About Platform Cooperatives and the Investor Problem

A new form of internet startup is emerging — the “platform cooperative” — an attempt to merge the most equitable form of capitalism yet devised with the distributed, international, software-driven ambitions of Silicon Valley.

The term was coined by Trebor Scholz and Nathan Schneider to describe an emerging organizational form that merges the “platform” (such as Airbnb, Uber, Facebook, Twitter, etc.) with the “cooperative” — a business structure in which profits are shared across workers and members and is built on a foundation of democratic controls.

These new coop platforms are needed now more than ever, for the dominant paradigm coming from the Valley is to quickly build up portals that extract value from communities around the world… in labor, real estate, data, the creative arts and more.

The cooperative business model, by stark contrast, is often designed to do exactly the opposite – retain value and control among all participants.

As numerous experiments attest, these new platform coops face a number of challenges that their purely profit-driven cousins are spared. Chief among them is the investor problem.

First, let’s explore the traditional route most startups take.

Typically, new platforms go through a phase of aggressive development in which the programmer-founders either burn through their life savings or live out of their parents’ garage while developing the first version. For young adults in their early twenties, these hardships don’t present much of a challenge. And this is where the mythos of the startup begins — a feverishly driven small group of programmers who dream of changing their world through code and/or lining their pockets with stock options.

During this early stage, some are lucky enough to get an “angel round” which amounts to a small investment in the range of $50K-$100K, which gets them through the initial stage of developing a minimal viable product (MVP) while not starving and/or selling off all their possessions.

If their MVP actually works, they may attract users. Some will even get wildly successful during this early phase, building up a major following for an app or service that may or may not have an actual business model. The membership rosters surge, ushering in the next stage of major investment. This is when the VCs (venture capitalists) jump in, driven by an insatiable lust to build the next Unicorn (Silicon Valley shorthand for any startup that crosses the $1billion mark). VCs will sink hundreds of thousands, if not a few million dollars into the project, so that the once small team of founders can ramp up by hiring additional designers and developers. Usually swanky offices get built and things really get cooking.

So if the majority of all startups are funded this way, then this leads to a rather obvious question…

Can Cooperatives Get Funded With Cash From VCs?

Unfortunately (or fortunately, depending on your perspective) coops can’t take money from Venture Capitalists. Quite simply, VCs want more than just a return on their investment through partial ownership. They also want a say in how the company runs and what it’s goals should be.

The conflict with the cooperative business model is that the workers (and consumer/members depending on the service) are legally the only ones equipped through the by-laws to make decisions on behalf of the company.

This leads most platform coops (like the one I founded) to seek out crowdfunding in order to build the service.

But the good news is, there may be an alternative.

Having recently attended on conference on Platform Coops, the problem of “no VC money for the platform coop” may be surmountable through a financial vehicle known as a Redeemable Preference Share which allows for direct investment without voting rights and gives the coop an opportunity to buy back the shares once profitable.

The collaborative decision making app Loomio was able to raise a serious chunk of capital this way, so it means there really are investors out there willing to try something new.

All of us in the platform coop movement are taking a significant risk that the web is ready to move on to the next stage of it’s rather short life span — one in which the crowd isn’t data-mined without their full consent, where a few don’t profit off the massive content created by the many, and where an invisible workforce isn’t abused through exploitative, mechanical processes that turn apps into the coal mines and sweatshops of the 21st century.

To paraphrase Jim Morrison, they’ve got the bucks, but we’ve got the numbers. Will you join our ranks to build a better online systems?

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Originally published at resonate.is on October 3, 2015.