The Cooperative Path to Starting a Business

By Robert McGarvey | Friday, 15 January 2021 | Feature, Business, Startup

Call it a secret pathway to a business startup. That’s exactly what the cooperative business structure is, where the workers own the business — and, hold on, isn’t that communism? Nope — that’s because a worker-owned cooperative is intended to be a profit-making business, but the profits are split among the worker-owners.

Right now might be a golden time for worker cooperatives. At the Northwest Cooperative Development Center in Olympia, Washington, senior cooperative development specialist John McNamara said he is working with 15 would-be cooperatives right now, perhaps three times more than usual.

Cross-county in western Massachusetts, Adam Trott, executive director of the Valley Alliance of Worker Cooperatives who noted he has been working in and with co-ops for 16 years, said “we are getting much more interest in worker cooperatives in the past two or three years.”

What kinds of wannabe companies are involved? In Washington State, McNamara said he is working with what the organizers hope will be new home care cooperatives, a fast-growing sector as baby boomers age, and many want to stay in their own homes but need assistance with everything from chores around the house to shopping. Another dynamic segment, according to McNamara, is what is called “the silver tsunami,” where aging small business owners want to retire and they are exploring cooperatives as a way to pass the business (everything from a hardware store to an architectural firm) onto longtime workers but still pull some equity out of the transaction.

In western Massachusetts, worker-owned co-ops include everything from Pedal People, which provides trash and recycling hauling services to Northampton Mass., to the Hive Makerspace in Greenville, Massachusetts, which plans to be a membership-based maker space devoted to supporting entrepreneurship and the creative economy. Trott, too, pointed to the silver tsunami: “We have supported seven conversions since we formed in 2009.”

Sounds eclectic? Indeed, just about any new business could be configured as a worker-owned cooperative — that’s the reality.

Case in point: one of the country’s most celebrated worker cooperatives is Union Cab in Madison, Wisconsin, which started in 1979 with financial support from a few dozen member-owners. It grew over the years to as many as around 280 member-owners, said McNamara, who before joining NWCDC in 2014 spent 26 years as a member-owner at Union Cab, including 16 driving a cab and a stint as the co-op’s general manager. Put enough like-minded people together and the energy and finances just may be enough to start a business — even in an unlikely industry.

Why Aren’t There More Worker Cooperatives?

Nobody knows exactly how many worker-owned cooperatives there are in the United States, but the consensus guess is around 400, said Michael Peck, executive director of 1worker1vote, which works to build a national network of worker-owned cooperatives.

As for why that number is so low, Frank Shipper, professor of management emeritus at Salisbury University in Maryland and among the country’s leading scholars on worker ownership, attributes the lack of worker-owned cooperatives to simple ignorance. We just do not know this is an option. Business schools, said Shipper, rarely teach about worker co-ops and so the possibility does not come up.

Cooperative History

Cooperatives are not well-known in the United States, but the history goes back to 1844 when 28 people in Rochdale, England — many of them weavers at a local mill — joined together to found a community store that would sell goods (such as butter, sugar, flour, oatmeal, and similar) at lower prices than a company-owned store charged. They also wrote out seven cooperative principles that still today govern how most cooperatives behave:

• Voluntary and open membership
• Democratic member control
• Member economic participation (every Rochdale founder put up 1 UK pound, a sizable sum at the time)
• Autonomy and independence
• Education, training, and information
• Cooperation among cooperatives
• Concern for community

Across the US, there were around 64,000 cooperatives of all kinds in 2015 (excluding housing cooperatives), according to Community-Wealth.org. Many are credit unions. Also numerous are agricultural cooperatives (Cabot Cheese, Ocean Spray, and Land O’Lakes are all cooperatives), and in much of the nation, an electric co-op provides electricity.

Worker-owned cooperatives have been a stunted, somewhat ignored option in the cooperatives mix.

Change in the Air

Now could be the time for a spike in interest in worker cooperatives, said Melissa Hoover, founding executive director of Democracy at Work Institute (DAWI), an Oakland, California think tank devoted to fostering more worker-owned cooperatives. Hoover particularly points to the emergence of many organizations — such as hers and Peck’s, McNamara’s, and Trott’s — that are there to help worker-owned businesses form.

At NWCDC, for instance, McNamara takes wannabe worker cooperatives through an intake process that tackles everything from creating a formal business plan, running the financial numbers (does the business have a chance of succeeding — many do not), exploring governance (who will be the executives, who will be on a board of directors), and strategic planning. The process is not random, nor is it casual. Fledgling business failure rates are always high, which applies to all formats, from sole proprietorships through worker-owned cooperatives. The more research and thought a worker cooperative puts in at the front end, the higher the probability of success.

Peck shared the optimism. According to him, as more communities decide to nurture locally owned businesses, eyes turn to worker-owned cooperatives. He also claimed that research shows that worker-owned businesses consistently outperform competitors — and probably that’s because workers know precisely why it is in their interest to put in that extra effort. After all, it may put more dollars in their own pockets. “They will make sacrifices for their own business,” said Peck.

Shipper agreed: “The workers in a worker-owned cooperative are more committed. They own a piece of the pie.”

Ask Peck why now is the moment for worker-owned cooperatives, and he will point to Mondragon, the world’s largest cooperative. Based in Spain — founded in 1956 — it employs 80,000 employees, over literally dozens of lines of businesses, and in 2019 it had €12.2 billion in revenue (about $15 billion).

Peck has been a US representative to Mondragon since 2000, and he is convinced the time is right for worker cooperatives to flourish in the United States, perhaps to grow to Mondragon scale. Ask him how many worker cooperatives there will be in the US in 10 years, and he says: “4 million.”

Press him on that point, and he will laugh and reluctantly lower his estimate to 400,000. But the fact remains: he is adamant that the time is now for worker-owned cooperatives.

First Steps

What next? Remember that there now are plentiful resources for wannabe worker cooperative owner-members. Use them when exploring scenarios for turning a startup idea into reality.

“Don’t go it alone,” said Trott. “Make sure you connect with the people and groups who can help you.”

Remember the sixth Rochdale Principle: cooperation among cooperatives. Most cooperatives view it as their duty to share advice and insight with others involved in cooperatives. That’s a strikingly different ethos from what typically prevails in the private business world.

For instance, Hoover’s DAWI makes available free of charge an array of tools, from sample worker co-op bylaws to “Coop 101: A Guide to Starting a Cooperative.”

Experts suggest joining together as a group and reviewing the available documents. Some co-ops fizzle out right there, and that’s no harm done — better to realize who wants this and who doesn’t. And understand that, according to McNamara, a key realization at Union Cab was seeing that the member recruitment goal was not to hire a cab driver but to hire a driver who wanted to be an owner and definitely not all cab drivers do. The same applies to gathering up a group to start a worker co-op.

Get the right group together, polish the idea and business plan, and there may even be seed money available. Sure, many would-be worker cooperatives struggle to raise sufficient capital from worker-owners. But that is not the only option. DAWI, for example, has gathered resources that point to possible paths to raising capital from third parties. Local and state governments, for instance, may have money available to support worker cooperatives that create employment, especially in areas with high unemployment.

At Shared Capital, in St. Paul, MN, where Adam Trott has another job as director of member relations, in 2019, $4.1 million in loans were made to 15 cooperatives by that organization. Shared Capital, by the way, was also involved in seven successful conversions of small businesses into worker cooperatives.

Many other organizations around the country are similarly prepared to help newbie cooperators with capital.

Think creatively, and the cash just might be there.

Keep pushing forward, and who knows, yours may be one of Peck’s four million worker cooperatives in 2030. And even if it’s only 400,000 or 4,000, it could still include yours.

That is something to work toward.

About the Author

Robert McGarvey

Robert McGarvey, a veteran journalist who has long covered startups and small businesses, created and hosts the CU2.0 Podcast for credit union and fintech executives which is at 120 episodes and counting.