Venture Capital/Analysis/ Tech investors should start backing worker-owned co-operatives Worker-owned co-operatives are some of the most resilient businesses in the startup world, so why don’t investors back them? By Tim Smith 15 October 2021 Richard Bartlett, Loomio cofounder Richard Bartlett, Loomio cofounder \Venture Capital Speedinvest starts €3m fund of funds programme to back emerging managers By Eleanor Warnock 17 February 2023 Venture Capital/Analysis/ Tech investors should start backing worker-owned co-operatives Worker-owned co-operatives are some of the most resilient businesses in the startup world, so why don’t investors back them? By Tim Smith 15 October 2021 There is a new class of highly resilient, tech-powered companies that are emerging with a different model from the norm. They are called worker-owned co-operatives (co-ops), and data shows that there are a growing number in Europe and they are far more resilient than regular startups. Co-ops are businesses that are owned and governed by their workers rather than shareholders, and 76% of them survive their first five years, compared with 50% of other startups. For co-operatives that are able to attract investment, the all-time survival rate goes up to 92%. Worker-owned co-ops cover all sections of the economy, from community-owned pubs to supermarkets and sports teams. They are now starting to challenge the status quo in the tech world too, and investors haven’t woken up to them yet. Platform co-ops are a subset of this model, which use an online platform or app to help people exchange and share services, goods or data. In Europe, platform co-ops are already beginning to offer alternatives to music streaming, taxi hailing, food delivery and courier startups, to name just a few sectors. A fairer tech economy? The idea, according to Ludovica Rogers, programme manager at Co-operatives UK, is that gig economy workers can take back control of the terms of their labour, putting an end to precarious and poorly paid work, by running the tech platform themselves. “They set up the tech platform to eliminate the intermediaries, but then they control the platform, and they control the wages,” she says. Ludovica Rogers, programme manager at Co-operatives UK This summer Islington Council in London made a seed investment into Wings, a worker-owned ethical food delivery platform. The service uses technology from CoopCycle, a federation of worker-owned delivery platforms active in eight countries and more than 50 cites. “We’re determined to make Islington a fairer place, and as we emerge from Covid-19, to rebuild an economy that works for everyone, giving local people a share of the opportunities on their doorstep,” said Islington councillor Asima Shaikh, about the local government’s decision to back the startup. But while grant investments like this from public bodies are a relatively common source of funding for worker-owned co-ops, institutional private investment remains a rarity. How to invest On the face of it, there’s one seemingly quite obvious reason that VC firms and other equity investors might not be keen to back worker-run co-ops: ownership. If your organisation has a worker-owned model and governance structure, it’s harder to dilute equity or hand over any decision-making power to external investors. This hasn’t stopped some VCs, though you need to look beyond Europe for examples of institutional investment into worker-owned co-ops. Founded in New Zealand in 2014, Loomio is a startup that develops decision-making tools and software for organisations. It’s run as a worker-owned co-operative, and last year made NZ$270,000 in revenue. In 2015 the team landed $450,000 in seed funding, in a round led by Seoul-based impact fund Sopoong Ventures. To make the deal work in line with Loomio’s governance structure, they agreed to an investment structure known as a “redeemable preference share”. The term sheet “It functions a lot like a debt,” explains Loomio cofounder Richard Bartlett. “The investor has bought the share, then it’s redeemable in the sense that the company will eventually buy it back off him. And it’s a preference share, because we will pay him off before any other debts or anything else.” Another debt-like structure that’s been used by VCs to fund platform co-ops is revenue-based financing (RBF), where rather than handing over equity in exchange for capital, the startup pays the investor back gradually, as a portion of their revenue. In 2020 New York-based healthcare co-op Savvy raised an undisclosed sum from Indie.VC using RBF, and while the fund closed down earlier this year, more and more investors are starting to use this method of financing. Revenue One investor actively pursuing these kinds of deals in Europe is Riverside Acceleration Capital, which uses both equity and RBF. “We would most certainly be open to investing into worker-owned co-operatives. Actually, it’s a very good fit, right? Since we do not demand any equity, that would work really well together,” says Cologne-based partner Christian Stein. Christian Stein (left) and Michael Aring of Riverside Acceleration Capital Stein, who’s been working in venture capital since 2007, believes that institutional investment is beginning to shift away from an “equity by default” model. “I grew up in a time where there was nothing else but equity,” he says. “I would say now there’s probably a new [investor using RBF] every quarter. The last 12 months has been absolutely crazy.” Irreconcilable outcomes It can only be good news for worker-owned co-ops that some VC veterans seem to be changing their mindset about what a successful investment looks like. That said, there’s no getting away from the fact that most of Europe’s early-stage capital is still held by traditional equity-only VC firms. According to American lawyer and worker-owned co-op advocate Jason Wiener, there is a fundamental clash between the underlying motives of most VCs and co-ops. Jason Wiener “Investors would rather see every dollar ploughed into growth toward a liquidity event that yields them the return they’re hoping for,” he says. “The underlying purpose of a co-operative is not to grow at all costs, and then exit at the highest possible point in the curve. It’s to grow and sustain value for its members, ideally, in perpetuity, or at least until the members decide they’ve had enough. It’s not to grow to a liquidity event. So we have to square those two seemingly irreconcilable outcomes.” Return on investment It’s certainly true that if investors are only interested in backing would-be billion-euro companies, and if cashing out at an exit is the only measure of success, then worker-owned co-ops aren’t a good fit. If, however, they’re interested in diversifying their portfolio with investments that are likely to provide a stable return, co-ops can be a worthy addition to a portfolio, according to Cansu Deniz Bayrak, senior partner at Bethnal Green Ventures. “Venture capital funds rely on outliers to be able to give the returns that their investors expect,” she says. “There’s also the expectation that the majority of the portfolio will either fail or will become healthy, sustainable businesses, but they might not be those outliers. And that’s absolutely fine, that’s part of the model already. So I think in that sense, there is definitely a place for [worker-owned co-ops] to attract funding, provided they have the appropriate structure for a VC firm to be able to invest without friction and an ambition for relatively fast scaling.” Cansu Deniz Bayrak Stein, from Riverside Acceleration Capital, adds that while you won’t get the same kind of moonshot results on individual RBF investments as you might by backing a unicorn with equity, on a portfolio-wide level the returns are roughly comparable to equity VC. When there’s a will… Rogers, of Co-operatives UK, says that many in the new wave of tech-powered platform co-ops are using a multi-stakeholder model, which also allows users of the service and investors to take some ownership of the organisation. One example is Dublin-headquartered music streaming platform Resonate, which has four different classes of membership: musicians, listeners, workers and supporters. Supporters are able to invest up to €100,000 and then receive a dividend, as a portion of Resonate’s annual surplus. Some co-ops have also been able to attract funding using innovative deal structures that allow for some kind of equity position for the investor, according to Wiener. “We’ve done a few deals where the investors say, ‘Yeah, we’ll get paid out, but we’ll hold onto 1%, or some kind of proxy for a 1% interest in a liquidity event,’” he explains. “We’ve taken the concept of most types of financing and we’ve been able to graft them on to the co-operative structure. And what we find is the structure — the deal terms — is not so much the issue as the underlying motivation and outcomes that the parties are pushing for.” That is to say that, if an investor is serious about investing in a platform co-op, they can find a way. And if they’re interested in backing resilient organisations with clearly defined sustainable goals, they could certainly do much worse. Tim Smith is Sifted’s Iberia correspondent. He tweets from @timmpsmith Related Articles The Europeans rethinking the gig economy model By Tim Smith Click here to read more Gorillas: The new WeWork? By Miriam Partington and Freya Pratty Click here to read more Glovo riders go on strike as European gig workers rise up By Tim Smith Click here to read more Most Read 1 \Healthtech Is Daniel Ek’s new body scanner worth the hype? Sifted tried it out 2 \Venture Capital VC diversity needs to change — and white men need to take responsibility 3 \Venture Capital New €3.75bn European Investment Fund pot to back late-stage VCs 4 \Sustainability Counteract closes £15m fund for carbon removal solutions 5 \Mobility Was the $5bn that VCs plugged into escooters worth it?