What Part Will Co-ops Play in Tech’s Future?

111 years ago when New Zealand’s Livestock Improvement Corporation (LIC) opened its doors for business, the idea that it would be “cooperatively owned” by its dairy farming customers was nothing groundbreaking.

Farmers collectively needed to test their milk, and so banding together for a regional service that could provide this was a no-brainer.

It didn’t take long for the milk testing product to gain a national hoof print, nor for LIC to dream up many more innovations in the dairy sector; the organization put together the first national digital herd database in the 60s, has become an industry leader in agricultural SaaS products, a world leader in genomics, and has produced a myriad of other herd improvement products.

And in spite, of its continued growth over the past century, the co-operative business model has stayed the course. In the last financial year, LIC generated $22.9 million of after-tax profits, of which $17.8 million were distributed to its thousands of farmer owners.

“With agriculture generally, farmers are happy to work toward the common good of farmers. So you’ve got your milk processing co-ops, you got your meat processing co-ops, you’ve got your distribution co-ops. And I think that’s just farmers saying, well, we want to be in control of our own destiny,” said Wayne McNee, Chief Executive Officer of LIC.

Agriculture, finance and insurance all number among industries that have readily embraced the idea of co-operative ownership: a broadly defined model which accommodates many modes of ownership.

Some are owned by the suppliers to the organisation, as is the case with New Zealand dairy giant Fonterra; some, like LIC, are owned by the customers; while others are owned by the staff themselves, such as U.K. retail heavyweight John Lewis.

“The core principles of being a co-op are that we are owned by our customers, we aggregate their data, we use it to their advantage and as it happens, are also very profitable and these profits are returned to the shareholders each year as the dividend,” McNee said.

All co-ops are fundamentally governed by seven key principles, which include democratic membership control and an open and voluntary membership.

“It’s really a social construct within a capitalist system, because they are all about democracy, but they are also all about driving profits for their members,” said Roz Henry, Chief Executive of local industry group co-operative Business New Zealand.

New Zealand, due in most part to its large agricultural sector, is one of the most co-operative dominated economies in the world, with one in five dollars of GDP generated by these companies.

But with its technology sector, the co-operative model has been less readily embraced.

Like most nations around the world, Silicon Valley’s founder-oriented, VC model has reigned supreme for Aotearoa’s new fangled startups.

“In startups, even in agritech, it’s more common that the startups are not co-ops. We work with a lot of startups and most of them are following a more traditional model of friends and family money and then moving into an equity raising round,” McNee said.

“I think the world has changed a lot. The startup model is well recognised. Capital is so easy to get now, and if you’re the founder with the big idea, you can make a lot of money out of it.”

For a founder with a potentially disruptive idea, introducing it through a co-operative model means ceding a large amount of the power they would enjoy through the corporate structure.

However, there is huge potential when multiple parties with aligned ideas can pool their resources together to a common goal. This year New York taxi drivers joined together to start the Drivers Cooperative, a platform aiming to provide the profits back to the drivers.

LIC itself reintroduced the co-op model into the startup space too, building the ‘Agrigate’ app with fellow dairy giant Fonterra, a new SaaS product designed to minimise admin time for farmers.

“We had a massive amount of data between the two co-ops that we could immediately get the benefit of, through integrating together. There are some advantages just because of the scale that you immediately get access to a lot of customers and a lot of data,” McNee said.

The evolution of the co-operative model from its utilitarian roots will also be essential in shifting prospective technology startups to the less popular ownership model. Organisations like LIC are shifting to a hybrid co-op model, where shares are listed on the national stock exchange, but these shares are only tradeable by approved dairy farmers.

Rahul Watson Govindan, Chief Executive of software co-op Loomio, says that the adoption of this model into the technology mainstream will require a paradigm shift in how people are considering their organisations.

“There are big industry sectors where co-ops are far more prevalent than technology. And behind the thing that provides the value in each case is a long trail of individuals, where it makes sense for them to band together,” Watson Govindan said.

“In the tech sector, we’ve found it difficult to value developers producing code in the same way that, say, the dairy industry has with milk producers.”

Loomio was founded in 2015 to improve collaboration in decision making through its open-source platform, and it is cooperatively owned by its staff members..

Watson Govindan sees one of the most promising opportunities of the tech sector being in the hard fought ‘talent war.’ In New Zealand’s tech sector in particular, hampered by its closed borders and limited local talent, the pressures to hire and retain high-skilled workers impacts all corners of the industry.

“In the talent war there's an opportunity for technology co-ops that non-co-op simply can’t offer,” Watson Govindan said.

“The way in which we run our companies, the nature of decision making, and the flatness of our structure, mean there’s a lot more buy-in and cohesion that give co-ops in the tech sector an edge for recruitment.”

This might be a valid opportunity for an organisation, but it struggles to answer a key question from McNee, who himself has led the LIC co-op through a period of significant digital transformation and company growth.

“In a co-op you generally don’t own the business, it’s owned by its customers, suppliers, or staff. If you’re the founder, what’s in it for you?” he asked.

Roz Henry, who advises a wide range of co-operatives, believes one of the fundamental answers to that question comes in the long-term sustainability of these companies.

“What you tend to see is co-operatives are not looking for an exit strategy, they’re looking for long term sustainability. Oftentimes these businesses are multigenerational, where the next generation will come in and take over the family business,” Henry said.

It’s an idea reiterated by Watson Govindan.

“As it stands the industry is still very much in a hypergrowth, boom or bust stage. I would like to see the technology companies grow, become companies of scale, and through the co-operative model be able to sustain that,” he said, adding that the sector can look to other industries for blueprints.

“I think we’re going to see more exploration in this model, and I wouldn’t be surprised if the co-op model emerges as a very popular choice.”