On Capital Conundrum And Preston Model For Platform Cooperatives

23rd March 2019
by Leo Sammallahti
Marketing Officer, Coop Exchange

NESTA report and event on platform cooperative capital conundrum

I had the pleasure of attending the NESTA event “Platform Cooperatives And The Capital Conundrum” that celebrated the publication of a report with the same title. The biggest announcement of the report was the launch of a Platform Cooperative Fund with the goal of raising £1,000,000. The fund seeks to attract funding, particularly from institutional social investors, and will provide initial funding for platform cooperatives to get them through the early, pre-trading “valley of death” until they start generating a revenue and raise investment from their users. Once profitable, the platform cooperatives will pay back the investors, perhaps with a small profit, and gather capital from their members from then on. The first platform coop to receive funding will be the Equal Care Coop, which is building a multi-stakeholder social care cooperative owned by both the givers and receivers of care. The panel discussion also included Kat Five from Resonate, a platform coop alternative to Spotify co-owned by musicians and listeners (I'm a member of Resonate and warmly recommend everyone else to join as well).

We are very excited to see the British cooperative movement, the oldest in the world, also spearheading the development of the youngest branch of the movement, that of platform cooperatives.


Ed Mayo, head of Cooperatives UK, talking about platform cooperatives

Two Reasons Why The Platform Cooperative Investment Fund Is A Big Deal

1. Cooperatives tend to have difficulties getting on their feet, but once they are up and running they can run faster and longer than other companies. For example, worker cooperatives have a lower risk of bankruptcy and higher productivity than conventional firms, but they are rare due to low rate of formation. This is why providing initial funding to get cooperatives on their feet is a good approach for the fund.


2. The other reason is something that was addressed by an excellent audience question by Patricio Julián Gerpe on whether platform cooperatives should distinguish themselves from conventional tech companies by having replicability, not scalability, as their goal. If the investment funds development of open source platforms, it allows other cooperatives that need a similar platform to develop their own cheaper and faster. Every time one platform cooperative has passed the valley of death, there is a better map for new ones to pass the valley using shorter and safer routes. This is why the next two chapters focuses on the phase after the valley of death.


The Preston Model For Platform Cooperatives - Anchor And Lighthouse Institutions


As open source software makes creating the platforms for platform cooperatives cheaper, the need to attract people to use the platform grows in importance relative to initial funding. I outline two ways that attracting users could be done. The first is through anchor institutions that buy goods and services from the cooperatives. This approach has been applied with success in Preston, where publicly-owned institutions such as hospitals have spent a larger share of their budgets on buying from small, local and cooperatives businesses.


The second approach is something that has not yet been tried out, which could be called “lighthouse institutions”. Lighthouse institutions direct traffic to platform cooperatives. These could be trade union, public and cooperative sector websites, mobile applications or email lists that would be used to invite new users to the platform cooperative.


As a hypothetical example of using an anchor institution approach to support a platform cooperative, the National Instutite Of Health could recruit research participants for medical trials using Savvy Cooperative, a platform cooperative owned by participants of medical trials. 
If the National Institute Of Health website would display messages for their visitors that would encourage them to take part in a NIH funded study through Savvy Cooperative, they would also be serving as a lighthouse institution. For example, NIH might fund a clinical trial in Boston researching diabetes, and the NIH website would display a message encouraging visitors to take part in the trial through Savvy if they are visiting NIH online content about diabetes and are from Boston.

Example of Savvy gigs

Alongside public institutions, trade unions and other cooperatives can act as anchor and lighthouse institutions as well. A worker owned cooperative of truck drivers in Finland with 4.5 million currently in turnover was started by truck drivers working for HOK Elanto, a cooperative that is the country’s largest private employer and the largest retailer. This is an example of a large cooperative acting as an anchor institution for a smaller one. National Union of Rail, Maritime and Transport Workers emailing its members to join the RMT credit union is an example of a trade union acting as lighthouse institution.


Two Limitations On Membership Funding For Cooperatives That Survive The Valley Of Death


There are few limitations on relying on investment from members after the initial investment from the Platform Cooperative Investment Fund.

1. When it comes to raising capital from members, worker cooperatives have fewer members than consumer cooperatives, but those members are more intensely involved with the coop, so it is likely that they would be more willing to invest. However, worker cooperatives with low income members are less able to take advantage of the willingness of the intensively involved members readiness to invest in the cooperative, as the members are more likely to lack means to invest even if they wish to do so. However, they still have the disadvantage of smaller membership. It could be argued that worker cooperatives of low- income members hold the most transformative potential of platform cooperativism, but unfortunately it is exactly those sort of cooperatives that are the least able to gather capital from their members.


2. Another problem for cooperatives of low income members is loss aversion. Loss aversion refers to findings from multiple psychological experiments that suggest that people tend to react more strongly to losses and risks than to wins and opportunities. The bad feeling from losing £100 tends to be stronger than the good feeling of winning £100. The traditional explanation of this phenomenon has been sourced to our evolutionary past, but recent research suggests that the current economic system might offer an alternative explanation which seems to predict behaviour better. For many losing £100 means a more substantial drop in quality of life than the improvement the extra £100 has. Loss of £100 can more easily spiral into further losses than an extra £100 can spiral into further gains, as being able to make payments in advance doesn’t have a comparable benefit to the fees from delayed payments. It is easier to get investment from those whose life quality is less affected by whether they make a £100 profit or loss than it is from those who experience a more detrimental effect from losses than returns. This is especially a problem for high-risk investment.


Two Reasons Coop Exchange Benefits Cooperatives With Small And Low Income Membership


The question on how can we get more investment to platform cooperatives is related to the question on how easy is it to invest in platform cooperatives. If someone likes platform cooperatives and wants to invest £20 in them, how easy is it to do so? Coop Exchange will offer the most straight-forward solution: enable everyone with a smartphone to invest in cooperatives around the world in just a few clicks.


We believe this will benefit cooperatives with small and low income membership the most, mainly for two reasons:


1. Expanding the pool of potential investors to everyone in the world will mean the pool of investors relative to the number of members will grow the most among cooperatives with small membership.

2. Expanding the pool of possible investors to those in all countries benefits coops from low income countries the most.


Two Reasons Coop Exchange Benefits Small Investors


Not only does Coop Exchange benefit small cooperatives the most, it is structured to benefit small investors as well. There are two main structural reasons for this:


1. Coop Exchange investors are members of Coop Exchange, with big and small investors having equal voting rights of one member-one vote.

2. Coop Exchange makes it possible to have small investments with no commission. Investments as small as 1 cent are possible, and Coop Exchange only takes a commission from investments over a certain threshold (most likely around £10).

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