Hybrid Organizations...Applicable Just In Theory?

As the authors, Chertok, Hamaoui and Jamison of The Funding Gap explain, creating and funding hybrid enterprises can be complicated. A hybrid organization is defined in The Funding Gap as, “…a hybrid structure consisting of two distinct but related organizations – one a for-profit and the other a nonprofit – with closely related missions and overlapping operations.” The allure of hybrid organizations is simple. The nonprofit is able to solicit donations and grant funding, while the for-profit entity can attract investors. Hybrids are especially helpful, at least in theory, for nonprofits facing difficulty in maintaining or increasing funding, especially during periods of economic uncertainty. Stephanie Strom in the New York Times article, “Hybrid Model for Nonprofits Hit Snag,” writes, “It is virtually impossible to grow a social enterprise in any significant way relying wholly on donated money, earned revenue and debt financing, which are the only sources of financing available to nonprofits. These hybrid structures allow social enterprises to tap conventional investors interested in making profits while continuing to pursue their social missions.” The way in which hybrid organizations are intertwined however, is many and varied. The entities, because of tax and legal issues, are separate, but can function interdependently of each other in various degrees and can offer possibilities beyond what either entity could be on its own. As The Funding Gap explains, “The extent to which the two organizations share board members, staff, and offices can vary. And the way that for-profit’s earnings are shared with the nonprofit can take many forms, including dividends, royalties, license fees or donations.” However, a hybrid organization can be exceedingly complicated.

Hybrid organizations are time consuming, expensive and confusing. Imagine running a nonprofit or a business...now try to imagine running both things simultaneously. While navigating through confusing tax codes, recruiting and managing a Board of Directors, and writing complicated grants to foundations, imagine trying to raise capital, hire and manage staff and revise a business plan. Hybrid organizations are a wonderful concept, but the reality seems to be much different. Managing a hybrid organization requires a tremendous amount of due diligence. In February 2010, World of Good Inc., a hybrid organization that was praised in The Funding Gap was sold to Ebay for a $100,000 grant and its shares retired. World of Good Development, its nonprofit counterpart, is struggling to stay afloat and has even lost its name. Investors are notably concerned that individuals are profiting off of donations that were given for the intent of public benefit. “These tiered capital structures where you have some mission-oriented capital combined with commercial capital can be challenging. 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.” How do we merge two different models, one based in altruism and social value and the other driven by profit to create a hybrid that will not only work, but flourish? How do we combine the best parts of both models and alter the tax structure and legalities to bring about a sustainable business model rooted in a social mission? Hybrid organizations could be the answer to our driving urge to "do well and do good" as long as we take the time to structure it correctly. http://www.nytimes.com/2010/10/26/business/26hybrid.html?pagewanted=all