Self-Subsidization

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Overview

Enterprises using this model, often in the early stages, are financed either by owners or from connected profitable businesses. Several of the enterprises interviewed have multiple lines of work, and use their consulting business or their higher end sales to fund their less-profitable work with the underserved, at least until they are able to work out a model that can cover its own costs. For example:

  • Sunlabob for many years was covering the extra costs of a rural electrification program for the poor through profitable consulting and sales of energy products to higher end customers.
  • Energy Plus ltd. installs battery backup and LED lighting systems in poor schools in Uganda.  They sometimes have budgetary challenges which make it hard for them to pay their loans on time, and EPL does energy efficiency consulting for higher end customers to cover its day-to-day costs when these payments aren’t coming in.

 

Some enterprises are non-profits connected to for-profits which fund them in exchange for positive marketing. Several founders interviewed did not take a salary for the first several years of operation, and subsidized their own time with other jobs.  The Ashoka fellowship is designed specifically for these situations, funding founders’ living expenses for 3 years so they don’t have to earn a living outside the enterprise. Another mentioned source of funding was 3F- Family, Friends, and Fools.

Pros

This model is good for an enterprise that is just starting up, and has no access to other types of funding, especially if is for-profit and has a harder time finding grants. It is also useful for non-profit arms of for-profit businesses. If an enterprise engages in multiple activities, it can fund experiments in underserved areas without risking losing someone else’s money.

Cons

If the founder is working in another job, there may not be enough attention, resources or energy given to the enterprise. Occasionally connected companies may change their stance and cease funding. Finally, Enterprises with dual businesses, one subsidizing the other, may have conflicts in whether to put more focus on the more profitable business or the more social one. Similarly, if one side fails, it may significantly hurt the other.

Case Studies

Lifeline Energy, which delivers off-grid energy products to underserved communities worldwide on a nonprofit basis, is a good example of how partnering with a for-profit can be a good way to subsidize overhead, byt also be dangerous if the for-profit’s interests shift.

Lifeline Energy began as the Freeplay Foundation, which was associated with for-profit company Freeplay Energy.  Freeplay Foundation received roughly 15-20% of its funding from Freeplay, which it used to cover overhead. In exchange, Freeplay Energy used Freeplay Foundation’s work as a marketing tool and promised consumers that a portion of product sales would revert to the charity. Freeplay Foundation procured Freeplay Energy products for its projects.  (These were products designed for the humanitarian sector which had been developed with funding raised by Freeplay Foundation.) The 15-20% subsidization of overhead was critical to Freeplay Foundation’s ability to operate.

When Freeplay Energy was sold in 2008, the new owners no longer wanted to fund Freeplay Foundation as they did not support humanitarian initiatives. The new owners of Freeplay Energy then went insolvent, owing the charity a significant sum of funding and failed to keep a series of promises.Freeplay Foundation, for this and other reasons, has now severed ties with Freeplay Energy, changed its name and relaunched as Lifeline Energy.  It has established its own for-profit product company, Lifeline Technologies Trading Ltd. (LTTL)  The profits from LTLL now revert to Lifeline Energy for core funding, and are more secure because Lifeline Energy is the majority shareholder in LTTL.

Enterprises