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Switching Things Up: New Corporate Structures
Last month, the Stanford Social Innovation Review published “In Search of the Hybrid Ideal,” co-authored by Echoing Green and Harvard Business School researchers Julie Battilana and Matthew Lee. The article details the rise and challenges of hybrid social enterprises that combines aspects of nonprofits and for-profits. The post below expands on that article, which was the first large-scale, quantitative study of emerging social entrepreneurs.
We’ve seen an emerging trend with social enterprises—testing out business models. Balancing the art of doing good and doing well, social enterprises don’t always fit into either a nonprofit or for-profit box. Hybrid models such as Low-Profit Limited Liability Corporations (L3C), Benefit Corporations, Community Interest Companies (CIC, UK based), and Flexible Purpose Corporations (FPC) offer some respite from the traditional corporate structures, but even these may be one of several structures an organization claims over time.
One transition we’re starting to see is organizations beginning as nonprofits then switching to a hybrid or for-profit structure. When an entrepreneur is just starting out, the economic benefits of being a nonprofit such as lower-cost resources, volunteer support, and donated supplies can be crucial for translating her idea into a functioning organization and validating elements of a business model. Moreover, the entrepreneur has the space to innovate without the pressure to meet a capital return.
When an entrepreneur has established her value chain and laid the foundation of her organization, the switch to a hybrid or for-profit structure becomes appealing. Not only does a new corporate structure allow her to tap different funding sources, but she can also engage in revenue sharing, provide competitive compensation, and expand her distribution networks. Read: She can take her idea to scale.
Echoing Green Fellow organization Embrace started out as a nonprofit organization, establishing product viability. When they began to scale, they realized growing into a hybrid organization was necessary and allowed them to take on investment capital. Embrace aims to address the infant mortality rate in India caused by hypothermia. They developed and now produce safe, low-cost Infant Warmers for populations in need. The hybrid structure consists of a nonprofit “dedicated to improving health in developing countries through access to innovative technologies, educational services, and advocacy.” Concurrently the related for-profit social enterprise, Embrace Innovations, conducts research and development on maternal and child health innovations and then manufactures, distributes, and sells those products in emerging markets.
There can be challenges with this model, most notably the issue of governance. Moreover, incentives can change as corporate structures shift, which could refocus the approach an organization takes. However, even with the many challenges and nuances that come with every stage of growth, this approach of testing and switching has some credibility.
Entrepreneurs face unequal challenges even before getting in an investor's door. Data illustrates disparities in the social innovation sector.
Identifying key trends affecting today's social entrepreneurs will help build out critical support.