Loomio
Mon 18 Feb 2019 5:03PM

High Risk Venture Investment in Co-operative Start-ups

G Graham Public Seen by 67

I'm always being told that there is no shortage of available finance for new co-operatives. And yet what I see on the ground is that while there are some ways to access some limited grant support for early stage projects some of the time (and if the project happens to meet the criteria of the funder), and no shortage of fairly pricey debt finance for those that are in a position to repay, there doesn't yet seem to be anything around that might offer something akin to what we might in the private sector call angel investment. I'm thinking about relatively high risk investment in new-start cooperatives, with the potential for a high return over time. Where a VC would take a hefty equity stake and be looking for a high value early exit, I'm thinking instead of a repayment curve where the investor could potentially still get a hefty return, but over a much longer timeframe, giving the co-op a good long runway to build a sustainable business model. The payments come out of profits rather than revenue. And of course the investor doesn't have to demand a 3x or 5x return: many of the people that put their money into ICOF weren't interested in a return, they just wanted to see good things happen.

A couple of examples of investment firms that are doing this sort of thing already that I've come across are: https://earnestcapital.com/ and http://purpose.capital/en/ If you look at the companies that Purpose ventures has supported, you'll see at least three that - in my view - are really close to the co-operative economy in terms of their values and ethos: Open Collective, Sharetribe, and Coliga.

I would be really interested in your thoughts on this idea. Is there a gap in the market. Is the paucity of new co-op startups in part as a result of the lack of early stage risk capital?

NBC

Nathan Brown (Co-op Culture) Mon 18 Feb 2019 5:10PM

I would have thought if that was the case we would see a bunch of non co-op start-ups saying "This is why we couldn't be a co-op, even though we wanted to be". I see far more people with ideas that aren't businesses or have no recognisable market so would not be worth investing in. To attract Venture Capital you have to pass a much higher threshold of proving the market potential with evidence or research, which I am afraid to say is a common weakness among coop start-ups (despite advice telling them to address this!). Might be worth talking to CCF to see if they have evidence of demand for this sort of finance?

G

Graham Mon 18 Feb 2019 5:28PM

I think my point is that you never see or hear from the people who would create these co-ops because there is no financing model that suits their business ideas - they've ruled out the co-operative model long before they might ever talk to you.

SWS

Sion Whellens (Principle Six/Calverts) Mon 18 Feb 2019 5:10PM

Think you're absolutely right. Cold we design a tapered version of the kind of loanstock/fixed term bond (debt behaving like equity) that the RR network uses for co-housing coops? Obvs a worker coop starter is more risky but it's still unsecured debt and people seem quite willing to take returns of between 0 and 2% early on.

G

Graham Mon 18 Feb 2019 5:47PM

Think about a new platform co-op start-up: the founding group have a killer business idea, but don't have software development expertise or money. They approach a group like CoTech, and get a 6 -figure estimate for the development cost for their digital platform. then there's the marketing budget required to reach and onboard all the platform participants. Could easily be looking at another £100K. ICOF bless 'em have little in-house tech expertise (I don't know whether this is the case or not, I'm merely setting out a scenario), and although the spreadsheets are telling them that there are healthy profits to be had in year 3 and beyond, are very shy to put their toe in the water, and in any event they want repayments to kick in after just 12 months, which is right when the plan suggests that cashflow will be at it tightest. The founders have got just £20K between them to put on the table. Where are they going to get their £200K from and avoid selling out to a VC?

AW

Alex Worrad-Andrews Tue 19 Feb 2019 12:30PM

Common Knowledge (the cooperative I am a founder member of) is currently approaching this problem.

We have an MVP, or a set of MVPs we are pretty happy with, a solid vision and a decent set of internal processes. Now we need to fund the ongoing proper development work. We are not adverse to taking VC per sae if the investor understood the project and prospective business model. We do have a few problems with our legal formation to give share options to potential funders, but might be able to take on the debt in another manner.

This conversation is therefore highly relevant to us so I could not be more all ears! We are basically in this position right now, with the difference that we do have developers on board (indeed a whole team) but don't have the resources right now to go full time on it and certainly not to scale.

MSC

Mark Simmonds (Co-op Culture) Tue 19 Feb 2019 11:46AM

I would be seriously considering a pioneer share offer to fund the development costs - aimed at co-operators and potential users of the platform.

MSC

Mark Simmonds (Co-op Culture) Tue 19 Feb 2019 11:47AM

Nothing to prevent a cocktail finance approach with a mixture of bonds, shares and even grant.

MSC

Mark Simmonds (Co-op Culture) Tue 19 Feb 2019 11:50AM

I think that what you are suggesting @graham2 is a legal vehicle where the investor invests in the primary vehicle to create a fund available to invest in projects that may not yet exist. I'm not sure of the regulation around this. I think that Rootstock (which has done this for years) may be amending its setup to account for this regulation. Maybe @andrewwoodcock would have useful stuff to add to this discussion.

G

Graham Tue 19 Feb 2019 12:23PM

I guess I was thinking that Platform 6 could be this entity, or perhaps a wholly owned subsidiary of P6. I've not idea what the regs might be around this whole issue - merely looking at it as a way of getting more risk investment in place in order to grow the co-operative economy.

G

Graham Tue 19 Feb 2019 12:18PM

@leosammallahti - how would/could Coop Exchange fit into this type of thing?

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