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Exit To Community - what if founders sold their tech companies to the users instead of big tech or Wall Street?

Weekly newsletter of Coop Exchange
Weekly newsletter of Coop Exchange
In 1925, a man named Gottlieb Duttweiler was conducting research on food prices for the Statistical Office Of The City Of Zurich. He discovered that food was more expensive in Switzerland than anywhere else in Europe. Duttweiler also noted a large discrepancy between the wholesale price retailers paid for food and the price they charged their customers. As an accomplished businessman with relevant experience, he established a company called Migros to solve this issue in the most straightforward manner imaginable: by buying food from producers and selling it to consumers with minimal intermediary costs, directly from trucks built for the purpose.
He faced fierce opposition from retailers and food manufacturers, who tried to stop his crusade against their lucrative cartels by sabotaging trucks and blocking supply agreements. However, the popularity of Migros soared and made Duttweiler a sort of folk hero. The 1935 Swiss federal elections illustrate how widespread his appeal was and how wide-ranging his endeavours were. He had established a political party called “The Ring Of Independents”, which sought to assemble “the best of all parties” by attracting politicians and combining ideological elements across the political spectrum. In the elections, Duttweiler personally received so many votes that a new law was passed prohibiting candidates from running in multiple districts at the same time.

Gottlieb Duttweiler smoking a cigar. Although selling tobacco products is prohibited in Migros.
Gottlieb Duttweiler smoking a cigar. Although selling tobacco products is prohibited in Migros.
Six years after the elections, Duttweiler did something quite remarkable: he decided to sell Migros to its customers and turn it into a consumer cooperative. This arrangement remains simultaneously one of the most unusual and successful business decisions in the history of Switzerland. It was unusual because it was extremely rare for a company to convert into consumer ownership and successful because Migros has since grown to become one of the largest businesses in Switzerland. It has become the largest private sector employer in the country, operating a range of businesses: it is the market leader in grocery retail, e-commerce, adult education and fitness centres, with a significant presence in numerous other sectors. Its membership has surpassed 2 million, making it the most widely owned enterprise in the country.
In an earlier issue of our newsletter titled “If cooperatives and mutuals are better than other firms, why are they so rare? Vanguard and the mutualist paradox”, we describe Vanguard, another example of a success story that began when a conventional firm was converted into customer ownership. Vanguard is now the second-largest asset manager in the world with assets exceeding 7 trillion dollars and has established itself as one of the largest owners of practically all publicly listed corporations in the world.
Could the next Duttweiler be found in the tech industry?
It’s unlikely that Migros and Vanguard will be the last examples of an enterprise that has become hugely successful after converting itself to customer ownership. It might be that these types of conversions will become more common. A movement has recently emerged to advocate for this cause called “Exit To Community”. It seeks to create modern Duttweilers with a focus on founders of tech start-ups who currently have mainly just two paths, or “exits”, to choose from: sell their business either to a bigger company (often a tech giant seeking to get rid of a competitor) or Wall Street by entering the stock market. Exit To Community provides a third option: selling the firm to the community of users that has formed around it and without whom the firm is worthless - for example, the customers of an online shop or workers of a gig platform. 
Many founders are unsatisfied with the current exit options and want to genuinely provide something valuable and useful for their users who they feel an emotional attachment towards. But they also have to pay their mortgage and want to be compensated for their work, ideas and risk-taking. They often feel that they have no one else to sell the service but to investors whose only purpose is to extract as much value as possible from the user community. For example, the founder of the world’s most popular genealogy site Ancestry.com Paul Allen (not to be confused with the ex-CEO of Microsoft), has spoken about some of his regrets. He said he agreed to deals without fully understanding them that gave away control of the site to investors who have since engaged in behaviour he finds contrary to the original mission that inspired him to start the company. For example, in 2014, the site closed down its social networking platform MyFamily.com and, by doing so, removed decades of correspondence between millions of people sharing memories and other information about their families. It is impossible to quantify the sentimental value this content had - but to the shareholders, it had no monetary value and was therefore erased. Allen has since become a critic of the conventional shareholder firm, calling it the “invention (that) has led to the most inequality in modern civilisation”. He has also shown enthusiastic interest towards models such as that of John Lewis Partnership, a large UK based retailer whose founder’s son transferred the ownership of the company to a trust controlled by the employees.
There is no polling on how many founders end up unsatisfied with what big tech or wall street decides to do with the company after an exit (which could be an interesting area of research). Still, it does seem that it is at least not uncommon for founders to feel that the new owners have failed to uphold the original mission that inspired starting the company. 
User ownership can also help dismantle perhaps the most significant source of problems in the current landscape of the digital economy: the conflict of interest between users and owners. To illustrate how, let’s imagine that one of the large social media platforms would develop a new feature that would make it easier for users to organise live events. As a result, people would spend more time going to events at the expense of being on social media. The feature would harm shareholder profits as users would spend less time looking at ads, and it would therefore be removed even if users would find it beneficial. In other words, there is a conflict of interest between owners and users of the platform. If, on the other hand, the social media platform were a cooperative owned by its users, it could simply decide that the benefits of the feature to members would exceed the costs. A conflict of interest between users and owners can be dismantled by making users into owners. This would also broaden the type of innovation: digital platforms would no longer be limited to only inventing new ways of making money for shareholders but could develop new features that would benefit the users more creatively. 
Providing users with ownership can also make them more loyal customers. For example, a study from Columbia University looked into users of Bumped, an app for retail investors similar to Robinhood. It provides users with $5 to $10 stock grants from companies such as Taco Bell and McDonalds, and the study found that users who were granted a specific company’s stock increased their weekly spending at those brands by 100%.
In conclusion
However, exit to community faces many challenges: legislation has been tailored to conventional exit options. As a result, it often makes it hard to implement alternative arrangements that would spread the ownership to users. For example, when AirBnB and Uber attempted to give their hosts and drivers shares in the company, the SEC blocked them from doing so. For Exit To Community to become more commonplace, there are pieces of legislation to look into that could prove helpful. For example, many countries provide incentives for companies to transfer into employee ownership. In Italy, the Marcora Law provides employees with a preferential right to buy a company and convert it into a worker cooperative if it is being sold or is facing closure. It has been largely successful, with the survival rate of cooperatives that have been created as a result of these buyouts standing at nearly 90% three years after creation, more than twice the rate of all Italian businesses. We at Coop Exchange also have practical experience of this: our founder Steve Gill is also the CEO of a software company called VME that converted into a worker cooperative by innovatively using Employee Ownership Trust, a legal framework designed to help companies become employee-owned. Some examples of legislation allow conversions into other forms of community ownership beyond just that of employees. For example, Scotland has recently introduced a “community right to buy” act that makes it easier for residents to purchase abandoned land and properties and transfer it into community ownership. Perhaps we will have similar legislation that seeks to enable online communities to purchase digital platforms in the future.
While it could be very productive for cooperative organisations to articulate and lobby for legislation that would help technology firms pursue exit to community, we also need to make a better and more creative use of the tools at our disposal within the existing legislative framework. There are many instruments that could be used to help finance cooperatives that go unused or underutilised. We at Coop Exchange seek to create new financial instruments tailored to the needs of cooperatives operating in new and emerging areas of the economy and hope to help unlock the potential behind ideas like exit to community.
If you are interested in exciting new ideas about what the future of the cooperative movement could look like, do consider subscribing to this newsletter.
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