HYBRID FOR-PROFIT HYBRID FOR-PROFIT AND NON-PROFIT AND NON-PROFIT

MODELSMODELSBlended Value for Social ChangeBlended Value for Social Change

Patrick O’HeffernanPatrick O’HeffernanGlobal Engagement Conference, 2009Global Engagement Conference, 2009

Workshop Process Workshop Process

An exchange, An exchange, not a transmission, not a transmission,

of wisdom.of wisdom.

The hybrid’s The hybrid’s dilemmadilemma

Question now, answer laterQuestion now, answer later

What is a hybrid?What is a hybrid?A hybrid organization tightly A hybrid organization tightly integrates a non-profit (NPO) integrates a non-profit (NPO) and a for-profit (FP) unit into and a for-profit (FP) unit into

one organization. (Virtue one organization. (Virtue Ventures)…Ventures)…but this covers a but this covers a lot of ground and there is no lot of ground and there is no

agreement.agreement.

The Mission Spectrum The Mission Spectrum

How NPOs and FPOs How NPOs and FPOs differdiffer

• A FPO seeks profit for its owners/shareholders. The A FPO seeks profit for its owners/shareholders. The business pays taxes on its profit. business pays taxes on its profit.

• A NPO operates with a mission to benefit the A NPO operates with a mission to benefit the community. It does not pay taxes, but it must use community. It does not pay taxes, but it must use its funds for its mission. its funds for its mission.

• NPO’s can and do make a profit, but they must be NPO’s can and do make a profit, but they must be used for operations or granted to other NPOS. used for operations or granted to other NPOS.

• FPOs can work to benefit the community, but they FPOs can work to benefit the community, but they must make a profit eventually.must make a profit eventually.

• When a FPO goes out of business, its assets are When a FPO goes out of business, its assets are distributed to the owners/shareholders. When a distributed to the owners/shareholders. When a NPO goes out of business, its assets must be given NPO goes out of business, its assets must be given to another nonprofit. to another nonprofit.

Hybrids?Hybrids?

• Non-profit with income generating Non-profit with income generating activities activities (most hospitals)(most hospitals)

• A social enterprise - a business A social enterprise - a business created for a social purpose created for a social purpose (World of (World of Good)Good)

• Socially responsible business Socially responsible business (Green (Green Mountain Coffee)Mountain Coffee)

• Corporation practicing social Corporation practicing social responsibilityresponsibility (Marriot hotels) (Marriot hotels)

You tell meYou tell meare these hybrids?are these hybrids?

•Banco CompartamosBanco Compartamos•Ben & Jerry’s Ice Ben & Jerry’s Ice CreamCream

•Aveda cosmeticsAveda cosmetics•GreenWorks division GreenWorks division of Cloroxof Clorox

Creating your hybridCreating your hybrid

Advantages of hybridsAdvantages of hybrids

• Better financial stability – control your Better financial stability – control your destinydestiny

• Freedom from funding constraints - no tied Freedom from funding constraints - no tied grantsgrants

• Ability to plow profits back into the missionAbility to plow profits back into the mission• Ability to pay real salaries and benefitsAbility to pay real salaries and benefits• Ability to access private capital – much more Ability to access private capital – much more

plentiful than grantsplentiful than grants• Never have to beg for money (well, almost Never have to beg for money (well, almost

never)never)

Drawbacks of a hybridDrawbacks of a hybrid

• Competition is not in most NPO leaders Competition is not in most NPO leaders bloodblood

• Skillsets and mindsets are very differentSkillsets and mindsets are very different• Pay taxes on profit incomePay taxes on profit income• Mission can take over the business and Mission can take over the business and

go out of businessgo out of business• Non-hybrids can enter the same Non-hybrids can enter the same

business and underprice and business and underprice and outcompeteoutcompete

The L3C legal modelThe L3C legal model

• Vermont legislation creating a Low Profit Vermont legislation creating a Low Profit Limited Liability Corporation (like a B corp, Limited Liability Corporation (like a B corp, not same)not same)

• Attracts capital from foundations and investorsAttracts capital from foundations and investors• Requires charitable/educational purposeRequires charitable/educational purpose• Main mission is NOT income or value increaseMain mission is NOT income or value increase• No politics allowedNo politics allowed• Must identify itself as a L3cMust identify itself as a L3c• Can operate in any state; HQ must be in Can operate in any state; HQ must be in

VermontVermont

L3C continuedL3C continued

• Hybrids often cannot offer ROI Hybrids often cannot offer ROI sufficient for most investorssufficient for most investors

• Need 3(c) money to get startedNeed 3(c) money to get started• Allows for some private capital, some Allows for some private capital, some

patient money (grants) and social patient money (grants) and social investors who can take a a lower investors who can take a a lower profit marginprofit margin

• Encourages PRI funds from Encourages PRI funds from foundationsfoundations

Louisiana State Office Louisiana State Office of Social Entrepreneurshipof Social Entrepreneurship

• New office; still figuring out its operationsNew office; still figuring out its operations• Set up to encourage hybrids – businesses Set up to encourage hybrids – businesses

and/or NPOs that work across sectors for and/or NPOs that work across sectors for sustainabilitysustainability

• Offers networking, training; no cash as yetOffers networking, training; no cash as yet• Helps with access to fundsHelps with access to funds• Assembling a public-private social Assembling a public-private social

innovation fundinnovation fund

Hybrid FormsHybrid Forms

• NPO converts to an FPO NPO converts to an FPO • NPO and FPO together NPO and FPO together • FPO operates as an L3C or similar FPO operates as an L3C or similar

low profit, high mission businesslow profit, high mission business• NPO creates an FPO - FPO funds the NPO creates an FPO - FPO funds the

NPONPO

How to decide which How to decide which formform

• The for-profit aspect of your organization The for-profit aspect of your organization should extend the NPO mission should extend the NPO mission

• Creating a hybrid for a for profit structure Creating a hybrid for a for profit structure should reduce the pressure to raise should reduce the pressure to raise moneymoney

• The hybrid/for profit structure shouldn't The hybrid/for profit structure shouldn't require an expensive infrastructure require an expensive infrastructure

• Financial failure shouldn’t undermine the Financial failure shouldn’t undermine the NPO missionNPO mission

Models and examplesModels and examples

• World of GoodWorld of Good• The Body ShopThe Body Shop• InTheStudio podcastingInTheStudio podcasting• Neuman’s OwnNeuman’s Own• WorkingAssets/Credo MobileWorkingAssets/Credo Mobile• Play RugbyPlay Rugby• Empowerment Group GatewayEmpowerment Group Gateway• Others – your experienceOthers – your experience

Play Rugby hybrid Play Rugby hybrid

Getting startedGetting started• Due diligence: careful researchDue diligence: careful research

– What business will you be inWhat business will you be in– Who is your marketWho is your market– Where will your capital come fromWhere will your capital come from– How will you operateHow will you operate– Why is a hybrid ideal and not a SRC or NPOWhy is a hybrid ideal and not a SRC or NPO

• Talk to your donorsTalk to your donors• Understand the lawUnderstand the law• Chose the best formChose the best form• Work out the operational detailsWork out the operational details• Write a business planWrite a business plan

Where can the money Where can the money come fromcome from

• SVN – Social Venture NetworkSVN – Social Venture Network• Investors CircleInvestors Circle• Calvert Foundation Gift ShareCalvert Foundation Gift Share• Skoll FoundationSkoll Foundation• PRI money from large foundationsPRI money from large foundations• Friends and Family fundsFriends and Family funds• Corporations (entry money or Corporations (entry money or

buyout)buyout)

Your answer to the Your answer to the questionquestion

yes or no?yes or no?

ResourcesResources

• Social Investment Forum Social Investment Forum http://www.socialinvest.org/http://www.socialinvest.org/

• Good money Directory Good money Directory http://www.goodmoney.com/directryhttp://www.goodmoney.com/directry.htm.htm

• Community Re-investment FundCommunity Re-investment Fundhttp://www.crfusa.com/socialinvestorshttp://www.crfusa.com/socialinvestors/Pages/ListofSocialInvestors.aspx/Pages/ListofSocialInvestors.aspxInnovation Exchange Innovation Exchange

http://innovation-exchange.org/abouthttp://innovation-exchange.org/about/social-investors//social-investors/