Business is Hard, and Cooperatives Will Fail

Finance Jul 11, 2021

Cooperatives speak to the dream of equitable workplaces and profit-sharing that enriches communities, yet that dream is loaded with pitfalls and traps.

I recently read "Everything for Everyone: The Radical Tradition that Is Shaping the Next Economy" and it chronicles many of both the problems and positives of cooperation. I've come away from the book cherishing the affirmation of my views – that co-ops are yet another vehicle for doing good, even if they're difficult to use in our society.

Nothing inspires me quite like the notion of transforming ideas into reality. That's a reason why I chose engineering as my field. We all have dreams, but unless we get actionable they'll just stay as dreams. I love driving projects to completion, and I refuse to let them die out unfulfilled.

I've got plenty of projects scattered throughout my life: some completed, some in perpetual progress, and some abandoned. It's given me lots of practise at trying to achieve "created" instead of "perfect" or "done."

As they say, perfection is the enemy of good enough.

I know that I want to build co-ops with my limited lifespan, and it's one of my big goals. Whether starting a co-op or joining one, I want to foster community level power structures.

Before going further, it may be helpful to understand what co-ops are. For an introductory glance at cooperatives, I invite to your attention this article:

Worker Cooperatives, Consumer Co-ops, and Corporations
Each of this trio of structures pursue three different agendas for the benefit of three classes of people: shareholders, workers, and consumers.

Despite all the optimism I have for cooperatives, it has to be acknowledged that business is difficult. Especially doing business as a cooperative in a society that does not offer abundant support to co-ops like it does to other business entities.

The odds are stacked against co-ops in our contemporary world. Co-ops run into all sorts of friction, such as trouble finding funding where other entities get a plethora of options. Or the limited ways of incorporating a co-op, as only a few US states have laws recognising co-ops and allowing them to form.

Co-ops also have a tendency to be the chosen vehicle for dreamers that lack execution skills, where they tackle big problems in optimistic enthusiasm. It's not the fault of the business structure when they run aground of problems and devolve into a fiery crash.

Despite all these factors, co-ops still have their niche. There's plenty of room for growth and success stories, even if a handful of them fail spectacularly.

Business is Hard with Out-of-Context Problems

There's a reason why I run my life like a business: business is variegated and full of endless intricacies that you learn and implement. It's complicated in the same way life is, and they both take a lot of skill in handling the unknown.

In my experience, both life and small business consist of hopping from snag to snag, solving one problem or disaster before moving onto the next one.

Along the way you'll face out-of-context problems – problems that you can't reasonably anticipate. Whether it's as simple as the first time the IRS comes calling for owed prior years, or as sudden and drastic as a plane dropping out of the sky onto your house.

It can also come with technological breakthroughs, such as the internet. There's a reason why people say it "revolutionised the way we do business." Imagine being a business leader during the early adoption days of the internet, and trying to navigate your business strategy through the brave new digital world.

It's hard to come up with good answers to radical problems you've never even contemplated before.

Even still, an out of context problem can be something as simple as legislation or tax code that you're not familiar with that springs up and ensnares your business. The kind that you kick yourself for missing and not knowing about, but how can you know everything?

In my tech job I constantly run across the limits of my knowledge. I can build stuff that works within my assumptions, but reality is a harsh mistress that reveals all imperfections. Human assumptions are always approximate, and always missing crucial pieces of information.

For example, I wrote a software service that used reasonable amounts of RAM, CPU, and disk space. I could monitor all of those resources.

Things went well with the service, up until the point where it all broke down horribly.

Turns out there are other resources that I wasn't actively managing, such as process IDs. It was something that was outside my context, up until it hit me and I had to scramble to face the unknown problem. It's a small one, to be sure, but still a specific problem I couldn't anticipate.

Outside context problems are similar to black-swan events. Black swan events are extreme statistical outliers, which means that they're rare. They also are high-impact in their contexts. Black swans are often explained away after the fact, making it appear as if the causes were obvious and the outcome predictable.

Similarly, out of context problems can appear obvious in hindsight. If only you'd known in advance the things that you learned dealing with the problem, then you could convince yourself that it would have been predictable – and therefore preventable.

That's not how the world works though. You have to cope with ignorance and uncertainty. You can't know everything in advance of a problem.

Going from Zero to One is Hard

Another reason why business is so hard is because going from zero to one of something is much harder than going from one to two. There's a whole book with that title on the subject, though I've never read it and likely never will.

In a nutshell though, doing something new takes a lot of work!

Barriers to entry and innovation are both hard problems to cope with. Businesses face a lot of startup costs, and sprinting to acquire their first customers usually makes it or breaks it. Either you get revenue to sustain the business, or your cash runway burns down.

Cooperatives face a particular problem with cash runways, as they do not have as easy access to debt and equity financing as other companies do. Without getting too bogged down in the details, co-ops have more trouble getting capital to operate and often rely on cash from their member-owners or debts.

Yet even if a business makes it through the starting-up phase, the challenge doesn't end. Growth is not a given, and businesses can suffer massive upsets that wipe out all the successes.

Thankfully at least, co-ops are in a position where they can take precautionary steps to be resilient against the normal woes of economic downturns. Though often what they give up is the growth-at-all-costs model of greed-driven traditional companies.

It's worth looking into the case study of Equal Exchange to see how they coped with both funding woes and resilience:

Case Study: Equal Exchange | Start.coop
Equal Exchange: Creating Non-Voting Investor Shares For Co-ops This case study was written in 2020 by Greg Brodsky and Shahzaib Azhar based on interviews with Equal Exchange employees and publicly available documents for the benefit of Start.coop accelerator participants and the broader co-op commun…

For one thing, you'll notice that EE gives a whole lot less growth than most investors typically are looking for. 5% is far below the fabled 11% S&P average yearly return, and that 5% is a target goal as it really varies from 3% to 8%. They give up the hyper-growth model in favour of something that is balanced.

Another aspect of EE is that they're able to build their resilience with retained earnings, as worker-owners are not greedily attempting to extract maximum profit out of the company – quite the opposite, the owners are invested in helping the co-op grow. They retain 60% of net profits yearly, according to the case study.

In a hyper-growth tech company like my own employer, their retained earnings sometimes peaks up to 80%. They can accomplish this by never paying a dividend, and pulling moves like suspending 401k matching during the pandemic to bolster their retained earnings to coast through 2020.

Yet that 80% peak is not sustainable for my employer, and instead some years they actually have an accumulating deficit, where they lose some retained earnings. They're not interested in retaining the capital to be resilient, not when investors are spurring them on to grow endlessly.

Cooperatives are the Dream

A lot of those who have been drawn into the co-op movement in recent years hope it can be something like universal basic income—a drastic, radical fix that changes everything. They try to create co-ops for the hardest of problems, using the most untested of means, building their dreams out of policy proposals and foundation grants and panels at conferences.
Everything for Everyone

A lot of us mundane people want to do honest work with equitable employers. Co-ops speak to this dream, offering a way of engaging in capitalism that is far less exploitative than traditional corporate structures.

Co-ops are also alluring because a lot of us think that given control, we could run a business better than the people already running them. Perhaps we tell ourselves that we know the industry better, or that we care more about the success of the company.

To be sure, small co-ops that rely heavily on tactical operations like manufacturing, producing, and services fare better than top-down structures:

"Worker cooperatives are more productive than conventional businesses, with staff working “better and smarter” and production organised more efficiently" – What Do We Really Know About Worker Co-Operatives

When you're a worker-owner, you're empowered to fix the points of friction you find in the workplace. It makes sense that direct, actionable problems can be solved better within co-ops than in top-down firms, where managers are insulated from the friction.

Another dreamy quality of co-ops is the ability to commit to transparency.

Lots of businesses and their leaders lie. At my work, one of the major projects I wanted to work on was continually on the back burner. Turns out there was a reason for that!

The company had a shroud of secrecy enveloping its strategic decisions. They constantly espoused the sentiment that "We're doing great," yet they took a number of backstabbing actions, including layoffs.

Then they blindsided the majority of employees with an acquisition, saving us from running out of a cash runway. Those platitudes the executive team repeated time and time again were empty. Things were not great, but they're compelled to lie so as to not worry the valuable workers.

Of course, things are not perfectly dreamy in the land of cooperatives.

One critique is that co-ops look at the class struggle between workers and owners and try to sidestep it by saying "the workers are the owners!" and then building their private island.

The critique also continues that co-ops do not assist in the class struggle, because even though the private island is comfortable for worker-owners, they are still participating in capitalism with the broader economy, and even taking away valuable organised workers from the pool of union workers.

In short, the critique is that co-ops are not radical enough to fix some of the problems endemic to our society.

Which is probably true, but who says we need to pin all our efforts on a business structure to solve problems?

Cooperatives Will Fail

One of the dreams that circles amongst financially independent and entrepreneurial circles is that you can "work for yourself." Co-ops are appealing in this sense too, but the problem is, no business ever works for itself.

You always serve the customer. To delude yourself otherwise will result in misalignment and failure, you need to balance stakeholder needs instead.

There's three main classes of stakeholders, the clients, the workers, and the owners. If one of those classes is catered to too much, then the others can suffer.

Focus too much on customer power, and the workers suffer for it – from burnout to abuse to poor wages from razor thin profit margins. Likewise give the workers too cushy of a gig, and the customers may quit giving their revenue due to lower quality of service. Extract too many profits for the owners, and employees may be laid off or the business fail from a lack of resilience.

Co-ops don't magically make this problem go away, and imbalances can lead to failure.

[...] cooperation is no drop-in solution-for-everything. It’s a process that happens a million ways at once, a diversified democracy. The troubles are as endemic as the promise.
Everything for Everyone

Business and life are complicated, with so much variety to how you approach them. So too are co-ops, they can be done every which way. There's not currently a set recipe or playbook that shows how to succeed with one.

Instead co-ops offer the promise of a process where you discover what works for your business.

Sometimes people wish co-ops can remain pure and idealistic, but economic pressures drive compromises. Purity does not stand resolute against the trials of reality.

In "Everything for Everyone," the best example of this is the compromise between consumer co-ops trying to keep only ethically sourced goods and trying to be a one-stop shop for customers. Market pressure demands that they pick up typical goods, so that customers aren't forced to visit more traditional stores.

Trying to fight the market will lead to friction, slower growth, and even collapse into failure.

Co-ops will also fail to achieve all their ambitious dreams – of a more egalitarian workplace, of ethical involvement in the economy, of bringing people together and empowering them. The reality is always that compromises happen, stretch goals go partially fulfilled, and problems crop up that demand re-evaluating the original goal.

There's also the co-ops that are so idealistic in the first place that they never have a shot at working – whether because the cooperators lack execution skills and practise for their first attempt, or because there's a fundamental flaw in their idea.

This is true for every type of business – a certain number will just fail outright, or slowly burn their way through capital until they are given up on.

Not All Cooperatives Will Falter and Fall

Throw enough darts at a board, and some of them will stick on the target. That's called "accuracy by volume." Some co-ops will fail, but others will succeed. It's the nature of businesses to face that risk.

A quoted failure rate is that 10% of co-ops fail in the first year of business. This is pretty significant, but nowhere near the 60%-80% quoted for typical small businesses in their first year.

There can be a plethora of reasons why this happens, whether from a higher barrier to entry for co-ops meaning that only more serious ventures get rolling, or that co-ops may be more resilient than traditional businesses.

It's hard to say why exactly, though. I'd love to see more research into co-ops, and to have more co-ops to study rather than the same few big ones.

There are plenty of smaller co-ops to look at, if only the case studies were done. I enjoyed discovering the Community Purchasing Alliance (CPA) purchasing co-op thanks to the book "Everything for Everyone," and it's yet another great success story. It certainly gives me ideas for what I want to do in the future.

In brief, CPA uses collective purchasing power to save its members money on relatively boring purchases: electricity, security, HVAC, PPE, and so on. It does so on a community level, with many members being churches or small businesses in the D.C. area.

This isn't some radical re-imagining of how society should work, it's local people finding the power to help each other.

Now all that we need is a thousand more co-ops like this to emerge, to prove themselves valuable, and perhaps start us down the path to more equitable business.

Final Thoughts

A byproduct of my youth is that I imagine my life's potential as near limitless: I dream big. As I grow older I know that my potential will surely dwindle, but I hope to convert it into actions – such as starting co-ops.

For now I am content to learn about them, and to share my findings with you.

If you enjoy my writing, I invite to your attention this article about how I view my war chest, operating fund, and emergency funds:

The War Chest and Taxable Accounts
The war chest is a business tool for handling rapid shifts. As I have the potential for immense income, I focus on my war chest instead of an emergency fund.

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Mistress

Mistress of the Home, responsible for all matters financial. A loving Domme tempered with ambition and attention to detail.

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