Nathan Schneider

Nathan Schneider is an assistant professor of Media Studies at the University of Colorado Boulder.

Startups Need a New Option: Exit to Community

Founders create startups for all sorts of reasons. Often, the motivation is a mix between the founders’ desires to do well for themselves and to do something worthwhile for others. Dreams of greatness might figure in there too. Rarely, however, is the overriding reason to build a company people want to get rid of. But that is what the startup pipeline is designed to produce.
When a startup company takes early investment, typically the expectation is that everyone is working toward one of two “exit” events: selling the company to a bigger company or selling to retail investors in an initial public offering. In either case, the startup is a hot potato. One group of investors buys in order to sell to another group of investors who buy in to sell to the fools down the road. There’s something sort of pyramid-scheme-ish about all this. The exit event, also, is often the beginning of the end of any positive social vision that the company might have held.
What if startups had the option to mature in a way that gets them out of the investors’ hamster wheel?
In the coming months, I will be exploring strategies and stories that could help create a new option for startups: Exit to community. In E2C, the company would transition from investor ownership to ownership by the people who rely on it most. Those people might be users, workers, customers, participant organizations, or a combination of such stakeholder groups. The mechanism for co-ownership might be a cooperative, a trust, or even crypto-tokens. The community might own the whole company when the process is over, or just a substantial-enough part of it to make a difference.
When a startup exits to community, founders should see enough of a reward that they feel their risk and hard work was worth it. Investors should see a fair return for their risk. Most importantly, the key stakeholders should know the company is worthy of their trust and ongoing investment because they co-own it. For a social-media company, this might mean that users have a meaningful say in how their private data is or isn’t used. For a gig platform, it might mean that the gig workers co-determine their working conditions and what is done with the profits they produce. These kinds of outcomes could help prevent the massive accountability crises that now beset today’s most successful venture-backed startups.
One way to begin exploring E2C could be by identifying a subset of startups in venture capital portfolios that lie in “zombie” territory—somewhere between failure and exit-ready. Investor owners would benefit from having a new way of liquidating investments that would otherwise lie dormant. In some cases, the community might be in a position to buy the company with cash on hand—especially if it came back to them in later savings or profits. In other cases, E2C might be financed externally on the expectation of future growth, as is generally done for employee-ownership conversions using an Employee Stock Ownership Plan. Startups might also plan ahead for E2C by identifying particular guardrails that keep this option open as they negotiate their early rounds of financing. As with the ESOP—and with the venture capital industry itself—a targeted policy intervention may be necessary to make this kind of financing attractive enough to be feasible. These possibilities and more are the kinds of things I’ve been thinking about and would like to think about with others.
Why not, you might ask, just begin these startups under community ownership? This is certainly an option, and it’s one that I have enthusiastically supported through the #PlatformCoop community and through co-founding the accelerator. But getting going under community ownership doesn’t seem like the right approach in many cases.
Ambitious startups are a risky endeavor, and it may not be fair to distribute that risk with early-stage participants. Also, startups usually need to make a few dramatic pivots early in their life, and having a large community of co-owners would make those hard decisions more difficult than if a small, high-trust group of founders is in charge. Centralizing the risk and responsibility early on is a reasonable strategy for startups. Later, once the company has found its market and its footing, the transition to accountable community ownership will better suit the nature of the business. With E2C, we get the best of both worlds—the dynamic startup, then the accountable, sustainable public asset.
For me, this vision came together in conversations with social enterprise lawyer Jason Wiener (who has participated in some exits to community), along with sources of inspiration that include Zebras Unite, ESOP inventor Louis Kelso, platform cooperativism, and the steward-ownership network. Now it is time to bring more people into the conversation.
Our team at the Media Enterprise Design Lab at the University of Colorado Boulder is looking for collaborators on this work. This includes entrepreneurs, activists, investors, policy advocates, researchers, and more. Do you want to join us? Let us know what you’d want your E2C to look like.



September 17th, 2019

IMHO Tumblr latest change in ownership is a big WHAT IF to this underutilized outcome. Their story in short:

While reports say the price tag was only $3M, most of the deal is in absorbing operating costs (and liabilities) as Automattic is “bringing over close to 200 people. We’re taking them all on. I am aware of some of the details of some of the bidders. You know they were not planning to keep much, if any, of the team going.”

Now, is this a good outcome for the Tumblr community? It’s probably better than sitting around the Version/Yahoo/AOL/Oath portfolio. In that same podcast Matt Mullenweg (Automattic CEO) said “(Tumblr has) more daily active users than has monthly active users. They’ve really cracked a lot of the social side of it.”

It’s pretty depressing to sell a company with more daily active users to a company with less monthly active users at a firesale firesale firesale rate… and yet that is the current market. I think Tumblr could surely find another purposeful life with Wordpress (and if it doesn’t it’s still valuable to Automattic internet real estate and talent expansion)… but what if it sold to its users instead?

The “subset of startups in venture capital portfolios that lie in “zombie” territory—somewhere between failure and exit-ready” is massive. But the rub is in HOW we execute “a new way of liquidating investments that would otherwise lie dormant.” In the use case of Tumblr, I think the challenge is not in crowdsourcing more money than the ticket price or even 10x-ing (or possibly even 100x-ing) it… the challenge is in how all management decisions (operating costs, liabilities, product implementation, etc.) are made going forward.

September 17th, 2019

I think i have 2 questions now

  1. after E2C how company will be operated. I.e. who will be in charge? will company has similar structure to companies that went to IPO for example?

  2. if part of owners(group of users) want to do A, another part want to do B - how this situation/conflict can be solved?
    Should it be voted and part that will have >51% votes win and other just lose and agrees with winner or maybe they can split company into 2 pieces and go into separated directions?

Btw, it’s awesome idea/vision. There was a lot of changes in last 100-60-30 years span. And this workflow looks “anti-old-fashion”. Like before web we have one way to do things.
Then after Kickstarter and sharing ecomony a lot of people can do things differently.

I like it and hope future will go into this direction. It’s sad to see when startups failing, or killed by company that just eat it in one piece.

September 17th, 2019

Thanks for your interest in this. Governance is in many respects an easier problem than most people think. One can look at the structure of the bigger cooperative businesses, for instance - think REI or one of the many rural electric co-op utilities in the United States. On the whole, they’re not all that different from investor-owned companies in terms of governance; there are shareholders, and a board is elected or appointed, and the board is accountable to the shareholders. The main difference here is the identity of the shareholders.

This could take various forms. It could be that the users’ stock is held in a trust, and the trustee is chosen by them, or is required to act based on their preferences. It could be that user-shareholders elect board members directly. It could be that the board is self-perpetuating (as in many credit unions) and is merely accountable to act in the members’ interest. For the most part, we would not expect users to be making or voting on day-to-day decisions for the company. There may be a referendum on a large policy decision, and the bylaws would determine how votes are counted. The point is, there is flexibility here, but for the most part what we’re talking about are fairly familiar challenges in corporate governance. The major difference, again: the people management is ultimately accountable to are users, not outside investors.

September 17th, 2019

Thanks, David! I agree that the financing challenges are pretty massive. There, we may need some new fund models, and perhaps even some new public policy along the lines of what enabled ESOP conversions beginning in the 1970s. (More on that here.) The governance challenges scare me less, because experience with large co-ops and ESOPs suggest that there can be some meaningful community oversight without radically changing executive level operations. The main question that changes is who is the CEO ultimately accountable to - outside investors or users?

September 18th, 2019

@ntnsndr curious to see how it will pass validation. because it can help a lot of people/businesses/owners.

I think there will be some difference between physical products and online projects. At Kickstarter most of products you can “touch”. Maybe it’s just a KS policy, but I see it as a trend

Next thing will be related to country where company was incorporated. So maybe it’s also important to move organization into countries like US, CA, etc during E2C process or before it. Like using Stripe Atlas for it.

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