The 3 Reasons We Don’t See More Cooperatively Owned Businesses
Despite the many benefits of cooperatively owned businesses, the cold hard reality is that 99.9% of new businesses are still traditionally owned.
In the long overdue discussion about race and wealth in our country, we can’t ignore that the gap between rich and poor is actually increasing. As Malia Lazu recently said, “when you look at how people build wealth, it’s not from a working class job, but from ownership of a home or a small business. If we’re not talking about owning, we’re not being serious…How do Black and Brown communities get white picket fences?”
Simply put, those who have the privilege to participate in business and economic growth — those who can buy stocks in public and private companies — are amassing wealth while the vast majority of Americans, and especially people of color, are left behind. The economy is structured in such a way that wealth at the top is accelerating, because those who own the wealth distributed by those public and private companies are the same people who can afford to invest again.
And yet, ownership doesn’t have to be restricted to the few. Most Americans, and in particular entrepreneurs, don’t realize we have a viable solution right under our nose: cooperative ownership. The United States’ first cooperative was founded by Benjamin Franklin in 1752: a consumer-owned mutual insurance company that is still in operation. The second oldest cooperative in the country is the Associated Press.
When we use the term “co-op”, we are referring to a cooperatively owned business, which means that it is owned and controlled by the people who directly produce or use its products, supplies, or services. In this shared ownership structure, profits are distributed with all the people who directly support that business. Governance rights are shared too: reflecting some of the core values from which co-ops emerged, in a co-op each member has 1 vote, regardless of their role in the coop: customer, staff, advisors, investors all have equal voice in how the co-op is owned and operated.
Large companies that are cooperatively owned include ACE Hardware, Liberty Mutual, Ocean Spray, Land o’Lakes, Cabot Cheese, Blue Diamond Almonds, and of course REI. In fact the top 100 cooperative owned businesses in the United States represent approximately over $222.2 billion dollars in total revenue and the profits distributed by these companies go back to the local owners of each co-op. Even better, the profits are distributed pre-tax, not post tax, which is far more efficient.
Like many others in the cooperative business ecosystem, we are passionate about the potential cooperatives have to unlock ownership and wealth generation, especially for people of color and other disadvantaged communities. We get asked all the time by investors, philanthropists, founders and many others, “if cooperative owned businesses are so much better at distributing wealth and power, why aren’t there more of them?” Indeed, despite the many benefits of cooperatively owned businesses, the cold hard reality is that 99.9% of new businesses are still traditionally owned.
In our experience building the next generation of transformative and scaleable co-ops through our accelerator program we have encountered three main reasons why we don’t see more cooperatively owned businesses:
Reason #1: Most people don’t understand what a cooperative is and how it works
As it turns out, most people have a misunderstanding of what the term “cooperative” actually means. While 78% of consumers are more likely to purchase goods & services from a business they know is a cooperative, only 11% of people can actually define what a “cooperative” is. That’s why we also use the terms “shared ownership”, “mutual ownership”, and even “distributed ownership.” And while most people have heard the term cooperative, it is loaded with misperceptions. Indeed that misperception is why some of the nation’s biggest co-ops such as credit unions, mutually owned insurance companies and large agricultural companies don’t necessarily place the word “cooperative” front-and-center in their marketing. But that is changing, recently Cabot Cheese added Farmer Owned to all its packaging, Land o’Lakes shed its racist imagery to focus instead on farmer ownership, REI is highlighting their Co-op bike brand, and many local credit unions are now re-embracing the term “mutual ownership”.
Reason #2: Comparatively, “traditional” ownership models feel easier
For an entrepreneur building a start-up, incorporating as an LLC or C-Corp is the path of least resistance. It’s the most familiar, the preponderance of information and resources are oriented to these business models, and so many of the rules, regulations, and systems were designed with these business models in mind. To this point, you can go through 2 years of an MBA program with a focus on social business and still come out never having heard co-ops mentioned, let alone having been taught about what they are and how they work. Even if an entrepreneur knows that incorporating as a co-op is an option, getting started can feel more opaque, mysterious, and frankly more complicated. The entrepreneurial ecosystem to support co-operative entrepreneurs and the growth of their start-ups is nascent; there are fewer supports and resources, from small business advisors, lawyers and accountants familiar with cooperatives to programs that help entrepreneurs acquire the skills and know-how to build a successful co-op business. Without the right knowledge, skills, and tools, it’s easy to get bogged down in the weeds of building a co-op and either give up or fail to thrive.
Reason #3: It’s harder for co-op entrepreneurs to access start-up capital
Just as the supportive ecosystem is nascent, so too is the financing ecosystem. Like the general public, many investors don’t understand what co-ops are and how they work. As a result, traditional investors’ expectations are often poorly aligned with most co-ops’ desire to build thriving, sustainable, and equitable businesses that build wealth for their owners over time (instead of chasing a big exit). And on the technical side, most individual and institutional investors do not know how to participate in funding a shared ownership business. The resulting undercapitalization impedes their business development in the critical early stages and hinders their ability to scale. The good news is that we are starting to see change here, with the influx of impact investors and a slow increase in diverse, flexible, and non-extractive sources of funding/patient capital.
So if we want to see more cooperatively owned businesses we need to help a greater number of people know what co-ops are, what they look like in tech, healthcare, and other key industries, and that they are a viable business model. We need to help those who demonstrate interest in co-ops acquire the skills and know-how to build a successful co-op business. And we need to unlock access to values-aligned financing for co-op entrepreneurs and their start-ups.
Start.coop exists to power up the next generation of co-op entrepreneurs and their shared ownership businesses. We are actively working within and beyond the entrepreneurial ecosystem to increase the number of scalable, cooperatively owned start-ups and help them thrive by addressing each of the three challenges laid out above. Because we believe that a more robust ecosystem for co-op startups will create more shared ownership businesses succeeding at scale — which means unlocking broader prosperity and greater economic opportunity for those who have been historically excluded from wealth generation.
To learn more about cooperatives and the supportive ecosystem we are building for transformative, scalable shared ownership start-ups, check out this year’s class, our graduates, our resource library, follow us on Twitter, sign up for the Start.coop newsletter, or send us a note.
This article was co-authored by Greg Brodsky and Jessica Mason, Co-Directors of Start.coop.
