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Workshop on forming a hybrid for profit/non profit organization presented at the Global Engagement Summit at Northwestern University April 11, 2009

Workshop on forming a hybrid for profit/non profit organization presented at the Global Engagement Summit at Northwestern University April 11, 2009



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  • HYBRID FOR-PROFIT AND NON-PROFIT MODELS Blended Value for Social Change Dr. Patrick O’Heffernan InTheStudio Productions www.inthepodstudio.com
  • InTheStudio Productions
    • Podcasting for social entrepreneurs and progressive organizations
    • Reach audiences that are too busy to read or watch
    • Foundations
    • Linked with my blog on socialedge.org
    • Conference podcasts
    • Top podcasts on iTunes government and NPO
  • The hybrid’s dilemma Question now, answer later
  • What is a hybrid? A hybrid organization tightly integrates a non-profit (NPO) and a for-profit (FP) unit into one organization. (Virtue Ventures)… but this covers a lot of ground and there is no agreement.
  • The Mission Spectrum
  • How NPOs and FPOs differ
    • A FPO seeks profit and pays taxes on its profit.
    • A NPO operates for social good. It does not pay taxes
    • NPO’s can and do make a profit, but....
    • FPOs can do good, but they must profit eventually.
    • When a FPO goes out of business, its assets are distributed to the owners/shareholders.
    • When a NPO goes out of business, its assets must be given to another nonprofit.
  • Hybrids?
    • Non-profit with income generating activities (most hospitals)
    • A social enterprise - a business created for a social purpose (World of Good)
    • Socially responsible business (Pete’s Coffee)
    • Corporation practicing social responsibility (Marriot hotels)
  • You tell me are these hybrids?
    • Banco Compartamos
    • Ben & Jerry’s Ice Cream
    • Aveda cosmetics
    • Amanco (Nueva Group)
    • GreenWorks division of Clorox
  • Creating your hybrid
  • Advantages of hybrids (with majority FPO income)
    • Better financial stability – control your destiny
    • Never have to beg for money (well, almost never)
    • Freedom from funding constraints - no tied grants
    • Ability to plow profits back into the mission
    • Ability to pay real salaries and benefits
    • Ability to access private capital – much more plentiful than grants
  • Drawbacks of a hybrid (relying on majority FPO income )
    • Competition is not in most NPO leaders blood
    • Skillsets and mindsets are very different
    • Pay taxes on profit income
    • Mission can take over the business and put it out of business
    • Non-hybri firms can enter the same business and underprice and out compete you
  • One model to consider
    • Launch with NPO/F&F funds in a B-corp/L3C
    • Prove concept, build market
    • Obtain FPO investors for expansion
    • Continue operations with FPO revenue, new technology, new markets
    • Pay taxes, dividends, use tax breaks, credits
    • Use NPO funds for non rev projects
    • Bank FPO funds for reserves
  • B Corp
    • New type of corporation unlike traditional CSR businesses:
        • Meet comprehensive and transparent social and environmental performance standards.
        • De-emphasize profit, but not completely
        • Institutionalize stakeholder interests
        • Voluntarily created by owners
    • Create additional rights for shareholders to take other stakeholders and the environment into account
  • Setting up a B Corp
    • Amend your governing documents to redefine the best interests of the corporation to include other stakeholders.
    • B. Obtain board / governing body approval of your amended governing documents
    • C. Obtain shareholder / member / partner approval
    • D. File your amended articles with the Secretary of State
  • The L3C
    • Vermont legislation created a Low Profit Limited Liability Corporation (like a B corp, not same)
    • Attracts capital from foundations and investors
    • Requires charitable/educational purpose
    • Main mission is not income or value increase
    • No politics allowed
    • Must identify itself as a L3C to investors
    • Can operate in any state; HQ must be in Vermont
  • L3C advantages
    • Hybrids often cannot offer ROI sufficient for most investors...need 3(c) money to get started
    • Gives social entrepreneurs maximum flexibility
    • Allows for some private capital, some patient money (grants) and social investors who can take a a lower profit margin
    • Encourages PRI funds from foundations
  • L3C drawbacks
    • Must be in Vermont - likely require some sort of legal HQ in Vermont and operations elsewhere
    • Pay Vermont state taxes
    • Liability laws and taxes may be more advantages in other states
    • May raise questions with donors, investors you have to answer in pitches
  • Louisiana State Office of Social Entrepreneurship
    • New office; still figuring out its operations
    • Set up to encourage hybrids – businesses and/or NPOs that work across sectors for sustainability
    • Offers networking, training; no cash as yet
    • Helps with access to funds
    • Assembling a public-private social innovation fund
  • Hybrid Forms
    • NPO converts to an FPO
    • NPO and FPO together
    • FPO operates as an L3C or similar low profit, high mission business
    • NPO creates an FPO - FPO funds the NPO
  • How to decide which form is best for your social venture
    • The for-profit aspect of your organization should extend the NPO mission
    • Does creating a hybrid with a for-profit structure reduce the pressure to raise money?
    • The hybrid/for profit shouldn't require an expensive infrastructure
    • Financial failure of the FPO shouldn’t undermine the NPO mission
  • Play Rugby hybrid
  • Models and examples
    • World of Good
    • The Body Shop
    • InTheStudio podcasting
    • Neuman’s Own
    • WorkingAssets/Credo Mobile
    • Play Rugby
    • Empowerment Group Gateway
    • Others – your experience
  • Getting started
    • Due diligence: careful research
      • What business will you be in
      • Who is your market
      • Where will your capital come from
      • How will you operate
      • Why is a hybrid ideal and not a SRC or NPO
    • Talk to your donors/investors
    • Understand the law your are incorp under
    • Chose the best form for your venture
    • Work out the operational details
    • Write a business plan
    • Have an exit strategy
  • Where can the money come from
    • Friends and family
    • SVN – Social Venture Network
    • Threshold
    • Investors Circle
    • Calvert Foundation Gift Share
    • Skoll Foundation
    • PRI money from large foundations
    • Corporations (entry money or buyout)
  • Your answer to the question yes or no?
  • Resources
    • Social Investment Forum http://www.socialinvest.org/
    • Good money Directory http://www.goodmoney.com/directry.htm
    • Community Re-investment Fund
    • http://www.crfusa.com/socialinvestors/Pages/ListofSocialInvestors.aspx
    • Innovation Exchange http://innovation-exchange.org/about/social-investors/