particular bears witness to the trend. For the third year in a row, about 500 nonprofit organizations have submitted for-profit business plans in a competition cosponsored by the Goldman Sachs Foundation, the Pew Charitable Trusts, and the Yale School of Management. This month, the contest announced eight winners who will share $500,000 in prize money. One example: EcoLogic Finance, a microlender in Cambridge, Mass., that over five years has largely weaned itself of its original reliance on grant funds to encourage eco-friendly farming in Latin America. Instead, it borrows its capital at 2 or 3 percent, loans it out to farmers at 9 percent or higher, and secures collateral in the form of signed purchase contracts for organic and otherwise environmentally friendly crops.

"Our end goal is to demonstrate that these community-based businesses, given the new market ingredients in play in wealthy consumer countries, are absolutely bankable and they're good business," says EcoLogic's founder and president, William Foote. By becoming financially sustainable itself, the nonprofit is creating a model it hopes local banks in Latin America and Africa might follow.

Of course, some nonprofits find that for-profit doesn't fit, says Cynthia Massarsky, co-deputy director of the nonprofit contest. But for many, the right match might do more than coexist with a nonprofit mission, it could also enhance it. "The taboos are shrinking," Ms. Massarsky says. "You can use the word 'marketing' at nonprofits and people don't freak out. If you had mentioned that 10 years ago, it would have been a different story. People then wanted to hear nothing about it.... There's been a fundamental shift that says nonprofits have to at least be thinking about [for-profit enterprises]."

Nonprofits trying their hand at business often set their sights on their core constituency. For example: one runner-up in the contest, Housing Partnership Network, launched an insurance arm for its member groups, which provide affordable housing nationwide. Annual savings: $1 million. In El Paso, Texas, El Puente Community Development spun off a textile business to hire Mexican immigrant women to make medical scrubs. Similarly, the South Mobile County (Ala.) Education Foundation aims to generate profits by selling red claw crawfish, raised by high school students in an aquaculture program, to wholesalers and breeders.

"If we're successful, it's something the community will replicate," says Steve Boykin, a teacher with the program. "We're hoping to develop an industry that [graduates] could go into."

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In other cases, the goal is twofold: to subsidize the organization's mission and to complement that mission with a compatible business. At Shattuck- St. Mary's, a private boarding school in Faribault, Minn., head of school Nick Stoneman brings his Wall Street background to the cause of leveraging campus real estate. A subsidiary corporation of the school expanded a nine-hole golf course into a profit- seeking 18-hole course, which students are also encouraged to use. Two chapels on campus host a strong summer-wedding business. And visitors who pay for access to a summer language institute, a sports camp, and a ropes course in the woods do more than boost revenues in Mr. Stoneman's view. They also help bring attention, and possibly future students, to the school.

"The kids are all gone from May to August, and the idea is to leverage that," Stoneman says. "Our goal, if we do it really well, is to reduce the level of tuition increases and keep the school affordable for our families." He says the various ventures bring in $900,000 to $1.2 million a year.

Though potential payoffs can be enticing, Massarsky emphasizes that sideline businesses aren't right for every nonprofit. A profit-seeking venture can become a distraction, she says, especially if its products, services, or relatively high salaries breed resentment or undermine the central mission. "The 'does this feel right?' test is something a nonprofit needs to do at every step," Massarsky says. A business "works well when it flows directly from what the organization is already doing."

In the Guthrie Theater's case, managers in the early 1990s were already renting storage space for more than 6,000 custom-made costumes. After launching Costume Rentals LLC in 2002, they discovered that their educational mission took on a new dimension as high schools and colleges would send for costumes they couldn't afford to make.

"A college might rent eight from us and use them as models to create four of their own," Ms. Hite says. Schools get discounts to encourage the production of classic dramas as well as the craft of costume design. One drawback: On occasion, a Guthrie actor needs a costume that's rented out, so the theater pays to rent a similar one.