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, 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.

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3 thoughts on “Startups Need a New Option: Exit to Community”

  • This is an important idea, but imho the framing/naming as ‘Exit to Community’ seems problematic. Communities of users who have not been party to building and operating platforms typically face a panoply of issues when offered the chance to take control.

    Chris Cook’s ‘Nondominium’ model offers a clearer approach – projects are developed from the start through mutli-stakeholder structures, with defined roles, rights and responsibilities for different interest classes. Crucially, the ‘community’ is the main driver. Classes of member who may not be permanent – such as ‘investors’ and ‘developers’ may also be included, and their exit strategy designed in from the outset. One approach is to identify two types of investors – those with an appetite for risk, strong domain competency and desire for early exit with relatively high returns, and those who have a longer term relationship with steady returns and low risk in mind. Vehicles can be structured so that the latter are lined up, but are not expected to invest early. Instead, these contract to ‘buy out’ the high risk development investors once agreed capacity has been attained.

    This model allows for a change in rights and responsibilities at the change-over point. ‘Community’ may exert control in the early stage simply by providing ‘traction’ – which is obviously crucial to the milestones needed for the development class to achieve their exit. After the swap to patient capital investors, community ramps up its control.

    This changeover is more of a ‘structure preserving transformation’ than a revolution or a ‘chrysalis’, and thus less risky.

    A key apprach which can strengthen the dynamic is to require the payment of long-term returns in ‘use-credits’ for the service under development – thus strengthening the internal economics of the system and providing a vehicle for further fundraising down the line.

  • very excited by these workings! thanks all!! Look forward to getting involved how I best can.

    interesting points on verbiage around exit ~ would be interested in studies to explore the difference of ‘Enter To Community’

    thanks for the revolutionary work!

    best, in cooperation,

  • In all discussions such as this, there is very often an underlying capitalist mindset. Questions such as exit strategy or return on investment all boil down to ‘show me the money’!.
    My perspective is what is needed is a new generation of entrepreneurs who don’t give a flying fish about money, but who find motivation in building a better world for all. I believe this is to be found within a fusion between the coop & commons movements, combined with a growing realisation that money is no more than the ultimate mechanism of control. It is carrot or stick. Behave, & you are rewarded, misbehave, & you are punished. The state may as well issue us all with special reward & punishment devices placed around our necks at birth, adjusted as we grow older.
    The question is how can we build businesses that are simply not interested in such primitivism,

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