How do you prove to stakeholders and the community that your organization cares about the impact of it has on society? If you’re Kickstarter, you re-organize as a Benefit Corporation. This and other types of “hybrid organizations” have been around for several years, offering for-profit organizations the opportunity to declare their commitment to social and environmental impact without sacrificing their ability to get traditional financing. Although they don’t get the tax benefits offered to traditional nonprofits, hybrid organizations attract customers and private equity funders that want to help further the organization’s socially-minded mission. With hybrid organizations, social entrepreneurs are able to enter the nonprofit space without the restrictions imposed on traditional nonprofits.
While some nonprofits might be concerned about increased competition for donors’ attention, hybrid organizations offer more opportunities for collaboration in order to achieve big community impact. There is still a distinct place for public nonprofit organizations, which are controlled by an independent group of community members that must follow strict rules about the use of funds and who benefits. However, a global economy has created a greater desire to produce global impact in a timely manner, which often requires significant funding and fewer restrictions on how change is structured. The current Kickstarter structure doesn’t qualify as a nonprofit, but it provides a much-needed avenue to help entrepreneurs around the world vet new ideas and succeed. The social impact is there, but the model would not work easily as a typical nonprofit organization.
The idea that alleviating societal problems requires commitments from nonprofits, government and the community is not new, but it’s changing. Grants, donations and earned income models have helped nonprofits achieve great impact for many years, and new financing mechanisms are emerging that look a lot more like some hybrid models. Social impact bonds, also known as Pay for Success programs, are a relatively new option where private investors provide initial funding for a nonprofit project and are repaid by a government entity if the project achieves certain agreed-upon outcomes. In this type of structure, the government is only paying for projects that successfully alleviate societal problems. In contrast, most current government grants pay nonprofits based on expenses incurred and may stop funding if outcomes aren’t as expected. Some grantors require nonprofits to have a proven history of success before they’ll provide funding, which makes it difficult for nonprofits with a new program activity to get initial funding. Social impact bonds help facilitate funding in a manner similar to venture capital for private companies since the initial investor will be repaid if the project is a success.
Nonprofits should always consider innovative ways to generate funding for mission-driven ideas. However, not all activities will fall within the boundaries of nonprofit regulations. In those situations, it may make sense to use a hybrid organization to perform activities a nonprofit cannot. Ultimately, the socially-minded community should not consider each other as competitors, but focus on working together to create the greatest impact.
