In this week’s Principle 6 Newsletter, Mike Mercer envisions a “co-op capital machine” that would fund cooperative startup and scale-up costs, filling the current gap co-ops face in accessing affordable and reliable capital.
“The great irony of the ‘cooperative moment’ is that cooperators invest their money in the corporations that they admonish for being extractive, the government that they regard as being too political, and the real estate that they advocate members should share,” he writes.
What if, instead, co-ops invested in co-ops? Read the full issue of Principle 6 Newsletter below to learn more. And while you’re thinking about “cooperation among cooperatives,” take a moment to consider how you and your cooperative practice this principle. 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!
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Principle 6 Newsletter – Co-ops should invest in co-ops
Issue 26 – July 28, 2021
If you’re reading this, you’re a cooperator. If you’re a cooperator, it’s because somebody convinced you that cooperation is a virtuous way to conduct business. You like the work, you enjoy the people, and you declare that you are compelled by a mission to help others succeed.
If you have assets, it’s because you inherited them or, more likely, because you live (or lived) within your means as a co-op leader. You may have your walking-around money deposited in the credit union, but your investments are almost certainly in stocks, bonds and real estate.
Entrepreneurs invest in their business—time and money. Cooperators devote time, but not much money, to their co-op. The great irony of this “cooperative moment” is that cooperators invest their money in the corporations that they admonish for being extractive, the government that they regard as being too political, and the real estate that they advocate members should share.
Much has been said about this being a time when cooperatives can step forward to provide an alternative to the concentrated and extractive free-market corporations. Even some of the largest for-profit providers have recognized the sharp edges of consumer push-back to exclusive focus on shareholder return. They say it’s a call to stakeholder capitalism. We have been calling it a co-op moment.
There is growing support for strengthening the “social” economy in the EU. In Italy, the characterization is of a more “civil” economy. There, the law requires that co-ops invest 3 percent of their profits in co-op development in return for tax preference. In the U.S., the preaching of co-op advocates is that a “fair (or just) and inclusive” economy should blossom. No matter the name, cooperatively structured organizations are regarded as one of the cornerstones for a more democratic economic alternative. Many say that it is a good time to invest in that cornerstone.
Cooperatively structured organizations are regarded as one of the cornerstones for a more democratic economic alternative. Many say that it is a good time to invest in that cornerstone.
The obvious place to start is with the members. All cooperators are members. But very few members are cooperators. Being a cooperator is to be a leader. Notwithstanding, all members are required to invest in a membership share. At a credit union, membership shares are one-time and nominal, perhaps $10 to “join.” For a grocery co-op, the membership fee might be $250, again one time. At the other end of the spectrum, one could encounter a purchasing co-op with membership shares in the multiple thousands or housing co-ops where the value of a share floats with market prices (but without change to the one-member, one-vote structure). Annual membership fees are often assessed to cover operating costs in the latter examples. Clearly, membership shares and fees are a way to invest in a co-op. But that’s not new. And it’s rarely sufficient.
Membership share investments are usually kept low to encourage new members to join, especially in consumer-facing co-ops, like credit unions. Once launched, the plan is almost always to operate profitably with the idea of building capital from retained earnings. New credit unions are typically given 10 years to build internally generated capital up to the minimum statutory levels expected of mature credit unions. Credit unions that serve low-income populations are provided with additional ways to temporarily source paid-in capital while the difficult task of generating internal capital is under way. Co-ops that need capital for investing in real estate, equipment, inventory and working capital often have trouble even getting off the ground.
Occasionally, grants are available from foundations or government to assist startup co-ops, mostly as encouragement to serve low-income populations. Private equity and venture capital funds are always looking for places to invest. But they expect high returns, quick exit and a strong voice in governance. Banks and other financial institutions lend to small businesses on a regular basis, but co-ops don’t fit into their underwriting guidelines. Their rates and fees would likely be high in any case. Until recently the SBA and other government guaranty facilities wouldn’t even consider co-ops without a personal guaranty for the co-op’s debt obligations. Suffice it to say that co-ops lack access to affordable and reliable capital—equity or debt.
Co-ops lack access to affordable and reliable capital—equity or debt.
Cooperators are working on this problem. Step one is identifying good business concepts and making sure that competent business skills are present to maximize the chances of success. No business structure can compensate for a poor business plan. No investor can expect a predictable return without a solid plan and capable leadership. Organizations like Start.coop and sector support organizations like NCG Development Co+operative identify entrepreneurs and provide technical assistance for new and existing co-ops. To varying degrees, there are many individuals and organizations that provide assistance in these areas. Entrepreneurship and technical training cannot be left out of the solutions for solving the co-op capital challenge.
There are growing pools of “patient capital” forming up in the investment community. The patience refers to lower return expectations and longer payoff horizons in return for an initiative that builds a better environment and contributes to a fair and more inclusive economy. Co-op centric initiatives such as Kachuwa Impact Fund and Equitable Economy Fund are just two examples of sourcing capital from outside of the co-op world to fund development. There are others. And, in some cases, these funds are willing to provide capital for other types of organizations (ESOPs, nonprofits, etc.) that elevate people or community above profit.
There has also been innovation around the cooperative model itself. Obran Cooperative Corporation has developed a unique approach to converting small businesses into worker-owned enterprises. Obran is a multi-stakeholder cooperative where the workers of acquired companies become one-vote-per-member stakeholders in the Obran Cooperative. The workers will apparently always own/control at least 51 percent of the mother ship, the Obran Cooperative. The remaining interests will be owned by investors and entrepreneurs. The cooperative holding company (Obran) will own the former small businesses. Through this structure, Obran plans to overcome some of the scale/talent disadvantages that worker co-ops encounter. And, outside investors supply the capital needed to buy out the small business owners and fund collective operations. Their return comes from future earnings.
Other groups like Zebras Unite and Seed Commons are taking a systemic approach to organizing, assisting and funding for co-ops. These and other initiatives, including CDFIs like Shared Capital Cooperative, Local Enterprise Assistance Fund and Cooperative Fund of New England are working with players from across the co-op space to design solutions to the co-op capital challenge. NCBA CLUSA and the National Cooperative Bank are convening discussions soon that will bring together some of the capital innovators with leaders from the established co-op sectors to explore the possibility of setting up a national co-op capital mechanism that brings co-ops together across the sectors to help solve for the co-op capital challenge.
Progress is happening. But let’s return to the “great irony.”
Most cooperators believe in but are not really investors in co-ops. Beyond membership shares and membership fees, there isn’t any easy way to become a financial investor in a co-op.
Most cooperators believe in but are not really investors in co-ops. Beyond membership shares and membership fees, there isn’t any easy way to become a financial investor in a co-op. Enabling instruments and structures are still in the early innovation stage. Laws and regulations could be more helpful. And what would compel a member/leader of a food co-op, let’s say, to become an investor in a childcare co-op? What does a credit union exec know about a worker co-op? Knowledge is currently transferred from co-op to investor one project at a time. Getting startup and scale-up capital into co-ops is still a severely inefficient market function. Where it happens now, capital is mostly sourced from outside the co-op system, making long-term sustainability and cost an issue.
These are the classic conditions for intermediation. The co-op system could benefit from a well-resourced capital sourcing facility. And such a facility should enable cooperators and the co-ops that they guide (especially the large ones) to become investors in new co-op development and early-stage co-op scale-up. Vancity CU and VSECU are two examples of credit unions willing to invest in co-ops. Investments from (and guided by) cooperators should be a combination of talent (planning and operational assistance) and money. The co-op system should become more of a circular economic engine. Risk can be managed collaboratively, and return should be generous, paid out over time from successful co-op operations. A co-op capital sourcing facility would be a major evidence of cooperative identity and a significant cross-sector exercise of Principle 6.
A co-op capital sourcing facility would be a major evidence of cooperative identity and a significant cross-sector exercise of Principle 6.
Co-ops should invest in co-ops. A few already do. Innovators are solving the technical issues. Government will eventually come around. It’s time for U.S. cooperators to design and build the circular co-op capital machine.