What If Tech Startups Became Community-Owned Co-Ops? By: April M. Short

2/20/2022

What If Tech Startups Became Community-Owned Co-Ops? By: April M. Short

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The new “exit to community” movement is experimenting with alternatives to the go-to model for startups.

Startups have a high rate of failure and they typically favor rapid growth over the good of their employees and customers. “More than two thirds of [all startups] never deliver a positive return to investors,” according to a 2021 article in the Harvard Business Review. To respond to this inherent risk, the startup ecosystem has mostly relied on venture capital to survive. Investors in startups often take on a number of deals at once, knowing some will fail, and hoping some will have significant success.

Under this investment model, many startup companies are founded with rapid growth as their driving force and may have the ultimate aim of being able to sell the company to investors or a larger conglomerate company. This economic environment leaves little space for the ethically driven innovations that are desperately needed today, given the many urgent problems in the world (like systemic racism, increasing corporatization, obscene wealth gap in the U.S., fraying food system, broken health care system, crumbling democracy and the emergency of the global climate crisis to name a few).

The biggest monopoly companies operating today—like Apple, Google and Amazon—all began as startups, as Laura Flanders noted on her show on December 12, 2021. “[T]hey followed the fairly typical path from toiling in the proverbial garage to success by going public, prioritizing shareholders, and if not becoming a giant conglomerate, then selling to one,” Flanders said.

Nathan Schneider, assistant professor of media studies and director of University of Colorado Boulder’s Media Enterprise Design Lab—a think tank for community ownership and governance in media organizations—spoke on the Laura Flanders Show about the drawbacks of the “conventional” startup model, and the necessity for alternatives.

“We’re starting to recognize some of the deep problems of that [conventional] model,” he said. “We end up with these rapacious monopolies that can’t be stopped and that grow at all costs.”

“[W]e really need a new set of tools to enable companies, as they mature… to become community-owned by whoever relies on them the most,” Schneider said.

Meanwhile, nonprofits, which can provide the platform for ethically driven innovations in the tech startup space, unfortunately, have not had great success with them. As detailed in a recent article in the Nonprofit Quarterly titled “How to Build Platforms that Our Movements Can Own,” the nonprofit funding method is not sustainable for the “capital intensive, open source driven, risk-laden landscape of technology today,” and tech startups tend to be too expensive for nonprofits to fund as a side project.

This is why nonprofits usually turn to the for-profit world for solutions, as the article in Nonprofit Quarterly noted:

“Those solutions—those companies—see the nonprofit world as a ‘market,’ and in our capitalist society, markets are meant to be exploited for profit… Nonprofits need to find a way to share the costs of maintaining technology that works for them and that will work for them in the long term. Sustainability and resilience are key. How can we build something that is immune to the whims of the for-profit market?”

Exit to Community and Open Collective

In response to these challenges being faced by nonprofits to sustain themselves in a for-profit market, the authors of the article in the Nonprofit Quarterly are spearheading a potential solution that, while new and untested, could significantly advance the startup environment away from the old and undemocratic platforms of the current market into a cooperative model. The experimental new model would provide “a new exit strategy for startups” known as “exit to community.”

Making the exit to community would let employees and other stakeholders purchase the company in which they’ve invested, as an alternative to IPO or acquisition for startups. This decentralized model would place ownership and governance back in the hands of workers, and even consumers.

The authors of the Nonprofit Quarterly article are all members of Open Collective, a worker collective tech platform that enables a network of more than 600 nonprofits, co-ops and businesses to support over 7,000 groups “to raise and spend $35 million each year with full transparency.”

The platform was launched in 2015 in response to a need for a place where informal collectives and community volunteer groups—like mutual aid groups, skill shares, tool libraries—could put their money. The platform offers a transparent place where groups may legally spend and collect money without having to incorporate, open a bank account, or place the onus on anyone to take responsibility for the collective’s funds—which often complicates filing of taxes for these individuals. Groups that join Open Collective also benefit from achieving charitable nonprofit status upon joining.

Rather than sell Open Collective for profit, its co-founder and CEO, Pia Mancini, recently decided to sell the company to its stakeholders, as a way of experimenting with the concept of an exit to community firsthand.

She says that through exit to the community, Open Collective is reinventing a public ownership structure, as the existing options for large-scale public ownership have been structured through government programs—like public utilities.

Mancini further notes that, with the internet, the tools to ensure ownership by thousands of people now exist.

Laura Ruffin, co-founder of the storytelling co-op Crux and former co-CEO of the Fractured Atlas, the country’s largest association of independent artists, is also working with Open Collective on their exit to community strategy.

Ruffin said on the Laura Flanders Show that over the last five years—and especially during the last 18 months since the outbreak of the pandemic in March 2020—there has been a heightened sense of urgency to support people doing mutual aid work and social justice work in their communities. However, while many U.S. companies made large financial commitments to support nonprofit organizations in 2020 through the ongoing pandemic and uprising after George Floyd’s murder, that money largely did not reach the community groups doing the work on the ground “because they did not have charitable status,” said Ruffin on the Laura Flanders show.

“But Open Collective solves that problem, and that’s why I’m passionate about their work,” Ruffin said, noting that Open Collective uses open source software and typically works with mutual aid groups.

Caroline Woolard, director of research and partnerships at Open Collective, says the platform has the unique potential to make connections across several sectors working for economic justice, “because we already support [more than] 200 mutual aid groups and nearly 3,000 open source software groups,” she says. “These groups—mutual aid and open source [software]—have shared values but entirely different cultural practices, communities, and ideas about ways of working. It is unusual for them to meet anywhere, but it is happening on our site and we are starting to offer monthly community forums to deepen these relationships. In some countries, like Brazil and Argentina, there is already a shared understanding of the connection between mutual aid organizing and open source software, but in the United States, the connection across these silos is very young. We are working to shift that.”

While speaking about the reason behind starting Open Collective, Mancini said during the Laura Flanders show that she spent most of her life working in politics, until starting Open Collective in 2015, out of a sense “that the institutions that we have are completely out of sync with the society that we live in.”

“Our financial system is designed for corporations that compete in a scarcity-driven economy because before, collaboration needed to be created,” she said. “We had ‘the firm’ so we could efficiently lower the transactional costs of collaborating. But the world changed. Now we are contributing online, we collaborate online, we breathe open source, we share the product of our creativity—and we do that with people we’ve never met, and we will never meet face to face.”

April M. Short of the Independent Media Institute (IMI) interviewed Pia Mancini, Caroline Woolard, and Nathan Hewitt, program manager of Open Collective, about potential future changes to the startup industry and why Open Collective is making the exit to community ownership.

April M. Short: How did you come to the decision to sell Open Collective back to the community who uses it?

Pia Mancini: Open Collective is a strange beast. We’re furiously mission-driven, long-term oriented, and very patient. We know what we want to achieve—making communities around the world financially sustainable—and we always knew it would take time.

We believe that a successful mission is one that survives its funders, and we always knew that we wanted to figure out a way for Open Collective’s mission to survive in the long term and adapt to changing times.

If you accept the premise that your mission (enabling communities to be sustainable) will be as relevant in 50 years as it is now, then you need to think about the role of the funders and team. We see ourselves as stewards of this mission and it’s our responsibility to build a way to usher in a new cohort of stewards while protecting the community.

At the end of the day, we are building infrastructure for the commons to be sustained, for more and better common goods to be created, funded and managed. It only makes sense that the infrastructure is itself owned by the community it serves.

AMS: Why is the conventional startup model—which typically involves going public, prioritizing shareholders’ interests, and ultimately selling to a giant conglomerate—less than ideal?

PM: Folks from the technology world will be very familiar with the term “exit,” but others may not be. An exit is when investors (in our case, minority owners of Open Collective Inc.) liquidate their equity (the portion they own), converting it [into] cash [and] ideally [multiply] it by a factor. In effect, they exit the organization and are no longer part of the company’s ownership.

As part of this process, someone else must purchase the investors’ portion of the company. The standard ways to exit [an organization] are by getting acquired by another company, as with Microsoft’s purchase of GitHub or any number of similar stories, or engaging in an initial public offering (IPO) where the company joins the stock market and sells equity to the public, as [was seen] with Google, Apple, Twitter, and many others.

The problem with both the options is that [they do not factor in the] purpose and social impact [of these exit options]. These pathways essentially put a company on sale to the highest bidder. And if the value the company has created is its community, that means putting that community up for sale. In the case of an acquisition or merger with another company, we cannot ensure that our values would be maintained [thereafter]. If we did an IPO, the focus would shift to profit above all else.

Caroline Woolard: The conventional startup model also has a negative effect on society, even at the level of our daily lives. After all, technology is everywhere. The average person in the United States spends two to three hours on social media per day, and algorithms that control the emotional and political content we [consume] are made to produce the greatest revenue, without any accountability to the communities they impact.

Further, more and more people are working for online platforms and have no control over their working day. More than 94 percent of new creative industry jobs created in the United States in the past 10 years [have been] outside the [purview of the] formal employment category [according to Professor Trebor Scholz from The New School]—this means these jobs were for independent contractors, freelancers, and other contingent workers. The gig economy does not provide living wages or workplace protections and conventional investors in tech startups require that these platforms exploit users in order to turn the largest profit possible.

Nathan Hewitt: In many cases, tech founders have good intentions. They create online platforms because they want to create new ways for people to connect with one another. When shareholders or large conglomerates take ownership of our online spaces and tools, however, all of that falls to the wayside: the goal becomes profit, above all else. The community is then a captive to the whims of M&A [mergers and acquisitions], an asset, sold to the highest bidder. It’s the opposite of community empowerment, during a time when we need our communities to be able to come together to face the great challenges of our time.

AMS: What is the incentive to “exit to community” and give stakeholders ownership of the Open Collective platform—and might this become a model for future businesses to replicate?

PM: Open Collective is a legal, financial and technical commons—a piece of shared infrastructure. Along with that infrastructure comes a network, and a community of collectives, nonprofits and funders.

The network that makes up the Open Collective constellation is part of that commons and should own the infrastructure that enables the network to emerge. Being dependent on bottom line analysis [being done by] a group of shareholders in a boardroom far removed from the community the tech serves is crazy, it defeats the purpose of building common infrastructure.

How common is it, then, if at the end of the day [someone] else owns it?

CW: We also know that, for example, worker cooperatives are more likely to succeed than conventional enterprises, that they are more efficient than traditional firms and have fewer layoffs during economic crises because they are able to call upon their community for support and workers can decide to adjust the hours worked by all employees rather than reducing the number of employees. A wide number of organizations are championing decentralized teams, from the [private charitable foundation the] Hewlett Foundation to [the online shoe and clothing retailer] Zappos.

NH: I think this is definitely replicable. We’ve written about the exit to community model in Nonprofit Quarterly and we’re also very glad to have the help of the crews at [other organizations working toward similar goals like] the Metagovernance Project, Exit to Community, MEDLab, Purpose Foundation, and Zebras Unite Co-op that are helping promote the exit to community model.

AMS: How can community-owned business models support the greater economy and help to shift the economy out of more extractive, scarcity-based corporate structures?

NH: Ownership matters. (That’s actually the name of a newsletter.) When users have economic power, they can ensure that a platform serves its community and its society. For Open Collective, it will make a big difference, but we try to be connected and community-driven, so I don’t think it will be as jarring a change.

But imagine platforms like Twitter, Facebook or Etsy being community-owned and collectively governed. How different would they be? How different would our world be? Community ownership and governance realign the incentives of our online spaces from rent-seeking and profit maximization toward creating a better, more livable world.

CW: Open Collective might become a cooperative or we might use another legal tool to achieve community ownership and governance.

Either way, cooperatives offer a great example of how ownership and governance make a big difference. Cooperative businesses have six times lower failure rates than traditional corporations and small businesses: 60–80 percent of cooperatives are running after the first year [of operation and have a] 10 percent [rate of] failure versus [traditional and small businesses’ failure rates of] 60–80 percent)—and after five years in business, 90 percent [of cooperative businesses are] still operating versus 3–5 percent of traditional businesses. They also address the effects of crises and survive crises better; provide better and more equitable wages, including at entry-level; advance gender equity at work, employ more women and nonbinary folks and pay them better wages than conventional businesses; and provide a pathway for more diverse and equitable working arrangements because these arrangements are determined by the workers themselves.

As is often cited, [in the United States,] providing equal pay to women in the workforce would cut the poverty rate for all working women in half and “the number of children with working mothers living in poverty would be nearly cut in half,” [according to Institute For Women’s Policy Research]. Cooperatives and community-ownership models, more broadly, offer a promising model for economic justice when cultivated with intentionality.

AMS: Will you expand a bit on the idea of “non-extractive finance” and why investors in Open Collective might be more interested in the greater vision they are supporting than expanding their earnings?

PM: Open Collective’s cap table is made up mostly of like-minded individuals (angel investors either working on similar problem spaces or aligned with our mission) and funds that have aligned investment thesis. For example, Purpose Ventures (the fund that advocates for and invests in steward-owned companies), Notation Capital (that invests in decentralization) and notably Bloomberg Beta, which is a long-term fund that invests in the future of work and organizing. I mean, how many companies have someone like Roy Bahat— head of Bloomberg Beta—in their cap table, who is out in the world advocating for more and better workers’ organization, especially in tech companies? Part of the reason we want to start returning value to [these companies] is because we want them to invest in other companies like us.

I don’t necessarily think that investors are broadly shifting priorities, we were lucky to count upon those who believe that what Open Collective is bringing to the world is valuable enough to let us build it in the way we are. I think they see that the value we bring lies in sustaining communities and community ownership is a key aspect of that sustainability. I guess, if you buy into the mission truly, you also buy into this exit.

NH: Pia is being humble here—luck has nothing to do with it, in my opinion. The founding team held strong to their mission, ensuring that they would be able to protect their mission and community in the long term.

AMS: What are the benefits of community ownership, particularly, in the context of the current historically significant moments being witnessed across the world with the pandemic, climate change and the fraying systems?

PM: Think, for example, what happens to many communities in Facebook groups—the platform arbitrarily decided to change the prioritization algorithm, and a group’s communication reach drops tenfold overnight. Communities—especially in the solidarity economy—work very hard to stay alive and achieve their mission. The infrastructure should serve them, not the other way around.

NH: Community ownership is even more important now, when things seem to be pulling apart. So much of our experience of community is now online, going beyond borders and nationalities and geographies. We need ways for online communities to work together. Whether that has to do with Open Collective, DAOs [decentralized autonomous organizations] and the blockchain, or other tech tools, I think that community ownership and governance are essential for us to collectively, cohesively face today’s many challenges.

CW: The Urban Institute’s “ABCs of Cooperatives” framework is a really useful tool for thinking about the benefits of collective ownership. Whether we use a cooperative structure or not, the [key areas of cooperative impact are] totally aligned with our goals: “access, business sustainability, community commitment, democratic governance and empowerment, equity, diversity and inclusion, financial security and [advancement for workers] and growth,” are all part of what we are building.

AMS: There seems to be a reframing of concepts like collective ownership and co-ops happening. How do you think people might begin to understand these models as the way of the future, rather than “alternative” or fringe?

PM: In general, society evolves a lot faster than the institutions that govern it. This is even more true with the kind of technological leaps we’ve seen in the past 30-50 years. As a result, our [existing] institutional framework is very much out of sync with how we are organizing in the world. What we are seeing today is a reflection of that systemic noise and a societal response to a lack of institutional mechanisms to organize, participate, create and share value in contemporary society.

It is extremely encouraging to see such a focus on community ownership and governance in the technology world. What we need is more experimentation, more sandboxes of political, economic and social innovation that enable us to learn, fail and build again. A fundamental aspect of evolving is related to experiencing novel power dynamics (such as community ownership) at scale. We are one of those sandboxes where communities can experience and learn.

NH: As I’m sure many readers know, cooperatives are very old, whether you track them back to the 19th century or the far older roots of collective ownership in cultures all over the world. But whatever you think of the Web3 world, I think the energy and growth in that space shows that people are definitely feeling the need for new models of ownership and governance. Over time, I think that the “innovation” in that space will begin to spill over into the broader consciousness, whether or not the blockchain tools are what we need or not.

CW: Web3 and DAOs allow us to scale cooperatives legally, financially and technically, but the cultural and human sides of cooperation still require deep human connections and skills along with governance. Think of all of the failures we have seen recently with regard to human collaboration online, and the need for Web3, crypto, and DAO communities to build more trust and governance structures.

That’s why we are so excited to be deepening our connections to the solidarity economy movement in the United States, for example, with the U.S. Solidarity Economy Network, Seed Commons, the Sustainable Economies Law Center and the New Economy Coalition, to name a few.

AMS: Will you explain a bit about why the exit to community model is part of the solidarity economy?

CW: Exit to community—like community land trusts, concessional loans and mutual aid networks—is about centering community ownership and democratic governance for political, cultural and economic power. This emergent movement goes by many names—economic democracy, regenerative economics, community wealth, just transition, self-determination, degrowth, the commons and local community economic development—but internationally, it is known as the social and solidarity economy, or the solidarity economy. The solidarity economy is a term used internationally to describe sustainable and equitable community control of work, food, housing and culture using a variety of organizational forms. Its principles include cooperation, participatory democracy, intersectional equity, sustainability and pluralism. Especially today, when startup tech companies dominate the lives of billions of people, exit to community is an essential tool for building power, cultivating economic democracy and centering community ownership.

NH: A solidarity economy will still have technology and innovation and creativity. Part of the challenge, then, is how to fund it. Technology is expensive. So we need alternatives to the attractive investment we see in the venture capital world, and finance in general. An exit to community centers the users, rather than investors and profits. It’s egalitarian, democratic and resilient. I think it is a powerful tool in the solidarity economy toolbox.

AMS: Few tech companies have the combination of a successful business model and investor agreements that allow them to shift power directly to their community stakeholders. Do you see this move by Open Collective as paving the way for future companies to set themselves up for eventual exit to community ownership, and if so how?

PM: Nothing would make me prouder of Open Collective than becoming another imperfect roadmap for other companies to use to build their own paths. These are uncharted waters, but we are not alone. Since we started our Learning in Public effort, we’ve been in touch with multiple companies trying to achieve similar goals. We feel part of an emerging cohort of businesses that are not comfortable with the classic exit paths and are finding new ones.

NH: We’re excited to engage in public conversation with experts in exit to community, the solidarity economy, steward-ownership, and non-traditional startup financing. In the coming months, we will be learning in public about potential structures, as we knit together deeper relationships to hold this learning, and we’ll practice spreading more wealth and power to our collectives and hosts.

CW: The investor side is key to the shift toward decentralized teams and community -ownership of technology. We hired Meerkat Media Coop to create a short documentary about the impact that this can have, and this is only the start of a process of sharing what we learn, along with the website and various community forums that we are holding. The key is that investors do not have majority ownership and cannot force us to exploit people in order to gain enormous returns.

Author

April M. Short is an editor, journalist and documentary editor and producer. She is a writing fellow at Local Peace Economy, a project of the Independent Media Institute. Previously, she served as a managing editor at AlterNet as well as an award-winning senior staff writer for Santa Cruz, California’s weekly newspaper. Her work has been published with the San Francisco Chronicle, In These Times, Salon and many others.

This article was produced by Local Peace Economy, a project of the Independent Media Institute.