Several years ago I read about Jack Dorsey’s strategy for pitching his new startup Square. Although he had already founded Twitter, a unicorn social media app, Square was a fintech company and Dorsey had no background in finance. It was an issue that potential funders raised repeatedly. In response to this opposition, Dorsey explained “We sat down..and just wrote out all the reasons why this thing would fail. One of them was ‘we know nothing about finance’.” They eventually came up with 140 reasons and included the list in their pitches. They identified the most important reasons and addressed each of them before investors had the opportunity to raise those issues.
As Wacif, DAWI, Apis & Heritage, the Employee Ownership Expansion Network and other partners move forward with planning the Greater Washington Employee Ownership Center, I decided to explore reasons why it may not be successful. This isn’t an exhaustive list, but here are three reasons why our employee ownership center will fail.
- So far, we have converted zero businesses to employee ownership.
Conversions are a numbers game. Wacif has engaged more than 150 business owners through workshops on exit planning and employee ownership. Of those, 4 have completed a conversion feasibility assessment. The creation of an employee ownership center will help us increase our deal flow and connect with more business owners in order to complete our first conversion.
In the fall of 2018, Wacif launched the DC Employee Ownership Initiative to preserve legacy businesses and build community wealth. More than 30 years ago in 1987, Wacif’s very first loan was to the Pasadena Housing Cooperative. We have a track record of financing more than $34 million in loans to both cooperative housing and traditional businesses. The DC Employee Ownership Initiative is a return to our cooperative roots. We have the infrastructure and capacity to provide up to $250,000 in financing to conversions. Apis & Heritage Capital Partners sources deals and provides mezzanine financing. The Employee Ownership Expansion Network, an offshoot of the National Center for Employee Ownership, brings years of ESOP conversion expertise to the table. Our partner, the Democracy at Work Institute, is a leader in worker-owned cooperative conversions.
In 2019, we solidified a network of partners that can walk a business through every stage of the conversion process from feasibility analysis to valuation to financing to post-conversion employee training and support. Through the Shared Equity in Economic Development (SEED) Fellowship, we worked with government leaders from the DC Department of Small and Local Business Development (DSLBD), Office of Planning, and Department of Employment Services (DOES) to identify local barriers to employee ownership. We’ve engaged in peer learning with the Cooperative Fund of New England and the Shared Capital Cooperative to expand our knowledge of cooperative finance. We’re members of the Workers to Owners Collaborative, a national network of organizations that support employee ownership conversions.
In the first year and a half of the DC Employee Ownership Initiative our intentional focus on field-building, partnership development, capital and program design have helped create the foundation for us to complete 3-5 employee ownership conversions in the next two years.
- The workers won’t be able to run the business effectively when the owner exits.
During the process of conversion, a management transition plan is created to ensure the continued success of the business after the sale. For cooperative conversions, the selling owner often participates in the process of identifying workers who can take on management functions, or helps train workers to fulfill these roles. In some cases, workers democratically elect new management. There are many options, and the conversion team works with all stakeholders to find a model that best suits the business.
In addition to conversions, the Greater Washington Employee Ownership Center will provide exit planning support to selling owners.
- More than one large scale cooperative project in the area has failed. The model doesn’t work here.
In 2012, several DC area funders came together to explore the creation of a worker-owned cooperative modeled after the Evergreen Cooperatives in Cleveland, Ohio. In the summer of 2015, after completing a feasibility study and a business plan, they created the Community Clean Water Management Group (CWMG). In October 2015, the business permanently shut down.
The funders later produced a report documenting the lessons learned from the venture. There have also been housing cooperatives in the area that have undergone the process of demutualization, raising doubt about the long-term success of the model. These experiences offer valuable insight. They aren’t, however, representative of the diverse ecosystem of ESOPS and cooperatives that have long existed in the DC region. The GLUT Food Cooperative in Mount Rainier recently celebrated their 50th anniversary. Four of the largest ESOPs in America are in the DC region. Wacif and Capital Impact Partners recently awarded $40,000 in grants to seven cooperative businesses led by people of color. It is a model that has worked here in the past and continues to work here in the present.
Can you think of other reasons why an employee ownership center may fail? From your vantage point as a funder, impact investor, business owner or community leader – what reservations do you have about employee ownership conversions?