Equitable Economy Fund will provide early-stage equity
by Karen Kahn
In American business, a mystique surrounds the solo entrepreneur—but many of those who succeed in truth got a good deal of help along the way. One of the tools that has become ubiquitous in high-tech areas such as Silicon Valley is the business accelerator—a program that provides business education, coaching, mentorship, connections, and investment to help early-stage businesses get to scale. Since 2018, Start.Coop has been running an accelerator for early-stage cooperatives, which has included some modest financial assistance. Most recently, this effort has added a more substantial capital dimension with the launch of the Equitable Economy Fund.
Cooperative entrepreneurs don’t have access to the full range of financial tools that other businesses have. There is a mismatch between what they need to grow and scale—high-risk equity financing—and what is generally available to them: low-risk debt.”—Greg Brodsky, founder of Start.Coop
In a recent interview, Greg Brodsky, founder of Start.Coop, noted, “We see a ton of interest in starting cooperatives right now, but there just isn’t enough support. We wanted to help the highest potential entrepreneurs get to scale.”
Brodsky grew up steeped in the idea of cooperatives. His father co-founded Carpet One, a purchasing cooperative that grew to include over 2000 carpeting stores, one of the largest carpet retailers in the country. The purchasing cooperative was so successful that Brodsky, in his mid-twenties, brought the same concept to bike shops. And later to craft breweries. After some time in and around high-tech startups, Brodsky began to think about how he could put the tools that were being used to launch tech startups to work to build a more robust cooperative economy.
In late 2018, Start.Coop launched its accelerator program, with a competitive application process. Out of 75 applications from early-stage businesses, a half-dozen teams were chosen to participate. Two additional cohorts have since graduated. Among those that have benefited from the program are Ampled, a musician-owned platform cooperative through which fans can support their favorite artists; Obran, a cooperative conglomerate owned by the workers at its multiple subsidiaries; and Forty Acre Coop, an agricultural cooperative owned by rural and urban Black farmers.
Participants in the accelerator go through an intensive 16-week cooperative business curriculum. In addition, they receive individualized coaching, access to a “world-class mentor community” and curated business management tools, and a financial investment of $20,000 ($10,000 cash and $10,000 in services). The cohort approach, says Brodsky, has been very successful; the teams value learning from accelerator faculty, but also one another.
But interviews of the entrepreneurs who participated in the accelerator program identified a continued obstacle to their growth plans: access to capital. The accelerator program provided much needed education and technical assistance but barriers remained when it came to financing. Says Brodsky, “We saw that cooperative entrepreneurs don’t have access to the full range of financial tools that other businesses have. There is a mismatch between what they need to grow and scale—high-risk equity financing—and what is generally available to them: low-risk debt.”
To solve that problem, Start.Coop has recently spun off the Equitable Economy Fund, a new angel investor fund that provides start-up and growth capital for cooperative businesses.
Equitable Economy Fund
Start.Coop’s goal is to create “a community of values-aligned investors to invest in cooperatively owned businesses poised for growth.” It hopes to attract investors who want to use their wealth to achieve a more equitable economy by investing in shared ownership enterprises led by and serving people of color.
The Equitable Economy Fund hopes to attract investors who want to use their wealth to achieve a more equitable economy by investing in shared ownership enterprises led by and serving people of color.
As yet that community doesn’t exist, says Brodsky, so the fund is a pilot project, testing the theory that an investment fund focused on cooperative businesses with leaders of color can attract social investors, demonstrate social impact, and offer steady returns. The goal is to raise $2 million for a ten-year closed fund. More than two dozen investors have already committed to help the fund exceed its first-year capital goals.
The Equitable Economy Fund differs from many of the existing employee ownership funds in its focus on start-ups and growth-stage cooperatives rather than conversions of traditional firms to employee-owned firms. Start.Coop is also agnostic on the type of shared ownership represented by these businesses; the fund will invest in promising cooperatives of all types: consumer, producer, worker, or multistakeholder. Brodsky points out that some of the most exciting teams participating in the accelerator program are launching platform cooperatives, like Ampled and Driver’s Coop, a ride-hailing service owned by its drivers preparing to launch in New York City.
The goal, says Brodsky, is to help more cooperatives survive “the Valley of Death.” Many startups—both traditional businesses and cooperatives—don’t survive their first five years. Access to capital is often the death knell. It’s hard to get a loan if the business doesn’t yet have a track record. For cooperatives there is an added obstacle: owners of a collective business can’t satisfy a traditional lender’s personal guarantee.
Early-stage businesses are usually self-financed (sometimes with help from family and friends) or the lucky few— less than 1 percent —find angel investors or venture capital. Think Apple, Google, Amazon. They wouldn’t have succeeded without a lot of early cash. But the entrepreneurs who most often have the access to early capital are white men. Start.Coop, Brodsky explains, “wants to use its investments in businesses with shared ownership and BIPOC [Black, Indigenous, People of Color] leadership to change that landscape.”
The expectation is that the fund will make a dozen or so investments of $10,000 to $100,000 annually, shared between six to eight startups, four to six growth-stage firms, and two to three mature firms. The seed stage businesses will be sourced from the accelerator participants, while the other opportunities will be identified through the network of advisors, mentors, service providers, and investors that are part of the Start.Coop community.
Equity investments in cooperative businesses are a bit different from traditional equity investments, says Brodsky. Usually, investors earn their returns at exit when the firm is sold. But cooperatives are owned by their members for the long term; investors are minority shareholders. The early-stage cooperatives will pay back their investors by allocating a share of revenue at a predetermined multiple—i.e., investors will receive anywhere from 1.5x to 4x their original investment, based on a pre-determined formula. For other firms, the return is based on profit-sharing or a pre-determined target dividend.
Going to Scale
In the last few years, the cooperative community has begun to settle on a shared understanding of the key barrier to growth: financing. What’s exciting to see are new tools emerging for cooperatives at different stages of development and growth. Brodsky makes the point that much of this is possible due to changes in the legal landscape that now allow cooperatives to have minority investors. Equal Exchange, which had net sales of $81 million in 2019, has been one of the pioneers in using investment capital to grow. The Equitable Economy Fund is testing the efficacy of bringing early-stage equity to startups and growth-stage coops. Multiple new and emerging funds are seeking to finance employee buyouts as baby boomers look to retire. As the capital ecosystem grows, so will cooperatives, providing the foundation for a more just and equitable economy.
Karen Kahn is a communications consultant and the editor of Employee Ownership News.