Impact Voices | May 3, 2021

Letting go: How investors are giving up control to democratize finance

Meg Massey and Ben Wrobel
Guest Author

Meg Massey

Guest Author

Ben Wrobel

The idea of democratizing investment has a long intellectual history, but it wasn’t until after the Great Recession that it started to enter mainstream financial discourse.

If you’re going to understand one core principle behind democracy and finance, it might as well be the solidarity economy. It’s an economic philosophy born out of the grisly factories of Great Britain in the early nineteenth century. Factory workers, covered in soot and tired of oppressive working conditions, wrote down a series of principles centered around democratic decision-making and cooperation. The core element was something they called non-extraction—the idea that an investor shouldn’t make more money out of an investment than he puts in.

The concept kicked around academic circles for more than a century, largely remaining on the margins of mainstream economic thought. But in the 1980s the Solidarity Economy movement experienced something of a revival in Brazil. In the aftermath of a brutal military dictatorship, a new leftist party took power and launched a historic wave of worker-owned cooperatives and successful experiments in direct democracy. Word spread, and a decade later economists from thirty countries gathered in Peru to discuss what a non-extractive economic system could look like in a modern context.

Solidarity economy

By the time the Great Recession hit in 2008, the intellectual ground had been laid. In Zuccotti Park, Occupy Wall Street protestors frequently spoke about a ‘solidarity economy’ as they made the case for a just transition to a new economy. They painted a vision of a post-capitalist world, where leaders would put people and the planet front and center, rather than the pursuit of blind growth and profit maximization. In this world, businesses would be managed by workers, banks would be responsible to public stakeholders, and city budgets would be decided by the people.

Of course, this vision never quite materialized. Capitalism, and for that matter capital, have proved to have significant staying power. Instead, something interesting happened. A generation of activists, investors and young philanthropists have borrowed principles from the solidarity economy to build new systems inside capitalism that model solidarity and democratic principles.

Some of these systems operate on the local level: neighborhood loan funds, built by grassroots activists who wanted to develop alternative economies when mainstream capitalism wasn’t working for them. Take the Southern Reparations Loan Fund, created in 2015 by activists of color as an answer to the deep racial wealth gap in the United States South, where slavery gave white Americans a two hundred-year head start on building wealth. The fund lends to worker-owned businesses that support Black and immigrant communities, along with poor white people. The board and staff are all local, and most are people of color or immigrants themselves.

Other participatory loan funds created around this time include the Boston Ujima Fund, the Baltimore Roundtable on Economic Democracy and the L.A. Co-op Lab. Several of them came together to form a national network called Seed Commons, which we’ll talk more about later in this book.

Other systems operate in the context of big finance and venture capital. In just the past decade, VC has transformed from a stodgy industry to a driver of the global economy and culture. Facebook, Google and Uber all used VC funding to fuel their meteoric rises—and there are hundreds more companies that have followed the hyper-growth strategy that tens of millions of dollars in capital can buy. There are now more than 350 “unicorn” companies around the world, or private startups worth more than one billion dollars, and many of these companies have monopolized industries and crowded out public services. More and more, decisions made in VC boardrooms define the way we live.

Participatory investing

But it’s become apparent to anyone paying attention that the VC industry has what investor Ross Baird calls “innovation blind spots”. The vast majority of investment funds are just as white and male as foundations, and just like foundations they tend to fund what and who they know. Around the world, female entrepreneurs receive less than 15 percent of venture capital funding. More than half of all venture funding globally goes to startups headquartered in San Francisco, Boston or New York.

In 2009, three impact investors decided to try and create a better system. Bob Pattillo, Ross Baird and Victoria Fram were early impact investors. They were frustrated with the homogeneity of VC culture, and the end result: instead of the world-saving innovations that Silicon Valley promised, money was being wasted on food delivery apps and valet services for the rich.

They created an organization called Village Capital that would apply a solidarity economy lens to VC investing: What would it look like to flip the power dynamics of VC investing and entrust due diligence and investment decisions to groups of social entrepreneurs? 

The above post is the first of three excerpts from “Letting Go: How Philanthropists and Impact Investors Can Do More Good By Giving Up Control” from authors Ben Wrobel of Village Capital and Meg Massey of Sanspeur.