An increasing number of entrepreneurs are gravitating to a new model for achieving social change: the hybrid organization. By offering a way to achieve both social and economic goals, this model has sparked the creation of thousands of social enterprises around the world, forcing long-standing business perspectives and even legal systems to make way.
Julie Battilana, associate professor of business administration at the Harvard Business School, has documented the rise of these organizations through of a large, quantitative study of early-stage social entreprises. Between 2006 and 2011, Battilana and a team of researchers gathered information on 3,500 applicants to Echoing Green, the U.S.-based non-profit with a fellowship program for social entrepreneurs.
Devex Impact spoke with Battlilana about the key findings of her research, and the challenges hybrid organizations face as they grow.
For those who may not have encountered this model before, what is a hybrid organization?
Hybrid organizations transcend the boundaries between typical for-profit and not-for-profit organizations: They pursue a social mission while engaging in commercial activities in order to generate revenue to sustain their operations.
Caja Rural los Andes, a Bolivian microfinance organization, is a good example of a hybrid organization. In the early 1990s, Los Andes was one of the first microfinance organizations to transition to operating as a commercial organization.
Microfinance – providing loans to poor entrepreneurs who lack access to banking services – was initially regarded as a purely not-for-profit endeavor. Some microfinance organizations, however, departed from this traditional model and said that lending to the poor could be managed as a self-sustaining endeavor by charging interest rates to cover the cost of lending and insisting on loan repayment.
How do you define hybrid organizations in relation to other social enterprises?
The label “social enterprise” has been applied for at least 25 years to a range of organizations that pursue a social mission. The ubiquity of the label goes together with a lot of heterogeneity in terms of what is identified as a social enterprise.
Not all social enterprises are hybrid organizations. Some of them operate more like traditional for-profits, not-for-profits or public institutions. Those social enterprises that operate at the intersection of the for-profit and not-for-profit sector are [what we call] hybrid organizations because they combine aspects of for-profit and not-for-profit organizations and are therefore distinct from those traditional models.
What are some of the current trends emerging in the hybrid movement?
Research from a variety of sources has documented the ongoing spread of hybrid organizations across sectors and around the world.
Through the research that I conducted with Matthew Lee, a doctoral student at Harvard Business School, we observed the ever-growing number of social entrepreneurs creating hybrid organizations.
We looked at Echoing Green applicants between 2006 and 2011. Because of that organization’s broad definition of social entrepreneurship, many applied who were looking to establish more traditional non-profits. But, in that five-year time period, we found an increase in the number of those focused on creating hybrid organizations.
In Echoing Green’s pool of applicants for 2006, 63.2 percent proposed business models based entirely on donations, 33 percent offered models based on a mix of donations and generated revenue, and 3.9 percent proposed models meant to run entirely on self-generated revenue.
In 2011, 54.2 percent of applicants had proposed donation-only models, with 40.6 percent proposing a mixed model. And 5.2 percent intended to run entirely on revenue generated by the business. These entrepreneurs pursued a social mission and intended to fund their efforts through commercially generated revenues, rather than solely through charitable donations or grants.
Another trend we saw was hybrid organizations spreading to new sectors.
Historically, we have mostly seen hybrids in microcredit, healthcare, and education. But recently hybrid organizations have sprung up to address other issues including the environment, food security, economic development, governance, and housing. These new hybrids are finding homes in sectors like retail, information technology and even catering.
So what we see is really the rise of hybrids across sectors and across the world. And it’s not just our research: studies from other sources have found similar increases in the scale and scope of hybrid organizations.
What kind of impact can hybrid organizations have?
In the aftermath of the financial crisis, hybrid organizations have been a source of increased interest because they are a promising vehicle of both social and economic value creation.
I am not saying they are the solution to all of the issues we’re facing, but they are an alternative that complements existing organizational approaches. For this reason, it is worth thinking about how we can create the type of ecosystem that will enable them to flourish.
What are some of the challenges facing hybrid organizations?
These organizations have to walk a very fine line. If they lose sight of their social mission, they fail. And if they do not generate enough revenue to sustain their operations, they fail as well.
A number of hybrid organizations, for instance, have been criticized for prioritizing financial gains at the expense of their social mission, what is called “mission drift.”
That type of criticism raises the question: Can these organizations sustain their hybrid nature over time, or will they slowly evolve to become more typical for-profit or not-for-profit organizations? In other words, we need to better understand the conditions under which these organizations can maintain their hybrid nature over time.
What other challenges do you see on the horizon for hybrid organizations?
First, the legal environment is still structured around the distinction between for-profit and not-for-profit organizations. This presents hybrid entrepreneurs with a difficult decision when it comes to incorporating their organization, as the existing options do not fit their hybrid approach. This is slowly changing, however.
In the U.S., there is new legislation to recognize, for example, Benefit Corporations. In the U.K., hybrid organizations can register as a Community Interest Corporation. And a number of other countries are thinking about new legal statuses to accommodate these new hybrid forms, because they are seen as having an increasingly important role.
Second, hybrids face managerial challenges in the tension of walking this fine line. Leaders have to answer tough questions, like: How will we stay true to our social mission while generating enough revenues to sustain our operations? Who should we hire, and how can we socialize our new recruits into the hybrid culture of the organization?
Where do hybrid organizations find their start-up capital?
It can be a challenge. The business and the not-for-profit sectors both have their own financial infrastructure for funding new ventures.
Traditional for-profit entrepreneurs can finance their organizations through debt, equity, or a combination of both. They often benefit from venture capital funds, which specialize in particular industries and provide not only capital but also expert strategic advice. Traditional not-for-profits benefit from an existing financial infrastructure in which foundations and venture philanthropists play a key role.
For the hybrid, they are not the typical for-profit or not-for-profit, so where are they going to find funding?
We hear a lot about the rise of social impact investing and how social impact investors are the ones who should be interested in funding these hybrid organizations. Some reports have estimated that more than 500 billion dollars will be going to impact investing over the next ten years, which is really great news.
But it’s still the beginning of this movement. Both impact investors and social entrepreneurs have expressed frustration with the deal-making process. The hybrids are not getting the funding they need, and the investors are not yet finding the deals they want. So it’s still early.
Once we better understand the types of capital that is most useful to hybrid entrepreneurs at different stages in the lifecycle of their organization, we will have more answers to help nurture this field over the next few years.
How do hybrid organizations measure their performance?
This question brings up the long-standing debate over how to measure social performance. Are we measuring it in a broad enough way? Are we being too narrow?
These are questions that people in the not-for-profit sector have been trying to address over the past decades. Now corporations in the for-profit sector are increasingly involved in that debate, trying to figure out how to measure social and environmental performance as we move to the model of more sustainable corporations. Hybrids are not an exception.
I think the Sustainability Accounting Standards Board is making progress very quickly in this area. The organization was created to promote a single reporting system in the U.S. that includes not only financial but also social and environmental measures.
It’s an exciting moment. We have been talking about impact measurement for a long time, and we are getting closer to having those standards in place.
Is the hybrid model an ideal that other organztaions should strive for?
I don’t think hybrids should replace every organization. I am not in any way arguing for the commercialization of the not-for-profit sector; some not-for-profit organizations that depend on charitable donations play a very important role at the societal level, and we should protect that.
But more and more people are creating hybrid organizations, so we should learn from them and seek how to support them as a way to create both economic and social value.
Join Devex, the largest online community for international development, to network with peers, discover talent and forge new partnerships - it’s free! Then sign up for the Devex Impact newsletter to receive cutting-edge news and analysis every month on the intersection of business and development.