Field Report

Turning the Page By Kathy O. Brozek

Stanford Social Innovation Review Fall 2016 Copyright

2016 by Leland Stanford Jr. University All Rights Reserved

Stanford Social Innovation Review www.ssir.org Email: [email protected]

Stanford Social Innovation Review / Fall 2016

! IN PERSON: Augusten Burroughs talks about his book Lust & Wonder during an event at Kepler’s Books in Menlo Park, Calif.

Turning the Page Four years ago, a Northern California bookstore reinvented itself as a hybrid social enterprise—and its story continues to unfold. BY KATHY O. BROZEK

PHOTOGRAPH BY JAMIE SOJA, COURTESY OF PENINSULA ARTS & LETTERS

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e set out to build the bookstore of the 21st century,” says Praveen Madan, owner of Kepler’s Books, a retail outlet in Menlo Park, Calif., that serves customers throughout the San Francisco Peninsula. It was late 2011, and Madan was leading a small group of Kepler’s supporters who were charting a plan that would allow the store to survive in a world where the prospects for brick-and-mortar bookselling looked bleak. Kepler’s was one of a trio of San Francisco Bay Area bookstores—including City Lights in San Francisco and Cody’s Books in Berkeley—that emerged as centers of political and social activism during the 1960s and 1970s. Founded in 1955 by Roy Kepler, a pacifist who had been a conscientious objector during World War II, the bookstore served as a gathering point for people in the antiVietnam War movement. Its patrons included students and professors from nearby Stanford University, along with counterculture figures such as the music icons Jerry Garcia and Joan Baez and the novelist Ken Kesey. In 1980, Roy Kepler’s son, Clark, took over the shop and led it through a new era. Menlo Park, which had been a sleepy, middle-class suburb, evolved into an affluent enclave in the heart of Silicon Valley. The forces of disruption that helped define the region had begun to sweep over the bookselling business. Bookstore chains like Barnes & Noble and Borders Books—and later the Internet retailer Amazon, combined with the emergence of digital books—steadily chipped away at the revenue of independent bookstores. In 2011, Kepler’s hit a critical point. “Kepler’s was about to be shut down, unless

there was a reimagining of its future and the role that it played in its community,” says Madan. “That bothered me deeply, that this great cultural and intellectual institution located in Silicon Valley—where there’s no shortage of innovation, creativity, and capital—would close.” Madan and his wife, Christin Evans, already operated a bookstore in San Francisco called Booksmith. Drawing on that experience, and on his passion for Kepler’s, Madan took up an opportunity to lead a rescue effort for the Menlo Park store. He formed a transition team, and in 2012 the team launched a plan to save Kepler’s: It settled the company’s debt via negotiated payouts to creditors, it put in place a new board of directors, and it transferred the store’s assets and liabilities to an entity owned by Madan. The plan instilled new life into Kepler’s. Each year since 2012, the store has turned a profit. In its 2015 fiscal year, the store’s annual revenues came to slightly more than $3 million.

Among the factors that have made Kepler’s a sustainable operation, two stand out. First, Madan and his team have built on the store’s heritage as a place that achieves impact not just as a book retailer but also as a community center. And second, they have explored the potential of using a hybrid structure that combines for-profit and nonprofit elements. MORE THAN A BOOKSTORE

Under its new structure, Kepler’s continued to run the bookstore as a for-profit business. But Madan and his team decided to shift the store’s community events operation to a new nonprofit entity called Peninsula Arts & Letters (PAL). Another organization (the Silicon Valley Community Foundation) provides fiscal sponsorship for PAL and oversees its governance. “If you take the missionfocused part of the business—community engagement and educational programs—and move it to a nonprofit, [you create] two new financing vehicles: investments and donations,” says Susan Mac Cormac, an attorney and partner at Morrison Foerster, who set up the new legal structure. “And that’s a compelling sell: to invest in, or donate to, building something in and for your community.” In 2012, as Kepler’s was developing its

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Stanford Social Innovation Review / Fall 2016

KATHY O. BROZEK is a consultant to nonprofits and businesses that have a social change mission. She is the author of The Transformation of American Agriculture, and her work has appeared in Community Development Investment Review, The Guardian, and GreenBiz.com.

new configuration, funding began to pour in from supporters, and the result was a cash infusion of $720,000. About half of that money came in the form of tax-deductible donations to the nonprofit, and about onethird of it consisted of loans to the for-profit bookstore. Remarkably, the rest of that sum took the form of non-tax-deductible donations to the for-profit entity. PAL offers three programs: public author events, author events at local schools, and a weekly radio show. “Now the community programming can flourish on its own, without being saddled with the question ‘Can we sell enough books to make this work?’” says Jean Forstner, manager of PAL. Under the new arrangement, Forstner and her colleagues have been able to upgrade the author events program. “For a while, we mostly featured authors on tour who would give a book reading. Now 75 percent of our events are ‘in conversation’ [gatherings] with a subject-matter expert, a local author, or a journalist,” she explains. That approach, she adds, makes for a “broader and deeper” form of engagement with community members. New funding also has enabled PAL to expand its program of hosting author events in local schools. In 2015, Kepler’s hosted 60 such events. One-quarter of them were in schools with a large proportion of students who qualify for the federal subsidized school lunch program, and Kepler’s donates 30 books per event to those schools. “The Kepler’s program has allowed us to give students an experience that they would not be able to get anywhere else in their lives,” says Erin Gonce Wakshlag, a reading specialist at Brentwood Academy, an elementary school in East Palo Alto, Calif. “For about 85 percent of [our] students, English is not their primary language. Kepler’s recruits authors who can really connect with children. The children absolutely love it.” The weekly radio show, “In Deep With Angie Coiro,” features a veteran public radio journalist who interviews guests in front of a live audience at Kepler’s. It explores a broad range of issues about the world at large, but it also covers issues that hit close to home. In

an episode from 2015, for example, the guest was Diana Kapp, a journalist who had written an article for San Francisco magazine about a series of widely publicized suicides among students at a high school in the nearby city of Palo Alto. By helping to address this oncetaboo subject. Kepler’s demonstrated that it could be a vital community asset. THE HYBRID MODEL—AND BEYOND

PAL has an annual budget of $400,000, which covers staffing and office rental costs. Each year since Kepler’s launched the events operation as a separate entity, the bookstore has used a portion of its revenues—in 2015, the portion was 7 percent—to subsidize PAL. But in 2016, PAL reached a milestone: A recent round of fundraising will make the nonprofit entirely self-sustaining for the next two to three years. Retaining a larger share of its revenues will enable Kepler’s to invest more in its bookselling operations—and in its employees. By the end of 2016, the store will increase its entry-level hourly wage to $15 per hour. (The statewide minimum wage won’t reach that level until 2022.) Kepler’s will also use the additional revenues to increase employee bonuses under a profitsharing arrangement that began in 2013. A hybrid structure offers clear advantages to a company like Kepler’s. Most important, it shifts the costs of hosting events to PAL. “The hybrid model has allowed us to free up capital,” says Evans. She notes, for example, that the store can now afford to maintain an unusually deep inventory. Publishers sell books to retailers on consignment, and bookstores often return unsold books just three to six months after receiving them. But Kepler’s keeps books on its shelves for 18 months or longer. That approach increases “the discoverability of books,” says Evans, who manages inventory for Kepler’s. All the same, using a hybrid structure can present a challenge for managers. In particular, they must take care to meet US Internal Revenue Service (IRS) regulations. “For a hybrid to work,” Mac Cormac explains, “you have to operate two independent entities,

with documentation and processes to track the flow of intellectual property, people, services, and funds that will move between the nonprofit and the for-profit.” Kepler’s isn’t the only independent bookstore to experiment with a hybrid structure. In 2002, Steve Costa and Kate Levinson opened Point Reyes Books, a shop located near the Point Reyes National Seashore, a national park northwest of San Francisco. In 2013, amid increasing interest in various activities hosted by the store, Costa and Levinson formed Black Mountain Circle, a nonprofit whose mission, Costa says, is “to explore the relationships between story, spirit, and place.” Among other projects, the nonprofit publishes the West Marin Review, an annual print journal of arts and literature, and it hosts Geography of Hope, a biennial conference that attracts 400 people to the area. At first, Black Mountain Circle operated under a fiscal sponsorship, but in 2015 it became a stand-alone nonprofit that relies on donations from foundations and individuals. Unlike Kepler’s, Point Reyes Books opted not to transfer management of all author events to its nonprofit counterpart. Back in Menlo Park, Madan is contemplating next steps for Kepler’s and its affiliated organization. By the end of 2016, he will submit an application with the IRS to make PAL an autonomous nonprofit that would control its own governance and administration. Plans are also in the works to reinvent the bookstore yet again. “We are committed to transforming Kepler’s into a community-owned institution,” Madan says. Over the next year, he will investigate several options. He might incorporate Kepler’s as a cooperative business, for example, or as a membership organization. (Regarding the latter option, he cites the model of the retailer Recreational Equipment, Inc.) Or he might sell shares in the store to community members. “The goal is to evolve Kepler’s away from its current model [and toward being] a social and cultural institution run entirely by the community, for the benefit of the community,” Madan says.