High Risk Venture Investment in Co-operative Start-ups

The Community Development Finance movement in the USA has led work on the development of Community Development Venture Capital. A few CDFIs have emerged in the UK with an equity provision focus. For example, CAF Venturesome designed with a team of us the National CLT Fund and provided the risk capital part of four stage co-financing model. Robert Owen Community Banking Fund here in Wales is a CDFI that has developed a system like this for community energy co-ops. Problems though arose when the FITs were cut and has restricted applications. Big Issue Invest could be interested as they are a community development venture capital fund essentially. Many CDVCs provide quasi-equity that they structured as deeply subordinated debt with no repayment before 5-7 years. So this provides the patient capital function for those social enterprises and co-ops able to convince the social investors.

Some context: I know the resource available for co-operative development is small, but I continue to wonder - with some amazement - at just how small the start-up rate for co-ops is compared to non-coop companies. The number from Co-operatives UK suggests that less than 200 new co-ops were set up in 2018. This compares - or rather it doesn't - with the number of new companies set up in the UK in the same period. I've seen one new report stating 660,000 new companies registered! The CIC regulator reports that 231 CICs were registered in Jan 2019 alone. Yes, co-operatives may be niche, but I would argue that by any reasonable measure the co-operative movement is failing pretty badly to build its own future. Even if we were to say that 99% of new company formations are one-person and their dog operations and to discount them on that basis, that still means that 1%, or 6,600 are valid in terms of a comparison, which means that co-op start-ups are about 3% of the market.

absolutely Graham. the issue is not available funding or coop friendly laws but awareness.

awareness of the coop option and solution to social needs has fallen to next to zero in the UK.

part of this i think is the fallout from old style coops which are unattractive to modern people.

and part is a failure to get to the kind of people who started 3000 worker coops in the late 70s and early 80s. who are the modern equivalent? why are they not hammering on our doors demanding help to start their coops?

this is a UK problem I believe.

Bob

Hi @alexworradandrews - thanks very much for pitching in. Highly relevant.

A great question Graham. In our recent report for Co-ops UK and the Co-op College, Working Together, we showed ways and means to tackle this lack of appropriate financing mechanisms. Public policy does matter and since the early 1990s has not favoured co-ops but social enterprises and employee ownership. When this policy shift happened there were about 3000 worker co-ops and the decline in number since then has been continuous. As you mention, ICOF had an endowment in the 1970s to get going and other public sector endowments have seed funded more CDFIs under the Phoenix Fund. In Italy in the early 1990s there were about 3000 worker and social co-ops. Now there are 23,000 but public policy supportive frameworks have given tax reliefs, helped support the development of mutual guarantee societies to pool co-operatively enterprise risk insurance. The MGS system enables co-ops to access lower cost capital from the 400 co-op banks in Italy. Also these banks and worker co-ops have co-developed a hybrid product, an equity loan that is patient in quality and by design to be so.
Money and banking for investor ownership enterprises are complex and adapted. We need a co-op financing eco-system that is similarly complex and adapted to be fit for purpose. We have three huge gaps: no mutual guarantee society system for risk insurance, no co-op equity bespoke products and services and no co-op banking system that wants to move to solve this democratic financing deficit. Alex Bird and I are involved in the work in Wales on a regional co-op bank for Wales. We have joined the CSBA working on other regional co-op banks in London, Bristol and the South West. There is also keen interested in Greater Manchester. This work could help address the gap.

@cathcornerstone

Thanks Pat. It would be great to understand more about this new wave of co-op regional banks. I'd like to see something like this happening in Kirklees/West Yorkshire.

Everything on this thread is both true & relevant.
Do you know this conversation is going on...? https://www.nesta.org.uk/event/platform-co-ops-solving-capital-conundrum/
Some exciting announcements in the offing being developed by Co-ops UK, Nesta & OSF.

Not to mention the main exciting thing being our upcoming Pioneer share offer!

I think (I might be wrong) that this event may also be related to the 'Funding Spark' conversation that we raised some support for at Congress 2018 as part of the Unfound programme.

I really do recommend reading at least page 26 onwards of the NESTA report - interesting use of withdrawable shares within a co-operative society where withdrawal of investor members shares is funded by the reinvested divi of the growing no. of transactional members.

The report does focus on replacing the lots of money needed up front replacement for a VC model - the focus of this thread. I would also recommend a twin-track approach - looking at growing from a Minimum Viable Product (MVP) that uses existing low-cost platform tools which can be further developed using the reinvested profits - the permaculture principle that truly sustainable solutions are often small and slow.