Ownership Matters|Issue 5
How to Invest in Cooperatives
- The Power of Steward Ownership
- Greg Brodsky on How to Invest in Cooperatives (Part 1)
- Why (and What) You Need to Know about Donut Economics
- Launch of the Inclusive Capital Collective
- Collective Decision-Making Workshop (July 14)
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The Power of Steward Ownership
Back in 1978, the farmer-owners of Organically Grown Company (OGC), may have felt they were a little ahead of the market, enormous though it would soon become.
Setting up its first operations in Eugene, Oregon, the company succeeded and also evolved over the coming years, along with the emerging organic marketplace.
Beyond the market, the company also made a kind of internal progression: from its beginning as a farmer-owned non-profit co-op to a co-op business and then to an ESOP.
In 2018, the company — with about 250 employees — registered as a Benefit Corp and took yet another innovative step: it changed its co-op status, partly out of concern about being sold off and demutualized. They moved from being an S-corp+ ESOP to a perpetual purpose trust — a form of the wider model known as steward ownership.
Explains Derek Razo, a partner with Purpose Foundation U.S., “OGC is a logistics-heavy, intersectoral warehousing company — it’s the wholesaler that serves the food co-ops in the region.” He notes that their anxiety about being taken over was well-placed. “OGC bought out the 250 workers and the owners at a time when revenues were $250 million and growing.”
No longer technically a co-op, OGC nevertheless operates on principles very similar to those utilized by worker-owned businesses while going a step further. The stewardship trust model ensures that preserving the company’s original mission and economic independence are embedded in its legal and governmental DNA.
In fact, a steward trust company cannot be sold to outside interests and its voting rights are separate from its dividend rights.
“The steward ownership approach tries to widen the focus from simply a labor vs. management question to something closer to Elinor Ostrom’s vision of a successful interdependent commons,” points out Camille Canon, executive director at Purpose Foundation U.S. “While being very co-op-like in many ways, a steward ownership company is able to self-define their rules in close alignment with their culture and mission.”
Steward ownership and trust-owned businesses are very old ideas but today more familiar to Europeans than to most North Americans. (Amazingly, some 60% of Danish stock market companies today operate with steward ownership.)
Razo points out that last year’s Covid crisis also revealed something about the value of having these kinds of intermediary businesses which do not advantage any particular stakeholder while also offering a kind of rock-solid stability. “OGC’s grocery business last year was doing great, despite the pandemic, but their co-op farmers were struggling due to the difficult labor situation. So OGC was able to invent a zero-interest grants program to get everybody through this period.”
Note: We’ll be offering more coverage of this important ownership strategy in future issues.
Greg Brodsky on How to Invest in Cooperatives (Part 1)
The Number-One Inquiry We Get at Start.coop Is about Investment in Co-ops
Every week we hear from entrepreneurs asking, How can I raise needed funding for our cooperative? and we hear from investors asking, What does investing in cooperatives even look like, and how would I go about it?
Many of these entrepreneurs are struggling to grow and scale their businesses because the pool of available funding is much smaller than for traditionally-owned businesses. They often have a great concept and early customers eager to use their product or service but many lack the resources needed to move from prototype to full-scale development and bring their solution to market.
Meanwhile, there is a growing community of investors who care deeply about wealth inequality, and for whom investments in cooperatives could be a great fit.
These entrepreneurs and investors both deeply want to participate in the cooperative economy. Yet, often neither side has a clear picture of what investing in cooperatives actually looks like. We spend a lot of time trying to help entrepreneurs and investors better understand the potential of the cooperative economy and ease their entry into it.
This two-part series shares our best thinking to-date on the unique questions and challenges of investing in cooperatives.
Let’s start with the need for capital, i.e., “where’s the money?”
The Need for Capital and the Realities of Startup Financing
As documented by the Kauffman Foundation, between 90% and 95% of entrepreneurs require some amount of financing to start their businesses. But existing capital markets barely scratch the surface of the capital needed. While there’s a prevailing narrative in the entrepreneurship and investor communities that the majority of companies are funded by venture capital, in fact less than 1% of companies in the U.S. ever raise venture capital. For women entrepreneurs and people of color, the financing landscape is even bleaker, as only 2% of venture capital goes to women entrepreneurs, and only 1% to Black, Indigenous and People of Color (BIPOC). While bank loans are a great option for later stage companies, they only provide financing for around 18% of companies in the U.S., and again because of implicit bias, women- and BIPOC-led businesses have a harder time securing bank loans. Most notably, 81% of businesses never receive outside funding at all.
Some businesses may not need any outside funding either because their business model has low startup costs or because of the founder’s ability to draw on personal wealth and / or the wealth of friends and family. But for those who fall in neither of these two categories, options for outside capital are few and far between. The result? The vast majority of startup businesses get stuck, unfunded, in capital purgatory in what Kauffman has called the “debt-equity chasm,” where businesses are too early for debt, but often can’t find outside equity investors.
But we are getting ahead of ourselves, so let’s take a step back to understand how cooperative financing has developed.
Why (and What) You Need to Know about Donut Economics
There is at least one thing the pandemic has accomplished, says British economist Kate Raworth. It has unveiled the economy as it really is.
“Up until last year, the free market model worked as a great cover story,” she stated recently in an interview on David Bollier’ Frontiers of Commoning podcast.
“But now we see how the financial system pushes businesses to aim for monopoly and extraction. So many companies are caught in a trap of expectations and structure: they were designed to be extractive.”
Raworth is the author of Doughnut Economics (2018), a minor earthquake of a book which argues for a new view of the market, the state, and the commons.
The now-famous doughnut (in the U.K. spelling) is a visual framework for sustainable development which integrates two concepts: planetary limits (the outermost ring of the doughnut) and social foundations (healthcare, education, equity). A sustainable society inhabits the middle space — the doughnut itself — aiming to make sure no one falls into the hole.
The power of the graphic is in its ability to reframe problems in a variety of sectors — city planning, business, community-building, public policy — so as to focus on meeting the needs of people without overshooting Earth’s ecological limits nor undershooting societal requirements.
A growing list of cities have signed on with the doughnut framework and are proceeding with plans for implementation: Amsterdam, Brussels, and Copenhagen, among others. (You can view Raworth’s February 16 video meeting with city leaders from Amsterdam and Brussels here.)
“We’ve moved beyond merely imagining the new economy,” she states, “it’s on the way.”
The framework points to some powerful re-imagining of our current financial systems — from transactionalized to relationalized, as Raworth puts it. In her podcast interview, she adds, “What matters is not just the design of our businesses but also the design of their financing and governance. We want businesses designed to achieve double-digit cuts in carbon emissions and resource use, for example.”
The global community which sprang up two years ago to turn Raworth’s ideas into practice is called the Doughnut Economics Action Lab (DEAL). The DEAL team notes they have downscaled the Doughnut in order to turn it into a “City Portrait,” a tool for transforming cities.
The first version of the City Portrait methodology has been piloted in Philadelphia, Portland, and Amsterdam, with further iterations underway. In Birmingham U.K., the Doughnut team is collaborating with Civic Square to create a tool that works at the neighborhood level.
Raworth, it becomes clear, is that unusual academic who is all about making things happen in the real world. “I firmly believe 21st century economics is going to be practiced first — then theorized,” she tells David Bollier. She then adds with a laugh, “If it can work in practice, it can work in theory, right?”
Juneteenth Launch of the Inclusive Capital Collective (ICC) and Release of Black Paper #1
Amidst the pandemic, its economic impacts, and the racial reckoning now underway, a powerful and quiet revolution in real estate is happening.
It was visible on June 15, when the Inclusive Capital Collective sponsored its debut event (recorded video viewable here), showcasing BIPOC-led projects and organizations from Chicago, Atlanta, Ft. Myers, and Philadelphia. Partners with the ICC include the Surdna Foundation and Zebras Unite network.
This national network of independent loan, equity, and real estate funds, along with entrepreneur support groups, are building a shared infrastructure of capital innovation. The group has a goal of mobilizing $100 million in new capital, for which it is seeking community fund managers.
Why the emphasis on real estate? This sector, as the authors of the ICC’s new Black Paper 1.1 describe (downloadable here), is one in which the history of systemic racism (chronicled in this study of Chicago’s decades of legally enabled segregation, for example) still impacts both families and real estate entrepreneurs attempting to build community wealth
The authors powerfully quote scholar Keeanga-Yahmahtta Taylor here: “The real estate industry created the idea that Black homeowners posed a risk to the housing market and then profited from the financial tools promoted as mitigating that risk.”
The ICC is arguing for a new investment toolkit which includes patient equity, friendly debt, lines of credit, and loan guarantees, all tailored to shift power and capital in ways that overcome the famous “friends and family” racial funding gap.
Case studies in the first Black Paper include:
- Philly Rise/Black Squirrel Collective (Philadelphia): a comprehensive real estate accelerator providing Black developers access to a dedicated source of capital, access to affordable land bank properties, technical assistance, and connections to key public and private players in local development ecosystems.
- Chicago Trend Corporation (Chicago): a social enterprise which supplies data and market analytics, development facilitation services, and financing for acquiring shopping centers and other retail facilities in strategic locations.
- The Guild/Groundcover Fund (Atlanta): this fund uses a community-owned and community-governed model grounded in a Community Stewardship Trust (CST) which allows residents in the zipcode to invest even small amounts in order to participate in their neighbhorhood’s financial upside.
- SW Florida Impact Partners LLP (Ft. Myers, FL): a to-be-registered fund to provide catalytic early-in capital for anchor institutions, small businesses, commercial real estate, and mixed-income housing.
Among the strategies the ICC will be pursuing are:
- prioritizing affordable operating spaces,
- involving neighborhood leadership,
- providing key community goods,
- using infill development to create affordable rental/sale housing,
- creating ownership opportunities in commercial real estate, and
- connecting the group with resources (TA, financial literacy, grants).
July 14: Cooperative Decision-Making Workshop
Co-sponsored by Loomio and RoundSky Solutions, this interactive workshop takes participants from all kinds of mission-driven organizations “through a decision-making framework (Integrative Consent) that integrates the best parts of collective decision-making processes for meaningful participation.”
The result: better collective decision-making in remote and in-person meetings, as well as in asynchronous decision-making.
Note: the workshop has an early bird price until July 3 (International Coop Day) of $50. Full price thereafter: $75.
More information and registration here.
Coming in Issue 6, July 13
- Fund Profile: Cooperative Fund of New England (CFNE)
- Break Room: Joseph Cureton of Obran
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