LAW AND SOCIAL ENTREPRENEURSHIP

BC LIBERALS PROPOSE ‘HYBRID’ SOCIAL ENTERPRISE COMPANIES WITH PROFIT CAP

The Campbell Liberals are mulling changes to the Business Corporations Act that would clear the way for the emergence of a new “hybrid” company focused on “community interest.”

Investor returns would be capped but companies in the sector would have a measure of sustainability in their business models which would presumably offset a lack of opportunity for windfall profits.

“Community interest companies would be incorporated with all the flexibility and certainty of regular companies, but under legislation that ensures they primarily benefit the community,” says a British Columbia government news release this week.

The model for this initiative comes from the United Kingdom, which has seen 4,200 social enterprise companies emerge since 2005 in response to amendments to its Companies Act.

Businesses could include family services, recycling programs, education programs – with limited investor returns that would distinguish them from the non-profits you typically find in these sectors.

A switch to this designation would be “irrevocable” according to the release, and the only way to end hybrid status would be to break up the company – and even then assets could not be distributed to shareholders.

Organizations that would have an interest in this model could include, and this is speculation at this point, the Vancouver Foundation, B.C. Centre for Social Enterprise, and the Vancity Community Foundation.

No special tax breaks are contemplated – and with the British Columbia small business tax dropping to zero next year, why would they?

The B.C. finance ministry has posted a ‘community interest company consultation’ link on its website, www.gov.bc.ca/fin and has set a December 1 deadline for responses.

(No disrespect to Finance Minister Colin Hansen, or Surrey-White Rock MLA Gordon Hogg who is the primary advocate for this idea, but I have to ask – am I alone in thinking this sounds more like an initiative of the B.C. New Democratic Party than one of the B.C. Liberal Party?)

By SCOTT SIMPSON 21 OCT 2010

from The Vancouver Sun

photo: kennymatic

HYBRID MODEL FOR NONPROFITS HIT SNAGS

Since its founding in 2003, the GlobalGiving Foundation has used its Web site to channel more than $30 million to charitable projects like buying seeds for farmers in Zimbabwe and feeding orphaned chimpanzees.

It also sent approximately $10 million in payments and loans that were never repaid to a company, ManyFutures Inc., that was largely owned by GlobalGiving’s founders, Mari Kuraishi and Dennis Whittle, former World Bank executives turned social entrepreneurs.

ManyFutures provided the technology platform on which the GlobalGiving Web site operated, and which it hoped to sell to others. But the company never broke even, even though it paid nothing for the platform, which had been donated to ManyFutures. In late 2008, GlobalGiving converted its loans into ownership of the company, paying Ms. Kuraishi and Mr. Whittle just $12,000 for their stakes.

They had invested $1.4 million. “I lost a large majority of my net worth doing this,” Mr. Whittle said. “It’s been personally very painful.”

GlobalGiving is one of the most prominent examples of the hybrid model of social enterprise that married a profit-making business to a nonprofit organization. Such dual-mission companies have sprouted over the last decade as a means of addressing the financing difficulties faced by many nonprofit groups, particularly as they need capital to expand. “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,” said Allen Bromberger, a lawyer with extensive experience in nonprofit financing. “These hybrid structures allow social enterprises to tap conventional investors interested in making profits while continuing to pursue their social missions.”

But like Dr. Dolittle’s pushmi-pullyu, the animal that had trouble moving because its two heads could not agree on a single direction, the hybrid model for nonprofits is proving problematic. On occasion, the need to generate returns for investors overwhelms the social mission. In other cases, the business falters altogether and cannot support the nonprofit.

Within the last two years, several ventures have split up or been dissolved. For example, World of Good’s commercial unit was bought by eBay, and its nonprofit arm is now struggling to stand on its own. Another prominent hybrid, Pura Vida Coffee, almost collapsed. And some, like GlobalGiving, demonstrate how hard it is to “cash out” of a venture that is not purely commercial. It wound up using foundation grants to prop up its losing profit-making partner.

Mr. Whittle said two things drove their decision to create a hybrid. “We looked at the philanthropy and didn’t think we could raise the capital required to support the technology, and we wanted to impose a brutal bottom-line discipline on what we were doing,” he said.

Investors have increasingly voiced concerns about hybrid groups. “This conjoined structure really has problems,” said Kevin Doyle Jones, a partner at Good Capital, one such investment firm. “Embedded in it is an inherent risk that individuals are profiting from donations that were made for public benefit.”

These entities, he cautioned, should avoid engaging in “private inurement,” or providing excessive benefit to a person who is close to or has a controlling interest in a nonprofit — though tax law says nothing about how much is too much.

Even newer models are evolving. Several states have passed legislation that permits the creation of so-called LC3 companies, which can raise money from traditional capital markets but place social benefit ahead of profit, and B Corporations, which are certified based on their ability to demonstrate that their business produces certain social goods. But Will Rosenzweig, a founder of the specialty tea company Republic of Tea and now the managing director of Physic Ventures, another firm that looks to invest in companies that bring social benefit, expressed skepticism of the new models. “I think you really have to make a choice and be a business or be a nonprofit,” he said. “It’s hard to be both.”

Concerns about the hybrid model surfaced in a very public way earlier this year when a tiny nonprofit in Seattle, Unitus, abruptly announced that it was letting go almost all of its employees and no longer accepting donations.

The award-winning nonprofit had helped commercialize the microfinance industry through its profit-making venture capital arm, which had made investments in several microfinance banks that were poised to go public, generating huge returns for investors, some of whom were Unitus board members.

There are, of course, examples of pushmi-pullyus whose two heads have learned to collaborate. In a structure reminiscent of mutual insurers of yore, members of the nonprofit Freelancers Union own the profit-making Freelancers Insurance Company, and both are affiliated with the charity Working Today. Board members of the nonprofit sit on the board of the profit-making company, and employees of both determine how expenses are allocated among the three organizations.

“It’s complicated but necessary,” said Sara Horowitz, who often jokes that she is the lowest-paid chief executive of an insurance company in America. “The structure ensures that there is no way that Freelancer’s Union could be sold for the benefit of any individuals or that the nonprofit could be abused for the benefit of the company.”

That allows Freelancers Insurance to focus on lowering the price of insurance than a conventional company could, she said.

For many hybrids, however, neither partner is achieving its mission and, as Unitus found, pulling them apart is tricky. “These tiered capital structures where you have some mission-oriented capital combined with commercial capital can be challenging,” said Laura Callanan, a consultant in McKinsey & Company’s social sector office. “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.”

When World of Good Inc. was sold to eBay and the GreaterGood Network this year, its nonprofit half was effectively orphaned, stripped even of its name.

World of Good Inc. had been established in 2004 to help connect small artisans around the world to major retailers. World of Good Development, its nonprofit partner, was charged with developing a free online tool to help calculate a fair wage and improve negotiating power with buyers.

“Those activities needed to be done in the public interest, and so we put that tool into open-source space,” said Priya Haji, chairwoman of the nonprofit board and a founder of the company.

Traditional venture capital supported World of Good Inc. The nonprofit held a 5 percent stake in it and was to receive 5 percent of its profits. “The nonprofit’s work never benefited the business,” Ms. Haji said.

Nor did the business’s operations ever benefit the nonprofit. “They were never profitable, so we did fund-raisers to support the organization,” said Holly Boyer, a board member of World of Good Development and its former executive director. “The business would host a fund-raiser and sell products where we were part of the event and would speak and talk about our work and get half of the proceeds from the sales.”

When World of Good Inc. was sold in February, the nonprofit got a $100,000 grant from eBay and its shares were retired. Ms. Boyer said the grant was intended to help the nonprofit rename itself, since eBay purchased the World of Good brand.

Whether the nonprofit got a fair deal for its stake in World of Good Inc. is unknown. “The transaction was private, so I’m not at liberty to talk about it,” Ms. Haji said.

Pura Vida Partners, the nonprofit partner of Pura Vida Coffee, also is changing its name, the result of a similar divorce imposed by Jeff Hussey, a no-nonsense investor who took control of the company in 2009, having sunk more than $3 million into it to keep it afloat.

“The business model was flawed,” Mr. Hussey said. “Whenever you have an organization of human beings with a blurry mission you get blurry results.”

Pura Vida was created in 1998 by John Sage and Chris Dearnley, former classmates at the Harvard Business School.

They set up a foundation, Pura Vida Partners, and gave it ownership of the company. But when the company needed money to grow, it could not get access to traditional lines of capital because of its ownership structure, a problem that led it to embark on a series of complex financial transactions involving wealthy private investors, including Mr. Hussey. “There was a lot of pretzel logic and gymnastics to create financing vehicles and structures that would let us continue to grow and continue our social mission,” Mr. Sage said.

Those transactions diluted the nonprofit’s stake in the company to 9 percent by 2009, when Mr. Hussey took over. “We could either agree to the dilution or lose the business — and all the funding streams for the nonprofit that had been established through the business,” Mr. Sage said.

Mr. Hussey purchased the nonprofit’s final shares for $200,000. “I overpaid,” he said. “I had to because of the laws governing nonprofits.”

Today, the Create Good Foundation, as the nonprofit will be known, is a stand-alone charity that supports clean water and economic development projects in the areas where the profit-making company, Pura Vida Create Good, buys its raw materials.

“Our goal now is to sell coffee, wine, tea, chocolate and other things and do it profitably,” Mr. Hussey said. “There’s nothing blurry about what we do and why we do it.”

from New York Times October 25, 2010

By STEPHANIE STROM

photo: SantiMB

SOCAP – DAY 2 RECAP

Day 2 at SOCAP… what a blur. We met so many amazing people and sat in on some of the best sessions of the conference. Below are some of the highlights from those sessions.

Seed Investing For Social EnterpriseRoss Baird, John Hardman, Kim Scheinberg, Tim Freundlich, Jessica Jackley

This panel was, by far, the most entertaining panel at SOCAP. I hate to say it, but you really had to be there to experience it… start saving your pennies for your ticket to SOCAP11 so you don’t miss out next year. Here are some of the best lines from the session in no particular order.

Village capital model uses the wisdom of a group of entrepreneurs to decide who to invest in. The HUB is launching a village capital fund called HUB Village Capital. It’s launching now with a cohort of 20 entrepreneurs at the HUB Bay Area. -Freundlich

Profounder is going live with 20 entrepreneurs looking to raise seed capital through private fundraising campings. The investors enter into a revenue sharing, not equity deal. Entrepreneurs looking to raise capital can do a private campaign for friends and family, or a campaign to the broader public. The unique twist on the public campaign is that once an investor makes his/her money back, the remaining proceeds go to a charity of his/her choosing.  - Jackley

I hate philanthropy.  - Scheinberg

Q: How does one get seed capital? A: Tell your story in a genuine way. -Jackley

If you are sitting in this room, you don’t need my money. -Scheinberg

Kiva was rejected twice by Echoing Green. I was rejected from Stanford Business School. You don’t need to be a part of any club to make it.  - Jackley

Not everyone thinks your kid is cute. Not everyone wants to steal your idea. – Scheinberg

Typically the relationship between the seed investor and the entrepreneur is like performing fellatio and having your hair grabbed. – Scheinberg (I think this was a comment on the power dynamics involved… but make of it what you will)

ReachScale Lunch Discussion – Corporations and Social Enterprises

David Wilcox curated a sharp group of people at this private lunch event. The topic was centered around the questions: How can large corporations and social enterprise work together? How can a partnership with between the two go beyond a transfer of money to assuage corporate guilt? Can real, equal partnerships exist? If so, what does that look like? This was by far the most engaging and intellectual discussion of the conference. I cannot do justice to the discussion here, but I will point you to a must read Harvard Business Review article on the Hybrid Value Chain by Ashoka.

The People Side of Triple Bottom Line – SJF Ventures, Endeavor, Better World Books

This panel discussed the bottom line that is all too often treated as an afterthought in triple bottom line accounting… people. The panelist discussed innovative ideas to engaging employees.

SJF Ventures presented highlights from an forthcoming report on the topic. One idea that caught my attention was Open Book Management.Open book management is a management stractegy based around transparency and accountablity from management to employees, whereby management discloses key financial metrics to the entire team so at they can rally around those goals and use them as a benchmark for success. For example, if your social enterprise needs to close $1.8 million of deals this year, that key metric is shared very publically with your employees. They use is as a goal and a constant benchmark for gauging success. Open book management is a simple, but often overlooked technique of creating employee buyin for the company’s goals. Combined with appropriate performance-based incentives, open book management can engage employees while motivating everybody to achieve stated goals.
Better World Books is the best example I’ve seen on employee engagement for two reasons: their approach to stock options and their response to the recession. Better World Books has instituted an incredibly generous stock option program: they give stock options to EVERY full time employee that has been there over a year. Currently 70% of their full time employees have options…. the other 30% are waiting to hit their one year anniversary. The fact that 30% of their full time work force has been employed less than a year shows that this type of employee engagement can lead to incredible growth in a social enterprise.

Better World Books was not immune to the recession, when it hit, their business suffered. Management had some difficult choices to make about how to cut costs in order to survive. like any business, they contemplated laying off employees, but in the end, they decided on a different approach. During the recession they cut everyone’s pay in order to avoid any layoffs, but they did this on a graduated basis, the highest paid managers took the biggest cut, and the lowest paid employees took the least cut. As business started picking back up, management decided to reinstate the lowest paid employees’ pay first, then gradually reinstate the better paid employees. The top levels of management didn’t reinstate their own pay until a year after the lowest employee’s pay was reinstated.  The outcome was a more loyal and engaged workforce.

These are but a few examples of some of the great ideas around fully engaging the most important resource any social enterprise has… its people. For more on employee engagement check out www.engageemployees.org

SOCAP – DAY 1 RECAP

The first day at SOCAP was impressive. In only its third year, SOCAP completely sold out. There are 1198 attendees and many of the session rooms were overflowing. The Mason Center is an incredible venue with views of the Golden Gate Bridge, the perfect spot for SOCAP.

What we were most excited about on Day 1 of SOCAP was Jay Gilbert’s of B Labs keynote speech to close the day. His theme was the absolute imperative to creating a distinct asset class for impact investment. This asset class must have a single standard of measuring impact for triple bottom line companies, and he noted that GIIRS has garnered widespread support from government, business, foundations, and funds to be THE standard by which we can measure impact. He announced that 25 GIIRS Pioneer Funds have committed to using GIIRS as their metrics for measuring impact. Gilbert closed with a call to action, “If you want to plan for a year invest in a company. If you want to plan for a decade invest in a fund. If you want to plan for a century invest in an asset class.”

But the most exciting from Gilbert was buried in the middle of his speech. As of October 3rd, only 3 business days after the Maryland Benefit Corporation statue went into effect, 11 companies have filed as Benefit Corporations! Out of those 11, B Labs had only had a conversation with one of them. So, clearly the demand for the Benefit Corporation exists. All we need to do is make the structures available and companies will respond.

The day started with a welcome from Kevin Jones and keynotes from Jacqueline Novogratz of Acumen Fund, Matt Flannery of Kiva and Kushal Chakrabarti of Vittana.

Novogratz was spreading her message of patient capital and the importance of measuring impact through PULSE. She spoke of the aid community looking to social enterprise to understand how to reform their efforts. She closed with a passionate call to action. We are the ones to create this movement that will bring equity to humanity.

Flannery, who started by celebrating the fact that Mohammed Yunus had made it on The Simpsons on Sunday night, was talking about the struggles that Kiva had starting a new category of online microlending. He ran into opposition from both the charity world and the business world. One side said Kiva is not charity, but the other side said that it’s not really business either. He had to navigate the legal landscape very carefully in order to get Kiva off the ground in the US, due to securities regulations.  Looking ahead, Kiva’s biggest challenge is not a struggle for capital or for lenders, but a fight for the most rare commodity – attention. How does Kiva – who gives loans to farmers in the developing world – compete with the massively popular online game Farmville – where users tend to their “virtual farm”.

Chakrabarti talked about the success of Vittana, an online micro-student lending site. It seeks to address the main obstacel for students to stay in school in developing countries – money. 70% of students that dropped out of school in Uganda dropped out due to the cost of school.

Those were the main highlights of Day 1. Stay tuned for Day 2 Coverage.