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EPISODE 0114 - MAR 16, 2021

Coops: The Next Generation

with Greg Brodsky and Jessica Mason
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Imagine if gig workers like rideshare drivers or grocery shoppers were compensated for their labor through ownership stakes in the Lyfts and Instacarts of the world. Imagine if companies distributed profits not just to founders and investors, but to their employees and customers. Start.coop is an accelerator for startups that are doing just this—reimagining concepts like scale, investment, and governance under a cooperative ownership structure, and trying to create a more equitable economic system in the process.

Transcript

(00:00:00) Broken By Design by Clip Art plays.

Shaun: (00:00:03) Welcome to REWORK, a podcast by Basecamp about the better way to work and run your business. I’m Shaun Hildner.

Wailin: (00:00:07) And I’m Wailin Wong. Last year on the show, we did an episode about a concept called Exit to Community which reimagines company ownership to include different groups of people that helped build a business. So instead of a small group of founders and investors having ownership and accruing most of the wealth that comes with that position, ownership in this case would be shared with workers or suppliers or even customers.

Shaun: (00:00:31) Today, we’re continuing that conversation about shared ownership by talking to the directors of an accelerator called Start.coop who support startups with cooperative ownership structures. And they’re exploring how concepts like scale, profitability, and exits start to look really different than what the startup world is used to.

Greg: I’m Greg Brodsky, I’m the founder and co-director of Start.coop. I found out about coops, because in my family, it’s the family business. So when I was growing up in Manchester, New Hampshire, my dad ran a carpet store. And when I was about seven years old, my father got together with about 10 other guys who ran carpet stores around the US. And they said, hey, you know, we’re all buying from the same manufacturers, we all have the same marketing challenges, operational expenses, there must be some economy of scale of working together. And so they didn’t realize it was called a cooperative, but that’s really what they were designing.

Wailin: (00:01:23) That group now has over 2000 stores in North America, and Greg’s dad is still running it. Greg has spent most of his career in the world of cooperatives, too. He helped create coops for independent bicycle stores and craft breweries, and he served on the board of a nonprofit that helps create cooperative businesses.

Greg: (00:01:40) We talk a lot about why there aren’t more cooperatives. And we really figured out that there’s three problems in the coop landscape. There’s a perception problem, that even though most people have heard the word cooperative, 86% of people can’t actually define what a cooperative is. There’s an entrepreneurial support problem, that for the entrepreneurs who want to create these companies, that they don’t necessarily have the supports of how to actually go out and do it. It doesn’t seem like a clear path. And then finally, there’s the financing problem. And so, about four years ago now, my father and I were talking and he said, you know, why don’t we just start an accelerator for coop stuff, the best entrepreneurs bring their ideas to life.

Wailin: (00:02:22) Start.coop launched in 2018. The following year, 2019, the inaugural cohort of five cooperative startups graduated from the accelerator program. That first year, Greg also met the person who would later come on board as a co-director of the accelerator.

Greg: (00:02:38) We were running the accelerator in the first year, and we were looking for someone to bring design thinking into the cohort. And so I reached out to our committee on LinkedIn and social media. And Jessica came back as a highly recommended person.

Jessica: (00:02:54) I’m Jessica Mason, I’m the co-director at Start.coop. So when Greg reached out on LinkedIn, I had no idea what a coop was. At the time, I had my own consulting studio, principally working with nonprofits and foundations. And when Greg reached out, I thought, sure, like I can extend my consulting into this realm, I can work with entrepreneurs.

(00:03:13) As I started to learn more and more about coops, I had a moment. At first I was like, Oh, that’s lovely, like, look at these nice little businesses. That’s great. But I didn’t understand the way they fit in our current economy and in our current kind of business ecosystem, and I didn’t understand the potential they had. And about halfway through our first cohort of the accelerator program, one of our entrepreneurs, he said, well, why aren’t you a coop? Why isn’t your business? Your consulting business? Why aren’t you a coop? I was immediately defensive. Well, because there are all these reasons. And the more I thought about it over the following weeks, the more I thought, there’s no good reason that I’m not a coop. It is an ownership model that is aligned with my values and aligned with what I want to bring to the world and the business I want to build. And the only reason was that I had never heard of coops before. And when I started my business, I went online, I went to Google and said, you know, how do you start a business and it said, first you register as an LLC, and so I registered as an LLC, and I never knew that incorporating as a cooperative or espousing the values of cooperatives was even an option.

(00:04:21) And now I’m a convert. Now, I believe deeply, deeply that cooperatives have the potential to offer an alternative to the way our economy works today, to offer an alternative to concentrated business ownership. I was a member of REI, but didn’t really think about REI as a coop, and I didn’t really know what coops were ,what that meant as a consumer buying from a coop, and I certainly didn’t know that there were other types of coops out there. The Associated Press as a coop. Cabot is a coop. Blue Diamond is a coop. Ocean Spray is a coop. You know credit unions operate under cooperative principles. These are businesses that are all around us.

Greg: (00:05:02) Coops can exist at any level of supply chain. So you can have a worker-owned company, you can have a consumer-owned company, you can have a small business-owned company.

(00:05:15) Ace Hardware is a coop of 4,000 hardware stores. They each own a piece of ACE. It can even happen at the farmer level. When Jessica was talking about Ocean Spray or Blue Diamond almond or Cabot cheese, that’s farmers owning the company.

(00:05:30) Forty Acre Coop was a graduate last year’s class. And they are a Black-owned women-led ag tech company owned by the farmers themselves. So they are growing and processing commercial hemp and CBD products.

(00:05:44) So you ask, what do these businesses have in common, right? Some people think well, coop is a sector, or it’s a business model. And the reality is what REI has in common, as a consumer-owned company in the outdoor sporting goods with Cabot cheese, which is a farmer-owned company in dairy. The only thing they have in common is the ownership model. Cooperative ownership is an ownership model, not a business model. It’s a model that distributes voting rights and profit share to their community. Right, rather than saying that all the profit share goes to this small subset of people and all decisions go to these people, we’re actually going to bring people into that sense of shared ownership through some level of decision making and some profit share.

Wailin: (00:06:29) How do you explain to folks who come from a tech background how cooperative ownership differs from joining a startup and getting equity in that startup.

Greg: (00:06:39) one of the reasons that we’re seeing such an increased interest in different forms of shared ownership right now is that everyone has seen a massive wealth inequality and even more massive racial wealth inequality in our country. The people who are benefiting from the wealth generated by the stock market, or those who can afford to angel invest or invest through venture capital are generally those who have already made a lot of money from their ownership in other businesses, right? That this cycle of I already own part of the business and that’s why I can afford to invest is what is perpetuating and speeding up the wealth inequality.

(00:07:14) And so recently, I will tell you, I talked to two entrepreneurs who want to invest in this new Equitable Economy Fund we’ve created. And I asked them why they wanted to invest. And they said, Well, I just sold my company and I benefited massively, my co-founder benefited massively, our investors benefited massively. Most of our workers they got a little bit, but they were not the main beneficiaries of the massive transfer of wealth that just happened.

(00:07:42) And so when we look at cooperative ownership versus traditional equity ownership, most of the time, in a startup, maybe you’re allocating 5%, 10% of employee stock options to your workers. For sure, if you get in early, you’re doing very well, if you come in much later, you’re getting very small slivers here. And what we’re saying is we’re flipping the entire paradigm, and saying that in our companies, actually 50, 60, 70, 80, 90% of the company should be owned by the community, whether that community is the workers, or the consumers, or the users of that platform.

(00:08:13) And so we actually think that a smaller amount needs to go to the investor. But really, the goal here is to share the wealth created by entrepreneurship. And so we’re seeing a ton of entrepreneurs who say, yes, I want to create a startup. But my goal is not just for me to get rich, I actually want to do this different form of leadership where part of my business objective is to share the wealth of the business that we create.

Jessica: (00:08:35) One of the questions in these companies, tech companies in particular, is who’s creating value? And when you think about some of the more recent IPOs, you think about DoorDash, or you think about Airbnb, you think about financially, who benefited most and most significantly from those IPOs and who was sort of proverbially left behind. There are clear groups of stakeholders who created value for these companies, but who weren’t compensated for that value in terms of ownership. So in the case of DoorDash, had their drivers been owners, even if only 20% of the company was set aside, that ownership stake was set aside for drivers, those drivers would have done incredibly well and would have benefited for the value that they created for this business at the point of IPO.

(00:09:28) But you can actually build that into your business right from the start. If you build your ownership model right from the start to think about and respect and compensate those who create value for your business. So in the case of Airbnb, that’s hosts, in DoorDash, it’s drivers Choose any tech company in the Valley or anywhere else in the US and there are communities who are creating value who are getting left out, and that deepens inequality and deepens inequities, and does so particularly for those who have been most marginalized by US systems and policies for hundreds of years.

Wailin: (00:10:01) That’s interesting, because it really seems to me to speak to the radical mindset shift that’s required when you think about a cooperative business, because these companies, if they decided to compensate their vast networks of delivery drivers, and the people kind of at the bottom of that pecking order, it’s like they would cease to exist. It’s like, that’s not how they were ever conceived and designed, right, as a business?

Jessica: (00:10:31) One of the things I think about is, oftentimes, when we talk about gig workers, what we hear from Uber, what we hear from Lyft, is, our business model won’t work if we pay them more. And so we can set that point aside, and you could say, what if you didn’t have to pay them more, but they actually held ownership? So you don’t have to pay them any more today, when and if you do well, they will be able to benefit and it won’t purely have been extractive, you will be recognizing the value they created.

(00:10:59) And so there’s a huge opportunity here, for the gigwork economy, to start to think about this value creation differently. And to reward that. And we have a fantastic graduate from our program, Driver’s Seat Cooperative, which is a business that helps drivers own their data and use the data about their driving to inform their choices about how to drive, where to drive, when to drive, who to pick up from, right? So in the case of restaurant deliveries, does this restaurant take 20 minutes to fill orders all the time, I’m not going to drive, I’m not going to pick up from there. Which delivery platform to even drive on, right? And so the purpose of this cooperative, it is owned by drivers, it is a driver-owned cooperative. Drivers download an app, it collects their data, the data ownership stays with the drivers, it is analyzed and provided back to the drivers to give them insights about how to do their gig work, how to survive in a gig work world.

(00:11:55) And then on the flip side, they provide the anonymized aggregate data to municipalities and other organizations to help them with urban planning and a whole bunch of other things. So, you know, there’s a data marketplace here. And when we think about these companies, and we think, who is the product, right? Facebook, who is the product? You’re the product, right? Uber in some respects… the people are the product, in many respects. And so what does it mean when you change, you shift ownership, you shift ownership of the company, you shift ownership of the data, and you say that can be shared by these stakeholders. It doesn’t have to be concentrated among a set of investors or among a set of founders.

(00:12:34) And yeah, at the end of the day, is the founder going to get as wealthy? No, because they’re sharing. But will they still be able to get wealthy? Yes. Can they still own 40% of the business? Technically, yeah. A founder in a cooperative could still own 40% of the business. That’s a huge amount of any Airbnb or DoorDash, that IPOs at the price that they IPO.

(00:12:53) There was this viral tweet recently, that said, you know, if Apple was a coop, here’s who would have benefited. The really funny thing was to look in the in the comments of this tweet and to see all of the kind of backlash. What people were saying was, well, if they were a coop, they would have given away all the money to their owners, and they would have had no funds for research and development. And that’s just a massive myth. Cooperatives invest in research and development, just like any other business. The profit that is shared at the end of a given year, is a percentage that is determined by the board, or whomever else is the kind of appointed governing body for the coop. And they decide, okay, we’re going to set aside this much to share out to our owners, but it doesn’t mean that any and all profit is necessarily given out and taken away from research and development or other functions of the business.

Wailin: (00:13:46) Do you think it’s then the accountability and governance piece that has a lot of people running scared, then?

Greg: (00:13:51) Well, I think it’s important to think about ownership as a bundle of rights. And so we’ve been talking about the first right, which is the profit share right. That we can actually share the wealth generated by these companies. And the second right you’re speaking to is the governance right. If you think about Uber and Lyft, you know that there would be board seats for drivers, right, maybe for consumers, too. But I think the point here is to build these models in at the very beginning, when the companies get going.

(00:14:18) We’re trying to talk about how do you design ownership? We think that the only option is that the investors get all the ownership and what we’re advocating for is the idea that you can start to think about how would we allocate ownership to different groups who might have a stake and either create better company outcomes, or just might simply benefit in this time of massive wealth inequality and such divisions within our country. Then maybe sharing wealth to drivers or giving drivers voices if we stay on the gig economy example would lead to different outcomes and I believe that it would. Then it would certainly make people feel like they have a say in what happens.

(00:14:54) And so, to your question, yes, there is a tension here that by allocating some voice beyond just the investors, that company behavior might look slightly differently. I remember a few years ago when Whole Foods got sold to Amazon and so Amazon provides tremendous value to us as consumers. But I don’t think anyone will look at it and say that, you know, the Whole Foods is now making better choices, because they’re owned by Amazon. The workers are getting fewer benefits, the farmers are getting squeezed, the suppliers getting squeezed, right? And why is that happening? It’s happening, because at the end day, it’s about the Amazon stock price, that the sole motivation, the sole driving force is investor voice. And so if you had some other people at that board table, would company behavior look different? We think it would. Maybe they would make a choice to still carve out roles for smaller suppliers. They would still keep employee health benefits, because at the end of day, who’s that that table drives the decisions they make.

Wailin: (00:15:56) I like this notion of baking this in from the start, which is what your accelerator is all about. Because I think back to your origin story, Greg, of your dad who had this carpet store, and then ended up in a cooperative, but at a fairly different point in the lifecycle of that business than the companies that you work with now in your accelerator.

(00:16:15) And maybe this is a good segue to talking about equity and investment in scale and seeing how those concepts can be really transformed and look really different when you build in cooperative principles, and a cooperative model from the beginning. So do you want to talk about some of those pieces and what they look like in your accelerator and kind of the conversations that you have?

Jessica: (00:16:38) So I think one of the one of the big myths is, you know, cooperatives can’t scale. Cooperatives work if it’s a local food coop, but at scale, they don’t work. And that’s just simply not true. You know, we talked earlier about the Associated Press, we’ve talked about Ace Hardware, we’ve talked about REI. These are cooperatives at scale. They are highly functioning businesses within our economy. Scale is clearly possible.

(00:17:03) When Greg founded the accelerator, the purpose was to help provide support and help equip entrepreneurs to start cooperative businesses at scale. There are a number of resources and supports available in the US that help local coops get up and get off the ground. And where he and his father saw that there was a need was in the how do we build the next generation of cooperatives at scale piece of the equation. We don’t define scale in raw numbers. It’s only about revenue, right? It’s not about some big, crazy unicorn-like revenue number. The way we think about scale is yes, in terms of revenue, but it’s also in terms of how many owners? So if it’s workers, how many workers does the business have in three, in five, in 10 years? It’s consumers, how many consumers are purchasing from and benefiting from ownership in this business in three, in five, in 10 years? We are really thinking about scale on two different dimensions. We’re taking the traditional dimension of revenue, but we’re adding a piece that talks about how are we affecting people’s lives? How are we affecting people’s ownership and hopefully wealth over time, and building community wealth?

Greg: (00:18:18) When we look at teams that apply to our accelerator, and we get maybe 100 inquiries a year, maybe 75 to 85 applications a year. The last round of applicants of those that we actually interviewed, 41% want to have an investor-owner class, that there’s still a need for outside capital to scale the company.

Wailin: (00:18:39) Can you go into a little bit more detail about how you think about exits and investor incentives?

Greg: (00:18:45) Yeah, so probably one of the most common questions we’re getting is how does one bring investment into a cooperative? How would someone invest in a cooperative? And this is the piece that looks the most different. You know, a lot of our business curriculum might look like Y Combinator, or 500 Startups. But the two pieces look really different are the governance aspect, and then the fundraising aspect.

(00:19:07) So on fundraising, specifically, when people invest in early stage in a tech startup, usually they’re looking for an exit, right? They’re looking for the company to sell, to IPO, to be acquired, and cooperative is really going in a different direction. The goal is to create long term ownership within that community, whether that community is workers or consumers or farmers or musicians. We’re not trying to sell the company, we’re trying to bring that company wealth and voice.

(00:19:38) So what that means is that basing the investment returns on appreciation of stock price, of saying that you’re going to get rich when we sell this to someone else, is really different. So instead, our investments generally have to be repaid out of actual company cash. It’s not to say that there aren’t ways to have stock prices appreciate. You know, we’re always looking at new ideas of how to do investment terms. But I think what aligns the incentives is to say, yes, we can have an investor class, yes, we need to pay the investor class back an appropriate return. But we’re going to do it either out of company revenue, or company profit. That’s really the biggest shift. So it’s not impossible.

(00:20:16) And I actually just had this conversation with one of our entrepreneurs yesterday, and I said, look, you know, this means you’re going to have to act more like a real company, right. And so it’s not as exciting as being VC backed. But the reality is that 99% of companies are not VC backed. And VCs are not very good about funding women entrepreneurs. They’re particularly bad at funding people of color entrepreneurs. And so you have to act like a real company. So you have to actually generate cash in the business, and profits in the business in order to be able to pay back investors. And we don’t think that’s crazy, and neither do our investors.

(00:20:52) So our pitch to investors is that rather than waiting for a company exit, which may never happen, we’re gonna set up repayments out of company revenue on a quarterly basis. And so we have our companies budgeted for it. We’ve also recently launched the Equitable Economy Fund, which is a pilot fund to invest in shared ownership. It’s open to accredited investors only. But we’ve had a lot of folks who have said, hey, I’m not an entrepreneur, but I’d like to invest in the kinds of companies coming out of your program. And so if someone is an accredited investor, you know, we’d welcome the conversation to share with them what the fund is looking to do.

(00:21:26) We are looking for entrepreneurs, we are looking for mentors, we’re looking for people who want to invest in US companies.

Jessica: (00:21:31) We have open office hours for folks who are thinking about this, we have a number of resources available on our website. We have a new course launching soon on how to build a lean coop. I think that it does require a fundamental shift in the way we think about business and who we think business is accountable to and why we’re building businesses, to what end. And if you’re building a business that’s just centered around maximizing profits and the biggest exit, then you’re probably not a good candidate for starting a coop.

(00:22:03) But if you’re someone who believes fundamentally in the fact that we need to address inequity in our society and can do so through business ownership and to shifting the way we think about ownership. And also believe in democracy and believe in shifting power dynamics by introducing new voices and perspectives to governance in business, there’s an opportunity.

(00:22:29) Broken By Design by Clip Art plays.

Wailin: (00:22:35) REWORK is produced by Shaun Hildner and me, Wailin Wong. Music for the show is by Clip Art.

Shaun: (00:22:41) You can learn more about Start.coop’s accelerator program and graduates on their website Start.coop. That’s start.C-O-O-P. More information about their Equitable Economy Fund is at start.coop/invest.

Wailin: (00:22:56) Greg Brodsky is on twitter at @GregBrodsky. That’s B-R-O-D-S-K-Y. And Jessica Mason is on twitter at @jessxdesign. That’s J-E-S-S-X design. We are on Twitter at @reworkpodcast and our website is rework.fm where you can find show notes and transcripts for our episodes.

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