Building a Non-Profit Organization The Right Way
Social entrepreneurs are today quite excited about this new trend of mixing mission and money within the organizations they run. You can often hear many of them proclaiming their intention to “do well by doing good,” implying that they will not only save the world but they will make money doing it. Behind the slogan, these entrepreneurs are experimenting with what we call “hybrid” organizations. In the for-profit world, new organizational creatures with descriptions like “social business” are now prioritizing social and environmental goals equally with financial performance. Among non-profits, social entrepreneurs are launching what are usually called “social enterprises” or income-generating businesses, like coffee shops, thrift stores, and bakeries, within non-profit organizations.
One the surface these hybrid organizations look very promising—an opportunity to have your cake and eat it too. The reality, however, is that these hybrid organizations come with substantial risks and consequences that are rarely discussed and that need to be carefully taken into consideration from the start.
As Founder and President of the Financial Policy Council for the last three years now, a New York not-for-profit corporation tax-exempt under Internal Revenue Code Section 501(c)(3), I am fully aware of the challenges a non-profit organization faces every day by needing to constantly raise money to keep afloat while providing value-added to its constituents. I am also very much aware of the risks taken in turning a non-profit into a profit type organization or even a hybrid organization.
The first, overarching risk is that people just don’t know what hybrids are. Is it a for-profit? Is it a non-profit? Is this about mission or money? This ambiguity doesn’t just affect potential backers who, for a start, are often not sure whether these organizations are a fit for venture capital or venture philanthropy. The ambiguity also affects board members who are not clear on whether their primary responsibility is to uphold mission or financial performance. Internally managers and staff face similar confusion and their decision-making often wavers or stagnates as a result.
The second risk is that these hybrids often have no clear systems of accountability. In traditional for-profits, everyone knows that profit maximization is the ultimate goal. In traditional non-profits, everyone knows that social impact is the ultimate goal. In hybrid organizations, these two goals are purportedly equal and yet they are often at odds. The magnitude of this risk is easily understood by looking at funding flows to hybrid organizations—they are virtually non-existent. Capital flows require transparency and certainty, particularly with regard to the organization’s priorities. For hybrids with two equal priorities and no transparent system to uphold them, the risk of misalignment and failure is extremely high. Consequently, capital avoids these type opportunities.
The third risk is that hybrids often have difficulty maximizing either social impact or financial sustainability. As the dichotomy between these two forces pulls social entrepreneurs in different directions, hybrid organizations often experience both internal and external pressures to lean more in one direction or the other. Non-profit social enterprises often ultimately choose social mission as their priority and find their enterprise running at a loss.
The fourth risk is that as hybrids face pressures to maintain financial sustainability it will come at the price of a long-term erosion of moral legitimacy. The net result is that hybrid organizations are not exactly the panacea they appear to be. Mixing mission and money is tricky business, requiring strong leadership to articulate and maintain clear priorities and accountability. The attraction to this type of organization is rooted in our hopes of find more financially sustainable ways of creating social and environmental impact. But as social entrepreneurs explore this intriguing territory, we must also beware of serious and substantial risks.
We at the Financial Policy Council have always been very adamant of being a hybrid organization and sticking rather to what we do best…. Empowering people by performing timely and accurate research on key policy issues and effectively marketing these findings to key policy makers, the nation’s news media, and the academic and policy communities at large
Come join us in being a part of decisions that are shaping the world’s future and helping us build the Financial Policy Council the right way.
