In my last post I talked about our new approach to developing startup ideas: doing lots of them in parallel. It was my most visited article to date, and the feedback was that many entrepreneurs are already doing the same thing, deliberately or otherwise. I now want to talk about solving the big problem we face as parallel entrepreneurs – how to collaborate. I want to describe a new kind of organisation, the startup co-operative, and provide a convincing argument for why they should exist and how they can run.
The Problem: “We need to talk about ownership”
The ownership conversation is a perilous event for a young startup. If the founders are equally experienced, similarly skilled and planning on working full-time, they can comfortably agree to share the equity evenly. But what happens when the founders have different backgrounds or different levels of experience? How do a gray-haired marketing pro and a 25 year-old CS major agree on respective ownership of a new company? Generally, these two archetypes will entirely fail to appreciate each other’s contribution, and each want a lion’s share of the company. They may agree to an even split, and go forward quietly resenting it, or may have their first blow up, probably sinking the nascent company.
With parallel entrepreneurs it gets worse. The ownership conversation is further complicated by the founders splitting their time between many projects, and therefore each making only a part-time commitment to their collaboration. Even with similar skills and experience, and even if they agree to make an equal part-time commitment to the new project, neither can count on the arrangement lasting. Can you imagine being satisfied with a 50:50 equity split when your new partner is liable to disappear if one of his/her other projects takes off? This is the business equivalent of an open relationship, without any of the upside.
I’ve had the ownership conversation countless times, and in the absence of a better basis, it has always come down to the would-be founders looking each other in the eye and agreeing to fully commit to the success of the project. This all-or-nothing approach is increasingly inappropriate for me, my company, and those we might want to collaborate with.
The problem is that the ownership conversation is happening up-front, before it’s apparent what everybody’s contribution will be. It’s impossible to reach agreement at this point, and valuable collaborations fall apart before they even get going. It would be great if there was a way for entrepreneurs to postpone the ownership conversation, while resting assured that when it does happen there will be a fair and solid basis for it, one that everybody can respect. This would allow people to get on with developing the idea, and should result in more ideas becoming successful companies.
Practically speaking, there’s some issues with postponing the ownership conversation. It’s traditional to develop a business idea within a company expressly created for the purpose. Without a company in place, ownership of the work is unclear, and many commercial activities are impossible. However, companies must have directors and shareholders, which leads us back to "the conversation".
We need a legal entity that can own an idea and the associated work until it is time to incorporate a company dedicated to the pursuit of the project. This needs to be a legal entity that can be trusted by the founders to transfer ownership back to their spinout later on. It must be more than a company formed by the same founders as a precursor to their main enterprise – such a pre-company would only lead us back into the same ownership conversation. No, it must be an organisation with a wider membership and fair procedures. The closest equivalent that is that of a co-operative – an organisation designed to service its owners.
a co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise
– International co-operative Alliance
Most co-ops are agricultural, but they’re not limited to farming. Credit unions are financial co-operatives, designed to help families and business get access to credit. BECs are even closer, designed to support people returning to employment through new businesses. What I’m proposing is still different again. It is a co-op for professional founders of companies that provides a framework for collaboration and success.
Basic Package: Collaboration
The key feature of the startup co-op is that it can be trusted with ownership of all intellectual property associated with an idea until it is ready to spin out into its own company. This trust is rooted in the fact that (as a co-op) it is owned by its members and run democratically. The co-op can be seen as an umbrella under which founders can get on with business ideas without first having to agree respective ownership.
When those that are collaborating on an idea feel that it’s time to spin it out into a dedicated company, the co-op will transfer ownership back to them so long as they have reached a unanimous decision on their respective ownership. Although this will require the founders to have an ownership conversation, this time it will be rooted in the reality of their contributions so far.
An additional powerful benefit delivered by deferring the ownership conversation is that collaborators can come and go while the idea is being developed. This allows founders to try each other on for size, so to speak, without scuppering the idea if things don’t work out.
This “basic package” promotes collaboration by providing a convenient place to park ownership. However, with a co-op in place, there are a number of obvious “add-ons” that can improve the odds of these collaborations resulting in successful businesses.
Add-On #1: Ideas from the Front Line
Most entrepreneurs have more ideas than they can possibly investigate, but those who are currently successfully selling into a market tend to have particularly good ones. At this stage in the startup life-cycle, new ideas are about solving immediate market needs. Ironically, it is at this front line of business that the entrepreneur has the least time to develop them.
As well as housing active ideas from existing teams, the co-op is in a good position to accept ideas from the front line, from entrepreneurs who have no time to develop them. For example, say a member of the co-op is currently a CEO of a company providing healthcare iPad apps for doctors. He might spot a potentially lucrative opportunity in the adjacent physiotherapy market, but be unable to exploit it himself. Instead, he donates the idea to the co-op. Other members, who have the time, can run with it. When this team eventually spins out, the originator of the idea can receive consideration, such as shares in the new company.
By designing the co-op to house ideas with and without associated teams, it becomes possible to create a very valuable database of business opportunities, which are available for the co-op members to collectively develop over time.
Add-On #2: Spread the Risk
The parallel approach is about spreading the entrepreneurial risk, and the startup co-op provides an opportunity to spread it even further. The co-op can be designed to take a small equity stake in all spin outs (e.g., 10% in return for licensing the idea), so that it receives a return on any phenomenal successes that it spawns. It can then pay dividends back to its members.
The Founder Institute operates a similar policy, requiring 3.5% from all spinouts. According to Adeo Ressi, its own founder, this creates “an unusual level of camaraderie” and allows its members to get the “upside once reserved for savvy investors”.
Add-On #3: Build the Network
There’s a opportunity to build a very valuable network of entrepreneurs and collaborators. Members have a strong shared interest in each other’s success, and will have a lot to learn from each other. The co-op can reinforce this through social events and seminars.
I currently run Dublin Techpreneurs, a closed-membership social group of about 40 active technology entrepreneurs in the Dublin area. It has been steadily getting bigger and better, and its exclusive and focused membership allows us to candidly share and learn from each other. Although its mainly a social gathering, it gives me a compelling glimpse of what a startup co-op could offer.
Add-On #4: Economies of Scale
Even in this age of cloud computing, early-stage teams still face operational issues related to their small size and non-existent budgets. The startup co-op is in a position to solve this by providing access to shared services and resources that the teams could not individually afford.
In the very simplest case, the co-op can permit its member teams to use its physical address. The co-op could also allow teams to use its bank account to receive or send payments, and could set up merchant accounts with services such as Paypal, which the teams could then receive payments through.
The co-op could choose to go further, and hire staff to be shared between teams. On the administrative end, there could be a case made for accounting, legal and secretarial services. On the implementation end, the co-op may see value in hiring shared implementation staff, such as graphic designers, online marketing specialists and analysts and so on.
Finally, some co-ops may want to go as far as sharing physical space and building services.
Where to from here?
Having once upon a time worked in a Students’ Union, I have learned that writing rules is a strangely seductive activity, and is one that should be avoided until absolutely necessary. During my first draft, I found myself inventing rules for a startup co-op, but managed to stop myself in the nick of time (lucky for you, valued reader). Now is not the time for rules – it is the time for people who are interested in trying this kind of thing to come together and talk.
If anyone would like to talk more about trying this in Dublin, please leave a comment or get in touch through the usual channels. The “basic package” is about fostering easy collaboration, and the “add-ons” are about improving the execution of ideas. Personally, I would like to have a conversation about how many of these add-ons should be initially in-scope, and then I’d like to rope in a lawyer to better understand how the co-op could be incorporated. My hope is that with the right group of initial members, a gentle and low-maintenance start could be made that permits us to reap early rewards, and move at our own pace towards a larger group reinforced by huge mutual benefit.
If anyone elsewhere in the world finds themselves inspired to try this, or even start a conversation about it in your locality, please leave a comment below so that others who come later can find you.