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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

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    1. 1. HYBRID FOR-PROFIT AND NON-PROFIT MODELS Blended Value for Social Change Dr. Patrick O’Heffernan InTheStudio Productions
    2. 2. InTheStudio Productions <ul><li>Podcasting for social entrepreneurs and progressive organizations </li></ul><ul><li>Reach audiences that are too busy to read or watch </li></ul><ul><li>Foundations </li></ul><ul><li>Linked with my blog on </li></ul><ul><li>Conference podcasts </li></ul><ul><li>Top podcasts on iTunes government and NPO </li></ul>
    3. 3. The hybrid’s dilemma Question now, answer later
    4. 4. 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.
    5. 5. The Mission Spectrum
    6. 6. How NPOs and FPOs differ <ul><li>A FPO seeks profit and pays taxes on its profit. </li></ul><ul><li>A NPO operates for social good. It does not pay taxes </li></ul><ul><li>NPO’s can and do make a profit, but.... </li></ul><ul><li>FPOs can do good, but they must profit eventually. </li></ul><ul><li>When a FPO goes out of business, its assets are distributed to the owners/shareholders. </li></ul><ul><li>When a NPO goes out of business, its assets must be given to another nonprofit. </li></ul>
    7. 7. Hybrids? <ul><li>Non-profit with income generating activities (most hospitals) </li></ul><ul><li>A social enterprise - a business created for a social purpose (World of Good) </li></ul><ul><li>Socially responsible business (Pete’s Coffee) </li></ul><ul><li>Corporation practicing social responsibility (Marriot hotels) </li></ul>
    8. 8. You tell me are these hybrids? <ul><li>Banco Compartamos </li></ul><ul><li>Ben & Jerry’s Ice Cream </li></ul><ul><li>Aveda cosmetics </li></ul><ul><li>Amanco (Nueva Group) </li></ul><ul><li>GreenWorks division of Clorox </li></ul>
    9. 9. Creating your hybrid
    10. 10. Advantages of hybrids (with majority FPO income) <ul><li>Better financial stability – control your destiny </li></ul><ul><li>Never have to beg for money (well, almost never) </li></ul><ul><li>Freedom from funding constraints - no tied grants </li></ul><ul><li>Ability to plow profits back into the mission </li></ul><ul><li>Ability to pay real salaries and benefits </li></ul><ul><li>Ability to access private capital – much more plentiful than grants </li></ul>
    11. 11. Drawbacks of a hybrid (relying on majority FPO income ) <ul><li>Competition is not in most NPO leaders blood </li></ul><ul><li>Skillsets and mindsets are very different </li></ul><ul><li>Pay taxes on profit income </li></ul><ul><li>Mission can take over the business and put it out of business </li></ul><ul><li>Non-hybri firms can enter the same business and underprice and out compete you </li></ul>
    12. 12. One model to consider <ul><li>Launch with NPO/F&F funds in a B-corp/L3C </li></ul><ul><li>Prove concept, build market </li></ul><ul><li>Obtain FPO investors for expansion </li></ul><ul><li>Continue operations with FPO revenue, new technology, new markets </li></ul><ul><li>Pay taxes, dividends, use tax breaks, credits </li></ul><ul><li>Use NPO funds for non rev projects </li></ul><ul><li>Bank FPO funds for reserves </li></ul>
    13. 13. B Corp <ul><li>New type of corporation unlike traditional CSR businesses: </li></ul><ul><ul><ul><li>Meet comprehensive and transparent social and environmental performance standards. </li></ul></ul></ul><ul><ul><ul><li>De-emphasize profit, but not completely </li></ul></ul></ul><ul><ul><ul><li>Institutionalize stakeholder interests </li></ul></ul></ul><ul><ul><ul><li>Voluntarily created by owners </li></ul></ul></ul><ul><li>Create additional rights for shareholders to take other stakeholders and the environment into account </li></ul>
    14. 14. Setting up a B Corp <ul><li>Amend your governing documents to redefine the best interests of the corporation to include other stakeholders. </li></ul><ul><li>B. Obtain board / governing body approval of your amended governing documents </li></ul><ul><li>C. Obtain shareholder / member / partner approval </li></ul><ul><li>D. File your amended articles with the Secretary of State </li></ul>
    15. 15. The L3C <ul><li>Vermont legislation created a Low Profit Limited Liability Corporation (like a B corp, not same) </li></ul><ul><li>Attracts capital from foundations and investors </li></ul><ul><li>Requires charitable/educational purpose </li></ul><ul><li>Main mission is not income or value increase </li></ul><ul><li>No politics allowed </li></ul><ul><li>Must identify itself as a L3C to investors </li></ul><ul><li>Can operate in any state; HQ must be in Vermont </li></ul>
    16. 16. L3C advantages <ul><li>Hybrids often cannot offer ROI sufficient for most investors...need 3(c) money to get started </li></ul><ul><li>Gives social entrepreneurs maximum flexibility </li></ul><ul><li>Allows for some private capital, some patient money (grants) and social investors who can take a a lower profit margin </li></ul><ul><li>Encourages PRI funds from foundations </li></ul>
    17. 17. L3C drawbacks <ul><li>Must be in Vermont - likely require some sort of legal HQ in Vermont and operations elsewhere </li></ul><ul><li>Pay Vermont state taxes </li></ul><ul><li>Liability laws and taxes may be more advantages in other states </li></ul><ul><li>May raise questions with donors, investors you have to answer in pitches </li></ul>
    18. 18. Louisiana State Office of Social Entrepreneurship <ul><li>New office; still figuring out its operations </li></ul><ul><li>Set up to encourage hybrids – businesses and/or NPOs that work across sectors for sustainability </li></ul><ul><li>Offers networking, training; no cash as yet </li></ul><ul><li>Helps with access to funds </li></ul><ul><li>Assembling a public-private social innovation fund </li></ul>
    19. 19. Hybrid Forms <ul><li>NPO converts to an FPO </li></ul><ul><li>NPO and FPO together </li></ul><ul><li>FPO operates as an L3C or similar low profit, high mission business </li></ul><ul><li>NPO creates an FPO - FPO funds the NPO </li></ul>
    20. 20. How to decide which form is best for your social venture <ul><li>The for-profit aspect of your organization should extend the NPO mission </li></ul><ul><li>Does creating a hybrid with a for-profit structure reduce the pressure to raise money? </li></ul><ul><li>The hybrid/for profit shouldn't require an expensive infrastructure </li></ul><ul><li>Financial failure of the FPO shouldn’t undermine the NPO mission </li></ul>
    21. 21. Play Rugby hybrid
    22. 22. Models and examples <ul><li>World of Good </li></ul><ul><li>The Body Shop </li></ul><ul><li>InTheStudio podcasting </li></ul><ul><li>Neuman’s Own </li></ul><ul><li>WorkingAssets/Credo Mobile </li></ul><ul><li>Play Rugby </li></ul><ul><li>Empowerment Group Gateway </li></ul><ul><li>Others – your experience </li></ul>
    23. 23. Getting started <ul><li>Due diligence: careful research </li></ul><ul><ul><li>What business will you be in </li></ul></ul><ul><ul><li>Who is your market </li></ul></ul><ul><ul><li>Where will your capital come from </li></ul></ul><ul><ul><li>How will you operate </li></ul></ul><ul><ul><li>Why is a hybrid ideal and not a SRC or NPO </li></ul></ul><ul><li>Talk to your donors/investors </li></ul><ul><li>Understand the law your are incorp under </li></ul><ul><li>Chose the best form for your venture </li></ul><ul><li>Work out the operational details </li></ul><ul><li>Write a business plan </li></ul><ul><li>Have an exit strategy </li></ul>
    24. 24. Where can the money come from <ul><li>Friends and family </li></ul><ul><li>SVN – Social Venture Network </li></ul><ul><li>Threshold </li></ul><ul><li>Investors Circle </li></ul><ul><li>Calvert Foundation Gift Share </li></ul><ul><li>Skoll Foundation </li></ul><ul><li>PRI money from large foundations </li></ul><ul><li>Corporations (entry money or buyout) </li></ul>
    25. 25. Your answer to the question yes or no?
    26. 26. Resources <ul><li>Social Investment Forum </li></ul><ul><li>Good money Directory </li></ul><ul><li>Community Re-investment Fund </li></ul><ul><li> </li></ul><ul><li>Innovation Exchange </li></ul>
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