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Friday, March 21, 2008

For-Profit, Non-Profit or Both: The Funding Gap

By Rob Katz

HybridWhen talking with people inside the "base of the pyramid" (BoP) community, I often hear strong opinions about how BoP ventures should be set up.? Some people strongly support registering these ventures as for-profit entities, while others maintain that BoP activities can start out as non-profits and transition into formal businesses later.

There is no one answer, and this is not a straightforward discussion.? The legal and financial implications of a for-profit vs. non-profit organization are myriad, and I don't claim to understand them all by any means.?Thankfully, a new article in the Stanford Social Innovation Review explores the tension between for-profit, non-profit and hybrid structures.? The Funding Gap (PDF) - written by NextBillion allies Jeff Hammaoui, Eliot Jamison and Michael Chertok - explores the social enterprise capital market and how the BoP community can address recurring legal, financial and funding issues associated with it.

Of course, the authors aren't writing solely about BoP ventures - the funding gap applies to all social enterprises.? I found this to be a particularly strong piece (usually I have at least one complaint about journal articles) due to its strong analytical background and minimal reliance on anecdotal evidence.

It is also timely, at least for me.? As a new Acumen Fund employee, I have been participating in an extensive on-boarding process with various senior staff, during which the new hires learn what the various functions and people do around here.? Typical for any job, I suppose, but Acumen is deliberate and effective, and they deserve some credit for having a good HR system in place.

In any case, I ran across this article on the same day that Ann MacDougall gave her on-boarding presentation.? Ann is Acumen Fund's Chief Administrative Officer and General Counsel, which makes her responsible for everything from administration to finance to IT to legal - it's impressive what she manages to get done on a day-to-day basis.?

She's also responsible for managing Acumen Fund's legal/financial status.? Acumen Fund is a registered 501(c)3 non-profit in the United States; our India, Pakistan and East Africa offices are all different but affiliated.? According to Hammoui, Jamison and Chertok, this makes us a hybrid enterprise.

Then again, we're also a funder to other social/BoP enterprises, which may have their own non-traditional setup.? Even more, we partner with funders - like the Overseas Private Investment Corporation and the International Finance Corporation - whose status is non-traditional as well.? In short, it can be messy - making me appreciate the difficulty of Ann's job!

All this messiness is why this topic - legal and financial status - is so important.? I first heard about it at the StartingBloc Institute for Social Innovation, when Pace University's Jeff Trexler spoke about the legal difficulties facing social enterprise startups.? In the year since, not much has changed - but at least we're talking about it.

Back to the article - it's more than just talk.? The authors provide concrete recommendations - like setting up a social enterprise incubator - that will help our sector get over this hump.? Whether you're a social entrepreneur, BoP investor, non-profit guru or businessperson, check out this article.? These down and dirty details may not lead to easy stories, but they are critical pieces in the drive to create successful BoP ventures.

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