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19 August, 2015
Zubaan Books was in active discussion with an investor for infusion of capital. Zubaan, a stand-alone not-for-profit since its inception had recently created a for-profit with an aim to better monetize its publishing assets as well as attract funding to build better commercial capabilities with an aim to reduce dependence on grant-funding. Zubaan was put in touch with Social Syngery to seek SS's help in preparing a business plan. When this dialogue was forward to me, I drafted an email to be shared with Zubaan team for Zubaan to question the 'why' behind what it was planning to do.
The reason for putting this correspondence up on this website is that it has general relevance for other entities that are at a similar juncture. That is, not-for-profits looking to respond to the current uncertainty with regard to the availability of grant-funding in India.
The reason for asking the question is that creating hybrid structures is done more out of external prodding from investors rather than serious considerations that a hybrid structure can ensure better financial management. Since this latter perspective is missed out, hybrid structures are open to the risk of being poorly governed and financially managed, or of being hybrid in name only with two operating entities that operate under different terms of governance and organizational culture. In either case the original purpose of having a hybrid entity is defeated. The email was to bring to the table a few questions that would force Zubaan leadership to ask these questions to itself and be more sure-footed in its next steps.
Most of these observations are drawn from my observations during the work with VIKAS Centre for Development.
The underlying reasoning for having 2 separate entities needs to be probed still further as such a change is irreversible and unduly increases management complexity. More importantly, it can create two 'attitudes', two 'work cultures' and two 'value systems' in the same structure that are increasingly difficult to reconcile as time goes by. This kind of strategy will also put the leadership in a zone of decision-making which is not their area of comfort making it necessary for them to lean more on outsider-experts to make critical decisions. The risk with this is that these additional participants may not necessarily have the inclination to spend time & effort to understand the historical context of the work and develop the sensitivity to the work and people that the current leadership possesses today.
The conflicts that arise from such a situation either lead to dilution of mission or eventual separation of entities operating at best at an arms length. The additional increase in daily stress & complexity will be a given.
However, the need to find, create or convert existing intangible assets (brand, publishing list, focus on women, associations, the leadership temperament) into sustainable source of income is real and thus the need to infuse additional organizational capabilities.
Given these two aspects: the necessity to build the financial security versus known disadvantages of having two entities treated as strategic equals is equivalent to addressing the question: Is there a real necessity to have a for-profit? If yes, then should the for-profit be treated as a strategic equal to the trust or as a tactical asset?
[A strategic asset would mean that the for-profit will be allowed a fair degree of independence, may have a distinct and different governance and management philosophy than the trust. It may or may not align with the core ethos and orientation of the trust.
On the other hand, it turns out that the for-profit is a tactical asset then it means that it shares the governance philosophy of the trust and is really an instrument to further the aims of Zubaan.]
More specifically, the following criteria should be applied: Is there a real, measurable, certain & permanent gain in financial security by having another strategic entity? If these gains visibly exist and are material, are they material enough to counter the risk of diminution / dilution to the 'independent publisher's spirit' of Zubaan that can accompany such a strategic transformation of Zubaan?
To answer this question, we can consider the following sub-questions:
1. Are there specific gains to be had in acquiring new business in publishing from having a for-profit entity? Or, is it really the brand, history, and values that are behind 'Zubaan' that will continue to drive most of the business going forward?
2. One way of securing an income source in publishing would be through a partnership mode which is mentioned in the email below. The question is: Are those partners interested in the competency that 'Zubaan' represents or want Zubaan in a strictly for-profit format because a for-profit represents a more commercial orientation to a prospective partner?
2.1 If it is the former, then the need for a for-profit is not strategic in nature but at best there may be legal requirements of Trust Act, Company Law & Income Tax Act that may make it easier to form & operate a partnership. In this case the need for a for-profit is purely for transactional purposes, and hence, it need not be vested with dedicated team, management approach, and investments beyond what is really necessary.
2.2 On the other hand, if the partners want a strategic for-profit partner/investee then is Zubaan comfortable with getting into such a relationship? The interpretation from the email below is 'no'. In this case too a strategic need for a for-profit does not exist.
3. Coming to the consulting revenue stream, does such a stream need a strictly independent and differently managed for-profit? Essentially, the consulting stream is an effort at monetization of existing knowledge capital and credibility of Zubaan's talent pool and work till date. Thus, again the need for a separate entity can be for operational and transactional reason rather than for a strategic reason of getting into a new area by putting significant amount of resources behind a new venture.
4. Is there a strategic need for a for-profit entity for fund-raising? Yes, if risk capital has to be infused to meet the primary objective of Zubaan. Today, to meet the primary objective of Zubaan the alternatives are: a) exploring strategic partnership(s) to further publishing revenue stream; b) an incremental building of a consulting revenue stream using existing resources supplemented by resources on an as-is project basis thus minimizing the need for upfront investment; c) grant-funding to further overall mission / idea of Zubaan; d) and finally, the largest source of funding already exists within Zubaan --- its ability to increase the pricing and revisit its unit profitability.
If there is a gap in funding after these efforts are made, then the same should be plugged through revolving funds in form of returnable grant or soft loan. Risk capital is the least preferred option for Zubaan as it has had no institutional capability in dealing with for-profit investors, allocating risk capital and subsequently managing it with a strictly return-based inclination.
At this stage, from a purely fund-raising perspective, a for-profit structure should be used as legal vehicle and an instrument for financial management and should not feature as an inevitable element of Zubaan's business plan. A business plan should instead be made for Zubaan as an organic whole rather than as sum of two separate structures.
5. Is it really necessary to separate some activities into a for-profit structure? From a financial managementt perspective, it may help to have billing, invoicing & expense booking to happen in a separate structure. However, from a management control & operations perspective, it is not necessarily clear if there needs to be a clear-cut separation of some activities, human resources and managemen control.
Rather than take a firm decision right now, it is better to base it on actual learnings. That a commercial activity needs to managed from a non-commercial one there is no doubt. But this can also be accomplished under a single human resource management structure till the time the commercial activity really reaches a certain scale.
6. Finally, there is the fundamental question of Zubaan's fund absorption capacity. That is, how much money can it digest today without changing its core organizational philosophy? From an investor stand-point, the higher the fund absorption capacity the better it is. And if one does not exist, there is a tendency to push to create more even if not needed. It is upto Zubaan leadership if it is comfortable to upfront create a capacity to receive more funds, or adopt the financially conservative approach of taking strictly what is practical today and establish a channel to tap into for more funds in the future. If it is the former, then the need for a for-profit structure is strategic. If it is the latter, then the need is more tactical.
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