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A Tool for Launching Worker-owned, Social Enterprises

December 04, 2013 By Lee Egerstrom, Economic Development Fellow

Finding sources of venture capital for workers to start or buy businesses, and for community leaders to launch new ventures that have social goals, has just gotten easier.

Finding startup capital is difficult for most entrepreneurs. It can be especially problematic for people using newer or less practiced business models, said Mary Browning, an attorney who started the research project this past year while enrolled in a Master’s of Public Affairs course at the University of Minnesota’s Humphrey School.

Browning’s report, Financing Worker Cooperative Start-Ups in Minnesota, focuses on the unique problems for these ventures. Many of these same issues exist for people seeking to start social enterprises, said Tom Triplett, a business consultant and Social Enterprise Alliance - Twin Cities (SEA-TC) board member.

The government agency with the most cooperative experience is the Rural Development arm of the U.S. Department of Agriculture. Its programs, however, are restricted by definitions of what is rural and by population of communities.

At the same time, the U.S. Small Business Administration (SBA) has started a pilot project to assist cooperative development. But its programs remain beyond the reach of about 99 percent of worker co-op projects, say cooperative development specialists.

State and local assistance to would-be entrepreneurs is hindered by a lack of knowledge about worker co-ops and social enterprise development. Browning said she hopes her research paper will serve as a crib sheet for both prospective entrepreneurs and the educators and development specialists who assist them.

Both worker co-ops and social enterprise ventures are gaining popularity because they both provide a social good while strengthening local economies. In the case of worker co-ops, these businesses tend to stay put, not get bought out and moved out of the community or country. Other social enterprises may have environmental protection, filling a community need or want, or correcting some market imperfection as a “double bottom line” with being a profitable enterprise.

In her paper, Browning acknowledges more work is needed to make investment funds available for these enterprises. For instance, some venture capital providers want to invest where they can do a social good, but they “still harbor expectations of a quick turnaround of about 15 percent return on investment.” That may not be realistic with either worker cooperatives or social enterprises.

The Securities and Exchange Commission (SEC) recognizes as much. On Oct. 23, it proposed rule changes under the Jumpstart Our Business Startups Act, or JOBS Act, to allow donors to crowdfunding groups such as KickStarter, Indiegogo and RocketHub to become investors – not just donors – in startup companies.

Triplett offers a particularly helpful explanation of the proposed SEC rule changes at the SEA-TC site. Any for-profit venture can use crowdfunding, he noted, although he anticipates strong investor appeal for social enterprises.

None of this is a done deal. Triplett’s article noted that the SEC proposed rules involved 592 pages of documents and the commission sought public comments on 295 specific questions.

All this makes Browning’s paper on development resources all the more important. It points to paths for prospective entrepreneurs, workers who may want to purchase or rescue their jobs and places of employment, and state and local economic development specialists.

On a related note, SEA-TC is among groups hoping the Minnesota Legislature will authorize Public Benefit Corporations giving legal backing for businesses pursuing a social benefit and not just financial returns for shareholders.

Minnesota companies can do that now, if shareholders approve of what is essentially a double bottom line. And Triplett said legal obstacles have been overcome by approval of B-Corps in 19 other states, including the popular state of Delaware for business incorporation.

What Minnesota would gain is greater public awareness of these business options, Triplett said in an interview. In that regard, having a Public Benefit Corp option would get information in the pipeline for government programs, Minnesota’s Small Business Development Centers, Minnesota’s nonprofit development centers and to area economic development planners.

That would be a useful companion with Browning’s research paper.

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