Funding a platform co-operative

We’re exploring how to convert Geddup to a platform co-operative. Part of this is seeking to understand how co-ops can raise scale-up funding. Following is a dot point discussion of some of the key points. We’ve also drawn up draft term sheets for hybrid equity and ordinary equity Co-operative Capital Units that we’ll be seeking to road-test with investors. Feel free to get in touch if you’d like to discuss.

The objective

To create a funding structure that is both:

  1. Attractive to non-member investors for investing startup capital in a platform coop; and,
  2. Enables scale benefits to be shared with members of the co-op rather than being channeled solely into equity investor returns.

The problem

To attract capital to fund activities, a business must be expected to earn sufficient profit to provide a return on capital commensurate with its risk, while preserving the base capital.

A cooperative structure creates a member interest where members are typically motivated to minimize the cost of using the platform’s services – as this is how they receive benefits for using it. As members also control the revenue model of the platform (via one-vote per member), they can manage the pricing of services to achieve this goal. As a result, a co-op will generally gravitate towards a break-even operating basis.

This arrangement is fundamentally at odds with a profit motive and makes it difficult for a co-op to attract non-member equity capital. In the absence of a credible profit motive, and explicit mechanisms to control the revenue model, non-member funding options are therefore limited to those that offer more predictable returns and rank ahead of member interests. This type of investment is not typically associated with start-up funding that requires very high returns on capital to warrant the inherent risks in a start-up business.

Possible solutions to attract equity investment

Given that member control of the revenue model is one of the key features of a co-op, the question is whether there are ways for members to either moderate their control, and/or align their interests to a profit motive, sufficiently to attract equity capital from non-member investors?

Some of the ways that a co-op can create an alignment of interests between stakeholders with respect to pricing and profits are:

  • Board representation for non-member stakeholders – while directors must always act in the interest of all stakeholders, it is not uncommon for Boards to include specialist expertise (for example, allowing non-member investors to elect a Board representative with relevant expertise);
  • Enabling staff to participate in profits – to motivate staff to optimise profits (for example, by creating a bonus pool from which staff may be rewarded);
  • Enabling members to participate in profits – as a counter-weight to minimizing pricing (for example, by paying dividends on member shares); and,
  • Creating Board directives around the profit objective – embedding objectives in the constitution to provide clarity for the Board in making decisions regarding the revenue model and payment of dividends (for example, by requiring the Board to pursue market competitive pricing or a return on equity benchmark).

These types of mechanisms in combination may be sufficient to entice non-member investors into equity start-up funding.