In this week’s Principle 6 Newsletter, Mike Mercer considers the immediate capital needs of startup and scale-up co-ops and asks why large, established co-ops would devote their financial resources to solve those capital needs.
“Growing your co-op and contributing to the growth of the co-op community may not be mutually exclusive strategies,” Mercer writes.
While you’re thinking about co-ops supporting each other, take a moment to consider how “cooperation among cooperatives” could spur a new commitment to moving forward. NCBA CLUSA is on a mission to document Principle 6 collaborations across the country so we can identify trends, document best practices and share this knowledge with you—our fellow cooperators!
Principle 6 Newsletter – Capitalschism
March 9, 2022
Co-op development and incorporation can sometimes be more complicated or time-consuming than other enterprise startups. The time from co-op development to incorporation and the launch of your enterprise will, to a large degree, depend on your working group’s resources and available time. – “Cultivating Co-ops,” BC Co-op Association, 2018
Shared Capital Cooperative was founded in 1978 by cooperative leaders in the Twin Cities of Minneapolis-St. Paul who were frustrated by the challenges local co-ops faced in getting financing from banks. Wanting to ensure that all co-ops would have access to capital, they decided to pool their extra cash to start a self-help, revolving loan fund. – “About,” Shared Capital Cooperative website, 3-5-22
Co-operatives today have many practical anxieties about accessing capital of suitable forms and in sufficient quantum. The first set of issues stems from the withdrawable nature of co-operative membership shares. The other major set of capital issues is the purported economic unattractiveness of co-operatives relative to other forms of enterprise, which limits co-operatives’ access to capital. In contrast to commercial companies, co-operatives do not maximize shareholder value or returns in proportion to capital contributed, but give benefits to members in proportion to transactions done with the co-operative. – “The Capital Conundrum for Co-operatives,” International Cooperative Alliance
All forms of economic enterprise require capital. Every dollar of assets must be supported by capital, either equity or debt. In co-ops, equity is mostly provided by the members. Either the members pay into their share accounts, or the co-op holds back a portion of its earnings to build equity capital. The amount of equity that a co-op assembles has a direct impact on the amount of debt capital that can be obtained. And, through that dynamic, the size of the balance sheet (ie: growth) has real limitations.
At co-ops, non-member paid-in equity capital is problematic. Co-ops optimize, not maximize earnings and profits go back to the members/users according to their patronage. In addition, members are unwilling to share governance control with disinterested third-party investors. If investors had control, even significant influence, the co-op would be required to maximize profits and direct a larger portion of earnings to the benefit of shareholders—in proportion to their ownership stakes. As a result, access to affordable and sufficient capital is difficult for businesses built on the cooperative model.
For co-ops, it’s “capitalschism,” not capitalism.
The co-op banks and credit unions are primarily lenders, supplying debt to consumers and businesses (including co-ops). Their loans are stacked on top of equity and augmented with liens on collateral in most cases. The lenders operate with significant leverage (10:1 for credit unions) and usually live on relatively small spreads. Throw in conservative regulatory oversight, the co-op system lenders almost universally embrace modest risk profiles. For them, startup and (early-stage) scale-up co-ops fall outside of the customary risk mitigation guidelines.
Co-op centered Community Development Financial Institution (CDFI) loan funds have emerged to begin filling the gap. Organizations like Shared Capital Cooperative, LEAF, Cooperative Fund of the Northeast and SEED COMMONS provide capital funding for co-ops and other mission-driven organizations. There are others. These organizations find entrepreneurs and help co-ops with organization and growth plans. In the course of their work, they enable new (or scale-up) co-ops to access funding. Again, debt is the predominant form of capital being provided. Debt, of course, comes with the requirements of interest and eventual repayment. The loan funds source capital from the CDFI Fund, foundations, mission-driven investors (patient capital), and even other co-ops in some cases.
We have written here before about the potential for the long-established larger co-ops to collaborate with the objective of helping to solve for the capitalschism that afflicts new and smaller co-ops. In fact, there is a significant effort underway to define if/how that could happen. With leadership from the National Cooperative Bank and others, a collaborative design process has been launched. This initiative is being enabled by an organization that specializes in “big tent” design processes—SecondMuse. This work will conclude in the late fall with recommendations for innovation directed at capitalschism.
The question to consider here is, Why would a large, established co-op devote any attention (or financial resources) to solving for the capital needs of startup or scale-up cooperative businesses?
Some will respond quickly. “That’s not our responsibility. We’re here to produce value for our members. We run lean. We focus. We have tough competition. It’s not directly beneficial for us to help a worker co-op get started in Detroit or to help a housing co-op in Las Vegas refurbish their cooling system. Heck, we don’t help businesses of any kind get launched right here in our own community.” Hard to argue with that. No room in tactical competitive strategy for co-op community building.
But what about the strategic considerations? Co-ops, even the big ones, are creatures of imagination and resolve in our capitalist society. Democratic ownership and distributing benefits of the enterprise across the users (i.e.—the “not-for-profit” model) are fragile things. Co-ops elevate economic fairness and inclusivity because, in part, their structure permits those things to be important. And, more commercially, being a co-op (a helpful, non-extractive business in the eyes of the people) is becoming a critical point of competitive differentiation.
Co-ops elevate economic fairness and inclusivity because, in part, their structure permits those things to be important. And, more commercially, being a co-op is becoming a critical point of competitive differentiation.
Under the circumstances of our time, devoting just a little attention to building systemic infrastructure for the formation of new co-ops and the scaling up of small co-ops could be an impactful strategy for all co-ops, especially the otherwise politically vulnerable large co-ops. In Italy, co-ops curry favor with the government by investing 3 percent of their profits in new co-op development and early-stage growth. When the opportunity comes along to participate in cross-sector co-op collaboration at the local level or when the design for a system solution for dealing with capitalschism comes along, give some thought to the long game.
Growing your co-op and contributing to the growth of the co-op community may not be mutually exclusive strategies.