Hybrid Social Enterprise Model Not a Panacea

While hybrid social enterprises that marry a profit-making business to a nonprofit organization have become more common over the past decade, the model is not without its problems, the New York Times reports.

In some ventures, the need to generate returns for investors overwhelms the social mission, while in others the business falters and cannot support the nonprofit. Indeed, in the last two years several such ventures have broken up or been dissolved. After the commercial unit of World of Good, Inc., a collective established in 2004 to help connect artisans in the developing world to major retailers, was bought by eBay, its nonprofit arm struggled to stand on its own. Another hybrid, microgiving site GlobalGiving, found it nearly impossible to "cash out" of ManyFutures, a profit-making venture created by its founders to market the site's technology — a market failure that ultimately cost GlobalGiving's founders most of their net worth.

Concerns about the hybrid model surfaced in a public way earlier this year when Unitus, an award-winning nonprofit that helped commercialize the microfinance industry through its profit-making venture capital arm, announced it was letting go nearly all its employees and would no longer accept donations. The perception that the venture capital arm had benefited at the expense of its nonprofit partner was exacerbated by the disclosure that the former had invested in several microfinance banks that were poised to go public, generating huge returns for investors, some of whom were Unitus board members.

Indeed, investors in such models have voiced concerns that gifts made for public benefit purposes might end up profiting individuals. To address those kinds of concerns, newer models are evolving, including so-called LC3 companies, which can raise money from traditional capital markets but put social benefit ahead of profit, and B Corporations, which are certified as such based on their ability to demonstrate that they produce social benefits in addition to profit.

Still, if neither partner is achieving its goals, the logic of such arrangements can break down. "These tiered capital structures where you have some mission-oriented capital combined with commercial capital can be challenging," said Laura Callanan, a consultant in the social sector office of McKinsey & Company. "When everything is going well, everyone is getting along and interests are aligned. But when financial challenges hit, the fact that there are different objectives creates questions about how the pain is shared."

Stephanie Strom. "Hybrid Model for Nonprofits Hits Snags." New York Times 10/25/2010.