Want Your Cooperatively-Owned Startup to Succeed? Avoid this Common Trap

A shared ownership model is important but startup co-ops will fail to thrive without an equally robust business model.

Shared ownership is having a moment. The past few years have shined a new light on the economic, social and racial injustices of our society, and as people look for opportunities to better themselves, their families, and their communities, interest in shared ownership has surged. The idea of an alternative to winner-takes-all capitalism is alluring, and the promise of economic empowerment for those most affected by inequality in U.S. society means that more and more people are turning to shared ownership.

At Start.coop, we have witnessed this surge first hand: over 1200 founders have signed up for our free online Lean Co-op course , we experienced an incredible 46% increase in applications for our flagship accelerator program, and our inboxes are home to a continuous stream of inquiries about starting or converting to cooperative businesses. We are incredibly excited about this momentum; from providing solutions to the housing and childcare crises, to re-gigging the gig economy, to creating platforms that share wealth, these new co-ops are exploring innovative new structures and growing the co-op movement.

But alongside this impressive enthusiasm for starting a cooperative business, we meet too many entrepreneurs who neglect their business model, thinking that having a cooperative ownership model somehow decreases the need for a well-thought out and robust business model, or worse, thinking that cooperative ownership is their business model. Too many founders assume that because their business is a cooperative, customers will flock to it, revenue will magically emerge, and the business will thrive. This line of thinking can be a critical flaw; too much focus on governance and not enough focus paid on developing a strong business model results in many of them failing to thrive.

Three recent cases:

1: A cooperatively owned start-up who is spending the vast majority of their staff time on inclusive ownership exercises rather than business building. As a result, company revenue is not growing, and all of a sudden their governance discussions are about to get a lot more difficult because they can’t pay their founding staff.

2: A well-known cooperative which, due to increased competition in the space, is now able to allocate less funding and time to culture and owner education. Because revenue is down, it is all hands on deck. And the staff time that was devoted to cooperative education now feels like a “nice to have”.

3. An innovative, multi-stakeholder co-op who designed inclusive governance and financial rights for all members. While they had an amazing governance model, the company is no longer in business because there was too little customer validation on the business side.

When building a business it’s critical to think about both the business model AND the ownership model and invest heavily in the development of each. Too many traditional entrepreneurs think only about their business model, failing to consider democratic governance and who benefits financially when it does well. And too many cooperative entrepreneurs are so enamored with their ownership model — and specifically governance — that they fail to build a strong business model with a growing customer base, well thought-out marketing, and solid revenue.

For better or for worse, a company can not compete primarily on the basis of having cooperative ownership. Cooperative ownership is an ownership model, not a business model. How your company generates money to pay the bills is very different from who your company decides to have as owners or what your by-laws say. To put it simply, being cooperatively owned doesn’t magically reduce the need for a great business model. You need both a great business model, and a great ownership model.

Purchasing from a cooperative is a value-added “sweetener” for many socially conscious consumers, however it doesn’t influence the purchasing decisions of most people the way many cooperative entrepreneurs hope and believe.

I loved Field of Dreams, but in the real world, “if you build it they will come” is a fallacy. We encourage the entrepreneurs in our accelerator to let go of the idea that the very nature of a cooperative will result in customers flocking to a business. Their cooperative’s chances of success are dramatically higher if their marketing plan is not solely based on them being a cooperative. While it’s true that 78% of consumers report that knowing that a business is a cooperative would make them more likely to use its goods and services, cooperative ownership is rarely the customer’s primary consideration of whether to purchase from a business.

Having a business model is not “evil”, or “corporate”, it means you are planning for long term financial sustainability so that you can better achieve your cooperative purpose. And long term financial sustainability should be a goal of all cooperative businesses.

Which set of governance decisions would you like to have?

When there is not enough revenue coming into the business, the lack of money means governance decisions become mostly painful conversations like:

• “Who can we afford to pay?”
• “What projects do we need to triage?”
• “How do we keep the company going?”

But if on the other hand you can quickly get off the ground with a business that generates revenue (and even profit!), company governance decisions becomes fun:

• “How do we re-invest this money into our platform?”
• “How do we share profits with our member-owners?”
• “How might we invest more staff time to build participatory governance and culture?”

With a minimum viable governance system in place, a focus on a strong business model will create the opportunity (time and money) to build out a more robust governance infrastructure over time and ask these fun, rewarding questions. Start.coop 2019 graduate Savvy Cooperative is a great example, co-founders Jen Horonjeff and Ronnie Sharpe built a great business by deeply engaging with clients in their industry. Because of their excellent work to validate customer needs and pricing, they had a strong business model from the start and now have the financial resources and staff to better support cooperative members, while also being in a position to start sharing dividends with members.

The lesson for cooperative entrepreneurs is to build a minimum viable governance — a simple model that actively integrates member voice into key decisions based on the community’s values but isn’t yet perfect nor exhaustive — and then double down on the business model. As your business starts to thrive, you will have the opportunity to adapt and refine your ownership model to fit your co-op’s growing needs, spending more time and money on building out important governance infrastructure.

For more resources to help you build your business model and your ownership model, cooperative entrepreneurs can enroll in our free Lean Co-op course, or contact us to book office hours with myself or my Co-Director, Jessica Mason.