In this #platformcoop model, the technology architecture is developed, funded, and deployed within the same legal vessel as that which processes, distributes, and monetizes the throughput data. The tech platform is owned by the same stakeholders as the community creating the content (data) flowing through it. This is the prevailing model for cooperative development. Members come together to create a cooperative platform (grocery co-op, housing co-op, freelance co-op, worker co-op, co-working co-op, etc.) for their collective needs. Members come together and they develop and own the key assets that enable their community to flourish and their needs to be met.
One key difference between traditional cooperatives that operate out of brick-and-mortar and #platformcoops is that #platformcoops generally do not own or create any assets that can readily serve as collateral for a loan. While grocery cooperatives, for example, can obtain debt financing secured by a building, land, or equipment, #platformcoops develop intangible intellectual property, which can be difficult to define, value, and collateralize. Further, secured debt is collateralized against an existing and identifiable piece of tangible property, whereas early stage investors are investing in little that already exists: just a founder’s vision, energy, and capacity to carry out a plan.
It can be difficult for #platformcoop founders to sell a vision to enough members on a #platformcoop idea that doesn’t yet exist to raise the sum of capital required to build the infrastructure. Conventional tech has solved this problem with venture capital (VC): big investments made on the basis of big ideas command big returns. Some pre-revenue VCs look to receive 10-50 times their original investment. Yet, 81% of start-ups go unserved by traditional capital markets.
Historically, cooperatives formed to meet the needs of members without any of the outside capital that had otherwise failed to create a functional market. Grocery co-ops often formed in food deserts, where corporate supermarkets saw little profit opportunity.
More recently, cooperatives started raising growth- or working capital by selling non-dilutive and non-voting shares of preferred stock. The universe of potential investors in this type of offering is admittedly small. It’s even smaller for a start-up cooperative with no operating history or track record of paying dividends.
So, can start-up #platformcoops try to raise VC capital?
My experience and observation suggest that traditional (and even many impact-oriented) VC shops are uncomfortable with the democratic nature of cooperatives and are reluctant to put substantial sums of capital at risk without seeing a straight line (lest the democracy bends a #platformcoop’s trajectory in a whimsical way) toward a profitable exit, usually from a wholesale liquidity event (but sometimes through a recapitalization).
Further, #platformcoop founders see alchemical magic in the harmony and synergy of various stakeholders contributing, using, and sharing in the benefits and surplus of their joint pursuit. Members see a community platform for creation, sharing, and sometimes monetizing and marketing their data or content. The theory goes that a platform designed by, for, and of members will best attract, serve, and retain those members, thereby creating a stickier relationship than traditional (and extractive) tech platforms. What inherent motivation does Facebook have to serve and retain a user if not for the attention and potential marketing opportunity to advertisers (and Russian bots)?
VCs see and want unfettered growth and then exit.
Some #platformcoops are founded on the belief that members ought to own and control the core assets on which it is based. Some even seek to preserve these core assets indefinitely, even into perpetuity. Some cooperatives operate on the belief that the fundamental purpose of key assets is not to liquidate for a profit (maximize liquidity value), but to ensure perpetual access (maximize use value). This is understandable; if a housing co-op is formed in a rapidly gentrifying area of a big city, the chief objective may not be to buy real estate low in order to sell high, but rather to remove the temptation (or even legal option) to sell the real estate so that it can be maintained as an affordable housing option for cohabitants.
So, if a #platformcoop builds assets it intends to preserve in perpetuity, how then could outside investors realize a rate of return?
I believe this #platformcoop model can offer quite attractive returns by or through:
- Offering a structured exit based on an aggregate cap or specific timeline (or a hybrid of cap and timeline) of profit distributions;
- Demand dividends;
- Dividends on stock;
- Prescribed formula for fluctuating price of preferred stock (which appears feasible under the Uniform Limited Cooperative Association Act);
- Permit lawful transfer of shares to third party purchasers;
- Convertible debt; and
- Warrants that re-create equity-like participation in a liquidity event, if the #platformcoop members vote to demutualize.
With the collision of stakeholder interests, certain species of integrated #platformcoops may be ill-suited to the raise the capital they need to scale and fulfill their purpose. In the next episode, I’ll discuss the “TechCo and Co-op Marriage” structure.