Traditionally, business organizations tended to be divided into two, nonoverlapping segments: for-profit or nonprofit. If you had a social mission — charitable, educational etc. — you organized as a nonprofit. If you had a commercial purpose, you formed a for-profit company. Funding approaches for each were likewise separate and distinct.
In recent years, however, these lines have blurred. From commercial organizations that also have a social mission, like Ben & Jerry’s or Bert’s Bees, to various forms of cross-sector investment like venture philanthropy, the ecosystem has diversified — there are now more options than ever.
Of course, this isn’t entirely new — cooperatives, and community development corporations have long mixed impact and commerce. However, recent legal and financial infrastructure options have softened the formerly hard line between for-profit and nonprofit, increasing the number and types of these organizations in the process.
B-Corp Certification
The B-Corp certification was established in 2006 by three friends who created B-Lab based on their belief that business could be a force for good by committing to a degree of social and environmental impact. Today, that legally recognized structure has led to more than 9,000 certified B-Corps worldwide.
[Note: a “beneficial corporation” is the legal structure that followed the creation of the B-Corp certification. The certification is separate and voluntary.]
Overall, this hybrid approach has made it easier for nonprofits to attract funding and bring products to market. For example, Shea Yelene was formed to improve the livelihood of women in Ghana by selling its shea butter products, thus achieving its mission in ways that were previously unavailable. As a nonprofit alone, they were unable to attract enough capital to bring their products to critical markets.
Venture Philanthropy
Another approach, known as “venture philanthropy,” blends investing with charitable goals. In 2015, the IRS confirmed that foundations can make mission-related investments (MRIs) even if returns are below market. Then, in 2016, it expanded the rules for program-related investments (PRIs) to cover things like equity, guarantees, and international deals. Together, these changes made the approach mainstream.
One example of venture philanthropy is The Cystic Fibrosis Foundation, whose nonprofit affiliate invested in Vertex to develop a CF drug. In 2014, it sold its royalty rights for $3.3 billion (yes, billion with a B!), giving the foundation huge new funds for more research.
What Does it All Mean?
These aren’t just arcane legal structures. The existence of these blended approaches means organizations — whether newly formed or existing — have more options with which to overcome the challenges or limitations of each form on its own.
Organizations with a social mission…
…might consider other options instead of, or in addition to, the traditional 501(c)(3) — particularly if they produce items to sell or have other forms of earned revenue through their mission’s work. Nonprofits often look for new funding because they lack a true capital market, and donor priorities can shift, making steady support hard to secure.
Organizations focused on disease-based missions…
…might embrace a venture philanthropy approach to fund research, especially for projects like drug development rather than basic science. While it may seem unusual to take a share of profits from that development, those profits can become an important source of funding for future research and discovery.
Organizations that are fundamentally for-profit…
…might wish to clearly signal their social values by becoming certified as a B-Corp. Also, registering as a “beneficial corporation” can provide better cover against activist investors who might challenge you for not maximizing financial returns.
Reflections
In short, both entrepreneurs and nonprofit leaders now have more choices than simply fitting into traditional nonprofit or for-profit models. Hybrid structures can open new pathways, helping organizations overcome funding limits while offering fresh strategies to tackle their biggest challenges.
