Suddenly, nonprofits seek profits

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."

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.

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