Instead of IPOs and acquisitions, exiting to community is one alternative

The tech industry is built on the venture capital model where hockey stick growth and selling to a larger company or going public are markers of success. But the traditional VC model does not leave much room for startups that might not be the next unicorn but still generate revenue — just not the type of returns investors are looking for.

This is where exiting to the community comes in.

“A lot of times, selling to the public doesn’t necessarily make the company or its service a better experience for the user or the workers,” Start.coop founder Greg Brodsky previously told TechCrunch. “Often it gets worse. It’s only really better for the investor.”

Brodsky, who helps cooperative startups through the Start.coop accelerator, pointed to this exit to community idea as an option for startups looking to transition out of the more traditional Silicon Valley model. In this framework, some portion of the company is sold back to the workers or end users, he said. This idea is being spearheaded by Nathan Schneider, a Start.coop board member and professor of media studies at the University of Colorado, Boulder.

“The idea with exit to community is how can you create a model where the whole point is to create a vibrant community that will become its eventual stewards,” Schneider tells TechCrunch. “It seems like a natural fit, especially in a moment where we’re looking for increased accountability and the wealth distribution problems in the startup economy.”

Through the Exit to Community project, Schneider is exploring ways to help startups transition from investor-owned to community ownership, which could include users, customers, workers or some combination of all stakeholders. Schneider is holding a series of meetings with people interested in this challenge to try to chart a clear pathway.

“I don’t think it’s going to be one playbook,” Schneider says. “We’re looking at a variety.”

The variety of approaches, however, does not include cooperatives, which we’ve explored here. In short, co-ops shift the ownership model from investor-owned to worker or user-owned. Schneider has explored additional possibilities due to barriers startups face with access to venture funding and other types of structural support. So far, Schneider says he has identified three different ways to go about doing this.

The first is a stockholding trust, inspired by more traditional employee stock-ownership plans in the U.S. The goal of the trust would be to acquire 100% ownership in the company over a period of time by buying out pre-existing outside investors. We’ll save the nitty-gritty for another time, but this approach would offer investors a way to recoup their initial investment and then some while giving the ownership to founders, employees and users.

Schneider explored this user-buyback option with Meetup co-founder and chairperson Scott Heiferman. WeWork, which bought Meetup in 2017, later decided to put it up for sale last year. When that happened, Heiferman started thinking about what it would take to buy it back.

“The question I am fascinated by — why I’m here today — is just that another world is possible,” Heiferman said during a webinar in December. “I don’t think we have seen the future yet of what it means to reimagine platforms that the world is depending on as sort of the lifeblood of software eating the world. The internet still remains a network of people, not a network of computers, and hopefully not a network of corporations. For those of you involved at venture at earlier stages, I hope you’ll be bold in imagining different possibilities.”

For Meetup, it’s looking like it’s not going to work out for Heiferman to buy it back. He said there’s another deal in the works that he’s not involved in.

“It doesn’t look like we’ll be able to make a competitive offer and that’s what poses the challenge for a business where its revenue comes directly from users,” Schneider says. “It’s so aligned with its users in that way, and it’s all very member-centric and has that spirit to it. So why can’t we do that? Why is that not an obvious model for it to be owned by users? We don’t have the maturity as an ecosystem to really enable this at this point but this is an example of why we need to make this possible.”

The second potential conversion strategy is the creation of a federation. In this scenario, a company could reorient itself toward the community by distributing decision-making powers to moderators and users of the platform. In order to seamlessly do this, the startup would need to first convert to a benefit corporation. The third option involves tokenization via blockchain to reduce the number of intermediaries involved and make shared governance more transparent and direct.

The plan for this year, Schneider says, is to keep gathering people around these ideas and to further flesh out the possible pathways to converting into a business that exits to the community. Beyond empowering users, Schneider sees exiting to the community as a way to increase inclusivity in the tech industry and better serve diverse communities of people.

“The thing with inclusivity is it’s not just about representation, it’s about the model,” Schneider says. “It’s the fact that our business models are not meeting the needs of diverse communities and we need more diverse business models for technology and startups if they’re really going to be an inclusive community.”