In the cooperative world, October is co-op month. October also marks the month that the National Cooperative Business Association (NCBA), the US co-op sector-wide trade association, hosts its annual Co-op Impact conference in Washington, DC. This year’s theme—Forward, Together—was optimistic. Paul Hazen—US cooperative hall of fame inductee and executive director of the US Overseas Cooperative Development Council, which supports cooperative development outside the United States, observed that the co-op movement has been “riding a wave that started in 2008.”
Even so, the obstacles to movement growth were hardly ignored at this year’s gathering. Haven himself remarked that co-op leaders have a “tendency to see the glass half empty instead of half full.” If last year’s conference focused on reconnecting with co-ops’ social justice roots, this year’s focused on the nuts and bolts of how co-ops can overcome the obstacles they face to achieve their social justice goals.
Financing the Movement
One area of focus was financing, with one panel titled, “Financing New Co-op Development, Early-Stage Growth and Business Expansion.” While the panel’s very existence speaks to the past decade’s expansion of co-op financing options, panelists were not shy about naming challenges that they face. Greg Brodsky, co-director of Start.coop, a national co-op accelerator program, noted that while the fund aims to provide investment for early stage co-ops, the Start.coop team still finds that, “There are six to 10 companies a year that are high potential that we don’t have the capital for.”
Casey Fannon, president of the National Cooperative Bank, noted that the problem was not a shortage of investment capital. In fact, Fannon contended that there was a “surplus” of capital. The problem, he said, was that available capital did not match user needs. To translate, this means that investors are seeking higher rates of return than co-op businesses seeking investment are able or willing to pay.
How do you square this circle? Panelists offered different responses to this question. Christina Jennings, executive director of Shared Capital Cooperative (“Shared Capital”), a community development financial institution (CDFI) that was founded by and lends to cooperatives, noted some of these tensions. The fact that Shared Capital raises much of its capital from co-op lenders may reduce pressure for higher returns, but co-op tolerance for losses is limited. As Jennings put it, the message from co-op investors is clear: “We’re supposed to take risks, and we better take smart risks.”
Jennings said that about one quarter of the projects that Shared Capital supports are startups. Most often, the CDFI finds it can lend to co-ops that seek its support, but sometimes “this comes with conditions that are challenging for cooperatives to meet.” As Jennings remarked, “We are betting on them to be able to repay us. Not VC [venture capital] level returns, but enough to cover the cost of capital and operations of the fund and put the money back out to other co-ops afterward.”
Raymond Guthrie, chief investment officer and head of capital deployment for Capital Impact Partners, another CDFI that lends to co-ops, said that part of the challenge is that co-ops are often “encumbered by debt.” This occurs for a reason. As Joseph Cureton, chief coordinating officer and cofounder of Obran Cooperative, which is owned by the workers of the businesses that it invests in, explains, “Co-ops are patronage-based, membership driven.” This creates tension with models of financing that rely on outside equity investors.
In short, the VC model of taking ownership, seeking a high return, and then exiting—that is, selling shares on the stock market or to other outside investors—is not possible. There are workarounds. For example, Todd Leverette wrote in NPQ about how the co-op investment fund that he helped create invests in employee-owned firms. The fund’s design involves seeking positive, but lower, rate of returns. Exit in this model occurs through ultimately selling the business to inside investors, namely, to worker-owners. In this case, the cash to pay back the fund’s outside investors is derived from the profits that the employee-owned business has generated over time.
Still, conventionally, a co-op’s equity comes from its member-owners. To gain ownership in a co-op business, co-op member-owners must each purchase a share in it. (Sometimes, in worker co-ops, this investment is made over time through a payroll deduction.) If the amount of equity needed to start the business exceeds the amount of capital that comes from member-owners, the gap must be filled in some way.
Borrowing money (debt) is one option, but too much debt can drain needed cash from a co-op business before it generates enough income to be able to afford to pay back lenders. This is the “encumbered by debt” problem Guthrie identifies, and it can easily sink startup businesses, as NPQ has noted.
Both Capital Impact Partners and Shared Capital offer equity investments in which business are only obligated to make payments if there are profits (such as non-voting preferred stock) and debt with equity features (such as loans with deferred payment schedules) to help fill this gap, but Guthrie estimated that only “two percent” of CDFIs offer equity investment as a financing option. Other investment vehicles such as crowdfunding also exist, but a gap remains between capital supply and demand.
In terms of resolving this gap, Brodsky suggested that a “charitable vehicle that could fund early-stage co-ops could be an amazing tool,” giving co-ops a “VC-like arm where we can take riskier bets.” Brodsky also offered that existing co-op employees could provide a source of risk capital.
Relatedly, Fannon suggested that if the co-op risk-aversion that Jennings mentioned can be reduced, then perhaps some co-op business revenue could help to finance startups. According to the US Department of Agriculture, annual co-op revenue tops $660 billion.
As this figure makes clear, the co-op sector is quite large—responsible for nearly three percent of US gross domestic product (GDP). But infrastructure to facilitate investments from existing co-ops into new co-ops is limited. The relational work needed to create meaningful economic links of solidarity and mutual support among these different segments of the cooperative movement is no small matter.
Outreach and Education: How to Spread the Co-op Model
Johan Matthews, community engagement facilitator for Cooperative Fund of the Northeast (CFNE), another CDFI, cautioned that even as co-ops have become more common in BIPOC communities, negative perceptions of co-ops in these communities persist. Matthews discussed the Co-op Cnxn program, a community engagement effort to help people in communities of color in upstate New York form co-ops. Matthews, who has led Co-op Cnxn since December 2020, described the engagement process he used, beginning with a months-long community listening process that preceded the program’s public launch.
Cooperatives have long played a critical role in the economic development of Black communities, a history honored this year with the posthumous induction of Ella Jo Baker into the US cooperative hall of fame. Still, Matthews emphasized that the co-op movement continues to have a “branding” problem among many African Americans. “Black people don’t do co-ops,” he noted, remains a common refrain.
But the word, “collective,” resonated, Matthews said. So, the CFNE program leads with collective—and seeks to “connect to cooperatives over time.” Other salient themes that came through community meetings included the importance of economic self-determination and of creating “opportunities for economic solidarity.” The hypothesis of the work, Matthews added, is that “if we understand all the reasons why folks with racialized identities don’t self-identify with co-ops, we can create one.”
Since Co-op Cnxn’s public launch, Matthews and community steering committee members have organized tours to spread knowledge about emerging co-ops in BIPOC communities and make existing models of majority-BIPOC cooperatives more visible. Matthews added that CFNE is also using learnings from the community engagement process more broadly to improve its investment and technical assistance offerings.
Building for the Future
The last session of the conference was, as has become the norm at these gatherings, a panel of US cooperative hall of fame inductees. At that panel, one of the inductees, Dan Waddle, senior vice president of the National Rural Electric Association, noted that the “uniqueness of a cooperative enterprise is it is an enterprise, but it has a social function.” Indeed, cooperatives were in this sense the original social enterprise, long before the term “social enterprise” was invented.
On that panel, Ajowa Nzinga Ifateyo, whose research was key to supporting Baker’s posthumous induction, reiterated the importance of education to Baker’s work and co-op development today. Echoing Matthews’ earlier comments, Ifateyo noted, “A lot of people don’t know about co-ops.…We are in a special place right now where the co-op movement has the potential to grow. If we have the education, the ideas are already out there. People need to know this is an option.”
Ifateyo added that co-op education needs to include both technical business skill development and unlearning. “We live in a society that is all about the individual,” Ifateyo observed. “We have to reorient people to talk about the good of the whole.”
This article originally appeared in the Nonprofit Quarterly. See the original article here.
