CO-OP CAPITAL

Users should be able to own the businesses they love instead of investors

Here’s a story you hear on repeat from apparently successful founders: Their start-up had a great idea, and users thought it was great too, so it became worth something. Investors offered fast money in exchange for chunks of ownership. The founders liked a lot of the investors and valued their advice. Some became real-life friends. But before long, the founders discovered that their companies were no longer built around that original idea anymore, or even around the users it could serve. The whole point had become to extract short-term returns for shareholders—and to disguise that fact from users. The great idea, together with the community it attracted, became a mere commodity.

This is the story that has brought us many wonderful machines; the one that enables huge investments in risky startups, of which a few end up making something worthwhile. Young people with clever ideas—but not a lot of business experience—get drawn in. Their mentors and accelerators groom them to be what investors want to see. For some, it works for a while. But most good ideas are not that rare unicorn that disrupts the world and delivers fabulous wealth. Many are merely useful and sustainable—they would make better communities than commodities.

Start-up founders deserve a wider range of choices in how to get their ideas off the ground, and so do their eventual users. Investors can still make a fair profit for playing their part. There’s a whole set of companies that inhabit the territory between boom and bust—companies that have good cash flow and a devoted user base, but that aren’t satisfying the cravings of Wall Street. These are the kinds of companies that might lead the way for a different kind of internet; one that aligns ownership with the interests of its customers, and puts the ownership of companies in the hands of the workers and users who depend on them.

Consider Paul Allen—not the billionaire who co-founded Microsoft, but the one who brought the world Ancestry.com, the genealogy website. Allen and his co-founder started with CD-ROMs in 1990 then started making websites later that decade. They owned nearly the whole company and were soon turning a profit. They raised millions of dollars from investors, moved the headquarters from Utah to San Francisco, and by Y2K, they were edging toward being one of the top 10 web properties in the world.

Then there was an aborted IPO and a sequence of deals—deals that Allen now admits he didn’t fully understand. The slice of shares he owned grew smaller, and he finally left the company and its board in 2002, watching as Ancestry endured the vicissitudes of various private-equity buyers and sellers. He’s still proud of what the platform he helped build offers its users, but he has grown philosophical as he watches the current investor-owners squeeze the company for whatever they can get—even eliminating vast troves of users’ family memories from an affiliated website in the process.

“When people ask what modern invention has led to the most inequality in modern civilization,” Allen told Quartz, “the answer I give is ‘the modern corporation.’”

Lately, Allen has become enthused with the model of the John Lewis Partnership, a British retail chain. In 1929, the year after the company’s founder and namesake died, his son John Spedan Lewis began the process of transferring ownership to a trust on behalf of his employees. The company’s workers now receive a share of its profits and can elect representatives to the board.

 For online platforms, users are often natural stakeholders. For offline retail, employees are natural stakeholders; they’re the ones who have to show up every day, and the more investment they feel in the company, the better work they’ll do. But for online platforms, which tend to employ far fewer people relative to their value and develop dependency relationships with their users, those users are often natural stakeholders, too. Winning their trust is winning their eyeballs and their data.

When Ancestry was a rising star and making a profit, what if the founders had been advised to raise investment capital directly from their users, who were already paying and relying on the platform? Investors could have facilitated the transfer with capital up front, making a reasonable, reliable return in the process. And with users as owners, you can bet they wouldn’t vote to delete their families’ archives, as the company later did, without consulting those most affected.

That’s an idea that Mark Zuckerberg might consider. The Facebook CEO has announced plans to transfer 99% of his stock to an LLC he controls and intends to use for unrelated pet projects. But what if he were to put that stock in a trust, owned and controlled by Facebook users, as JLP did for its workers? (Although Facebook has formal employees, it’s reasonable to consider its users to be workers as well, since most of them don’t pay for services and do the labor of furnishing the platform’s content.) Users could elect their own board members so they have a hand in decisions about what’s done with their personal data. They could even distribute dividends.

There is a growing set of experiments along these lines emerging under the banner of “platform cooperativism,” a movement for democratic ownership models in the online economy. Purpose Capital, for instance, is a fund designed to keep tech companies under the control of the people who build and love them, rather than rushing to a buyout or IPO. Equity crowdfunding—like Kickstarter, except your kickback is stock, not just a product—was recently legalized in the United States, and it can help companies raise money by making users co-owners, adding a long-term investment in their users’ best interests to the cash infusion. Rather than grooming founders for an audience of investors, accelerators can help them prepare to meet their future user-owners.

“Ownership matters, and it and translates into greater user adoption and loyalty,” says Jason Wiener of Colorado Cooperative Developers, a leader in the new generation of social-enterprise lawyers. “I’m even seeing investors willing to forego conventional control and accept a more modest return if it means supporting a democratic organization.”

Tech can also learn from the little-known sector of cooperative finance—like the $126 billion CoBank, which is co-owned by its borrowers. In a case like that, both the bank and the borrower have an investment in each other’s success, resulting in the kind of mutual trust that may save in the costs of contracting. Smaller outfits like The Working World and Project Equity are helping some of the millions of retiring baby-boomer business owners finance conversions to worker ownership. What if accelerators introduced their startups to options like these, alongside the usual investors?

Balancing the competing, diverging needs of investor-owners and users is a cumbersome task. Given the choice, many companies may find they’d be better off making their owners and users one and the same.

You can follow Nathan on Twitter at @ntnsndr. Learn how to write for Quartz Ideas. We welcome your comments at ideas@qz.com.

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