Why Hybrids?

We blogged in a previous post about the nonprofit vs. for-profit decision that social entrepreneurs make as they are starting up their new venture.  But even that difficult choice between nonprofit and for-profit is overly simplified.  On the spectrum of business models, what about everything in between?

Clark and Dees tackle the issue of hybrid legal forms in their post below, using the interesting example of Lifeline Energy (formerly the Freeplay Foundation).  Lifeline is a nonprofit that has shifted from one hybrid form (a nonprofit affiliate created by a for-profit consumer electronics company) to another (cutting all ties with its original for-profit partner, striking out on their own and launching their own for-profit subsidiary). It is a fascinating case study and a timely discussion as business models and hybrid forms are quickly become a hot topic in the field of social entrepreneurship.

Read below and join the conversation on the Social Edge now!

Business Models: Why Hybrids? by Clark & Dees

Last week, in its May 2011 issue, Inc. Magazine released a 26-page set of stories called “Start a Company. Save the World,” a special report on innovative business models invented by social entrepreneurs. At the bottom of the article, the authors laid out a “spectrum of business models,” namely:

  • Nonprofits
  • Nonprofits Earning Income
  • For-Profits with a Social Mission
  • B Corporations
  • Hybrids
  • Impact Investors

We want to use Inc.’s attention to legal forms as a ramp into our next blog theme: hybrid legal forms and why social entrepreneurs are turning to them.

The idea of a spectrum of business models is an old one, going back to the earliest academic work on social enterprise, such as Greg’s 1996 Harvard Business School note on “The Social Enterprise Spectrum: Philanthropy to Commerce.” He described the idea again in a more recent article “Social Ventures as Learning Laboratories:”

“It is useful to think of social venture business models as running along a spectrum, from fully reliant on philanthropy and government subsidy at one end to fully commercial and businesslike at the other. In recent years, many social entrepreneurs have been driving toward the commercial end of that spectrum to reduce their dependence on philanthropic or governmental subsidies. Commercial strategies are not optimal for all social ventures. The business model has to align with the strategy for social impact, but within that constraint, social entrepreneurs work to create sustainable, scalable ventures. For-profit ventures, social business ventures, and hybrid ventures that mix elements from the philanthropic and commercial worlds have become common.”

This pattern of mixing elements from the nonprofit and commercial worlds is the hallmark of the field of social entrepreneurship. As Greg notes in the article above, the deeper reason for this is the need for entrepreneurship that creates greater long-term value while drawing on fewer resources and generating fewer destructive consequences.

Social entrepreneurs must, however, choose a legal form in which to operate, and those options are currently still binary: nonprofit or for-profit. Even if you are building a hybrid form, these are the building blocks from which you must work. We see Inc.’s list of business models as a good simple list of the practical choices ventures have to make about how to work in each sector. If you’re nonprofit, what level of commitment to entrepreneurial practice or earned income activity do you have? If you’re for-profit, what level of commitment do you have to mission or social purpose? B Corporations are interesting as a relatively new 3rd party certification that documents a for-profit company’s intentions and actions around social purposes.

So, that leaves us with the last two categories Inc. mentions.  Impact Investing, we must respectfully insist, is not a social venture business model form. Impact investors must also choose from among the same forms as entrepreneurs do. But the emergence of Hybrids in this list is fascinating. As Inc. states:

“In the hybrid model, a nonprofit and a for-profit are linked. In some cases, one is a subsidiary of the other; in others, the two entities are bound by long-term contracts in which one entity fulfills a basic need for the other and vice versa.”

We’ve found several very interesting examples in our work of social entrepreneurs using hybrids for specific reasons. We think the most interesting question about hybrids is where and why the business models of each entity can be complemented by the other. What are the ties between the entities? Can, as some suggest, contractual relationships among entities be enough or when is ownership required?

We’re launching this new theme today with a story we think is illustrative of issues of control and value creation through hybrids. Lifeline Energy is an award-winning nonprofit social venture that produces and distributes lighting and communications products to the developing world. Our profile documents a huge business model change at the end of a 10-year hybrid partnership; namely, they exited the partnership and created their own subsidiary for-profit, of which they now own the majority share.

Read our profile and consider why this nonprofit jettisoned its unique business model and decided to create another to control its hybrid destiny:

  1. Did Lifeline need to create its own subsidiary? Why or why not?
  2. There are many nonprofits that distribute products to developing markets. What is unique or not about Lifeline and what lessons might there be for others distributing, for example, eyeglasses, irrigation pumps, hearing aids, or other BOP-designed products?
  3. What do you think the relationship and operational division of labor will look like between Lifeline and LTTL in 5-10 years? What might be the best outcomes?

Join the conversation on the Social Edge now!