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HYBRID FOR-PROFIT HYBRID FOR-PROFIT AND NON-PROFIT AND NON-PROFIT MODELS MODELS Blended Value for Social Blended Value for Social Change Change Dr. Patrick O’Heffernan Dr. Patrick O’Heffernan InTheStudio Productions InTheStudio Productions www.inthepodstudio.com www.inthepodstudio.com
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Ges Powerpoint

Jan 13, 2015

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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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Page 1: Ges Powerpoint

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

MODELSMODELS

Blended Value for Social Blended Value for Social ChangeChange

Dr. Patrick O’HeffernanDr. Patrick O’Heffernan

InTheStudio ProductionsInTheStudio Productionswww.inthepodstudio.comwww.inthepodstudio.com

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InTheStudio ProductionsInTheStudio Productions

• Podcasting for social entrepreneurs Podcasting for social entrepreneurs and progressive organizationsand progressive organizations

• Reach audiences that are too busy to Reach audiences that are too busy to read or watchread or watch

• FoundationsFoundations• Linked with my blog on Linked with my blog on socialedge.orgsocialedge.org

• Conference podcastsConference podcasts• Top podcasts on iTunes government Top podcasts on iTunes government and NPO and NPO

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The hybrid’s The hybrid’s dilemmadilemma

Question now, answer Question now, answer laterlater

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What is a hybrid?What is a hybrid?

A hybrid organization A hybrid organization tightly integrates a non-tightly integrates a non-profit (NPO) and a for-profit (NPO) and a for-

profit (FP) unit into one profit (FP) unit into one organization. (Virtue organization. (Virtue

Ventures)…Ventures)…but this covers but this covers a lot of ground and there a lot of ground and there

is no agreement.is no agreement.

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The Mission Spectrum The Mission Spectrum

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How NPOs and FPOs How NPOs and FPOs differdiffer

• A FPO seeks profit and pays taxes on its A FPO seeks profit and pays taxes on its profit. profit.

• A NPO operates for social good. It does not A NPO operates for social good. It does not pay taxespay taxes

• NPO’s can and do make a profit, but.... NPO’s can and do make a profit, but.... • FPOs can do good, but they must profit FPOs can do good, but they must profit eventually.eventually.

• When a FPO goes out of business, its assets When a FPO goes out of business, its assets are distributed to the owners/shareholders. are distributed to the owners/shareholders.

• When a NPO goes out of business, its assets When a NPO goes out of business, its assets must be given to another nonprofit. must be given to another nonprofit.

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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 Good)(World of Good)

• Socially responsible business Socially responsible business (Pete’s Coffee)(Pete’s Coffee)

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

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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•Amanco (Nueva Group)Amanco (Nueva Group)•GreenWorks division of GreenWorks division of Clorox Clorox

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Creating your hybridCreating your hybrid

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Advantages of hybridsAdvantages of hybrids(with majority FPO income)(with majority FPO income)

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

• Never have to beg for money (well, almost Never have to beg for money (well, almost never)never)

• Freedom from funding constraints - no Freedom from funding constraints - no tied grantstied grants

• Ability to plow profits back into the Ability to plow profits back into the missionmission

• Ability to pay real salaries and benefitsAbility to pay real salaries and benefits• Ability to access private capital – much Ability to access private capital – much more plentiful than grantsmore plentiful than grants

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Drawbacks of a hybrid(relying on majority FPO income)

• Competition is not in most NPO Competition is not in most NPO leaders bloodleaders blood

• Skillsets and mindsets are very Skillsets and mindsets are very differentdifferent

• Pay taxes on profit incomePay taxes on profit income• Mission can take over the business Mission can take over the business and put it out of businessand put it out of business

• Non-hybri firms can enter the same Non-hybri firms can enter the same business and underprice and out business and underprice and out compete youcompete you

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One model to considerOne model to consider

• Launch with NPO/F&F funds in a B-Launch with NPO/F&F funds in a B-corp/L3Ccorp/L3C

• Prove concept, build marketProve concept, build market• Obtain FPO investors for expansionObtain FPO investors for expansion• Continue operations with FPO Continue operations with FPO revenue, new technology, new marketsrevenue, new technology, new markets

• Pay taxes, dividends, use tax Pay taxes, dividends, use tax breaks, creditsbreaks, credits

• Use NPO funds for non rev projects Use NPO funds for non rev projects • Bank FPO funds for reservesBank FPO funds for reserves

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B CorpB 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

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Setting up a B CorpSetting 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

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The L3C The L3C

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

• Attracts capital from foundations and Attracts capital from foundations and investorsinvestors

• Requires charitable/educational purposeRequires charitable/educational purpose• Main mission is not income or value increase mission is not income or value increase• No politics allowedNo politics allowed• Must identify itself as a L3C to investorsMust identify itself as a L3C to investors• Can operate in any state; HQ must be in Can operate in any state; HQ must be in VermontVermont

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L3C advantagesL3C advantages

• Hybrids often cannot offer ROI Hybrids often cannot offer ROI sufficient for most investors...need sufficient for most investors...need 3(c) money to get started3(c) money to get started

• Gives social entrepreneurs maximum Gives social entrepreneurs maximum flexibilityflexibility

• 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 foundationsEncourages PRI funds from foundations

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L3C drawbacksL3C drawbacks

• Must be in Vermont - likely Must be in Vermont - likely require some sort of legal HQ in require some sort of legal HQ in Vermont and operations elsewhereVermont and operations elsewhere

• Pay Vermont state taxesPay Vermont state taxes• Liability laws and taxes may be Liability laws and taxes may be more advantages in other statesmore advantages in other states

• May raise questions with donors, May raise questions with donors, investors you have to answer in investors you have to answer in pitchespitches

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Louisiana State Office Louisiana State Office of Social Entrepreneurshipof Social Entrepreneurship• New office; still figuring out its New office; still figuring out its operationsoperations

• Set up to encourage hybrids – Set up to encourage hybrids – businesses and/or NPOs that work businesses and/or NPOs that work across sectors for sustainabilityacross sectors for sustainability

• Offers networking, training; no cash Offers networking, training; no cash as yetas yet

• Helps with access to fundsHelps with access to funds• Assembling a public-private social Assembling a public-private social innovation fundinnovation fund

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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 FPO operates as an L3C or similar low profit, high similar low profit, high mission businessmission business

• NPO creates an FPO - FPO funds NPO creates an FPO - FPO funds the NPOthe NPO

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How to decide which How to decide which form is best for your form is best for your

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

• Does creating a hybrid with a for-Does creating a hybrid with a for-profit structure reduce the pressure profit structure reduce the pressure to raise money?to raise money?

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

• Financial failure of the FPO Financial failure of the FPO shouldn’t undermine the NPO missionshouldn’t undermine the NPO mission

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Play Rugby hybrid Play Rugby hybrid

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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

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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 donors/investorsTalk to your donors/investors• Understand the law your are incorp Understand the law your are incorp underunder

• Chose the best form for your ventureChose the best form for your venture• Work out the operational detailsWork out the operational details• Write a business planWrite a business plan• Have an exit strategyHave an exit strategy

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Where can the money Where can the money come fromcome from

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

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Your answer to the Your answer to the questionquestion

yes or no?yes or no?

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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/directry.htmhttp://www.goodmoney.com/directry.htm

• Community Re-investment FundCommunity Re-investment Fundhttp://www.crfusa.com/http://www.crfusa.com/socialinvestors/Pages/socialinvestors/Pages/ListofSocialInvestors.aspxListofSocialInvestors.aspx

Innovation Exchange Innovation Exchange http://innovation-exchange.org/about/http://innovation-exchange.org/about/social-investors/social-investors/