New trustbusters aren’t waiting for government to democratize the economy



To some investors, monopoly is the definition of winning. “Competition is for losers,” boasts venture capitalist and Facebook investor Peter Thiel.

A new set of investors are taking precisely the opposite approach. They are deploying financing and ownership structures designed to prevent or even reverse the accelerating trend toward monopolization.

These new trustbusters are not waiting for government antitrust enforcement, which has largely languished in recent years. Rather, they are building companies that can prosper – and repay investors – without being acquired by one of the small handful of giants in each industry.

“When success for a company is being acquired by another company, you are essentially encouraging companies to pursue consolidation and monopolization as a specific strategy,” says Ross Baird, president of Village Capital, which has backed more than 100 early-stage firms in the U.S. and around the world. “Too much money and power in one place opens the economy up to catastrophic risks that a more distributed and resilient series of investments might not face.”

After 100 early-stage deals, Village Capital takes aim at later and larger investments

“There’s an incredible amount of fragility and volatility in monopolies,” says Baird. The counter-narrative requires “alternative investment structures that help entrepreneurs raise capital while keeping ownership – over the long term – to the founding team, with an eye towards expanding it to coworkers and employees.”

Trustbusters

The American economy has become increasingly concentrated since the 1980s, with fewer firms controlling more market share in a majority of U.S. industries. New business formation has been falling for decades. In just the past decade, Google, Amazon, Apple, Facebook and Microsoft have bought up more than 500 companies.

A more balanced distribution of industry power is good for entrepreneurs, investors and consumers, as well as the economy as a whole, the new trustbusters argue. Market concentration, write Jonathan Tepper and Denise Hear in The Myth of Capitalism, “has created less competition, lower investment in the real economy, lower productivity, less economic dynamism with fewer startups, higher prices for dominant firms, lower wages and more wealth inequality.”

“Competition is the essence of capitalism,” they say, “yet it is dying.”

Concentration may be baked into the venture capital model itself, with expectations for hockey-stick growth, sky-high returns and quick exits. In contrast, the new model favors companies that generate early revenues with products that meet real needs for paying customers. Revenues allow companies to fund their own organic growth. That lets them raise less outside capital. The point, says entrepreneur Tim O’Reilly, whose Indie.vc is a proponent of the model, is how little venture capital a company can raise, not how much.

Bryce Roberts and Tim O’Reilly: VCs that help startups raise revenues, not rounds

The backlash to traditional venture capital has led to a flourishing of innovative mechanisms for financing companies that variously preserve independence, provide investors with alternative ways to get their money back and incentivize employee ownership.

An important element of the new approach: changes in how investment decisions themselves are made, and who is making them. The venture capital and private equity field itself is concentrated, where a small group of decision makers have control over who gets capital. More than three-quarters of call venture capital goes to just three states. About 2% goes to women founders, and 1% to founders of color.

New Belgium Brewing Co., makers of the popular Fat Tire Ale, is bucking the concentration of the beer industry, where Anheuser-Busch Inbev, MillerCoors or Constellation together control 75% of the U.S. beer market. Owner Kim Jordan and her family sold their majority stake in the Fort Collins, Colo. brewery to the company’s Employee Stock Ownership Plan, or ESOP, allowing employees to earn a stake in the firm. Today, more than 700 employee-owners in Fort Collins and Asheville, North Carolina control the firm.

The Creative Action Network, an artist-activist community in San Francisco, decided to avoid traditional venture capital when it needed growth capital. Instead, the firm is experimenting with a modified revenue-sharing structure that repays investors from company profits. The model, sometimes called a “demand dividend,” lets investors exit without an acquisition, and lets companies flexibly manage the debt burden while retaining ownership. Repayments begin only after the firm hits a certain revenue threshold and continue until investors have received a multiple of their initial investment.

‘Demand dividend’ emerges as alternative to venture capital financing

In Cleveland, Evergreen Cooperatives has secured $5 million for a new fund to buy out business owners who want to sell their businesses or retire. The fund will then effectively sell the businesses back to employees, via such ESOPs. Over the past 10 years the cooperative has built three worker-owned businesses – an industrial laundry, an urban greenhouse, and an energy efficiency contractor – giving more than 250 low-income, low-skilled workers access to new economic opportunities.

What can restore vibrant competition and chip away at market concentration? A “diversity of mindsets, business models, capital sources, and life histories of entrepreneurs and innovators,” says Astrid Scholz, who helped create Zebras Unite to support companies that can be both profitable and purposeful with new tools and models. The group aims to support “entrepreneurs and businesses of different stripes whose strategy is one of mutualistic rather than monopolistic wealth creation,” she says (see, “Zebras fix what unicorns break).

Monopoly economy

The increasing concentration in the American economy is suddenly a political issue and a hot topic in think tank and media circles.

Your new washer and dryer was almost certainly manufactured by Whirlpool, Haier or Samsung. Four firms control about three-quarters of the domestic airline industry, up from 38% in 2005.

Apple and Google, as another example, now control 99% of the smartphone operating system market, according to new data released last week by the Open Market Institute, an anti-monopoly think tank. Market concentration has increased in three-quarters of U.S. industries since the early 1990s, according to the Council of Economic Advisors.

One reason: over the past 40 years, the federal government under both parties has “largely surrendered to monopoly power,” allowing most mega mergers to proceed, David Leonhardt wrote in his New York Times column last week. In 1981, the Federal Trade Commission stopped collecting data on industry concentration.

The 1950s Anti-Merger Act, passed to curb economic concentration, is still on the books. But it has been “evaded, eroded and enfeebled by the corroding effect of decades of industry pressure and ideological drift, yielding hesitant enforcers and a hostile judiciary,” according to  Tim Wu, author of the The Curse of Bigness. Legislation to reaffirm the original intent would create new levels of scrutiny for mega-mergers, says Wu.

Reviving competition

But investors don’t need to wait for government to act. For companies earning enough in profits to sustain growth and cover distributions to investors, financing mechanisms based on revenue or profit-sharing can reduce pressure on founders to sell out. Organically Grown Co., a Pacific Northwest produce distributor, for example, is working on a trust ownership structure that repays investors via dividends and profit shares (see, “Re-plumbing business financing with alternative capital structures”).

The Center for Economic Democracy in Boston is working with the Oakland-based The Worker’s Lab to help existing small business owners who want to retire to sell the business to their workers instead of another sole proprietor.

Carmen Rojas: Building a 21st-century economy that works for working people

Boston’s Ujima Project is putting communities, rather than investors, at the center of investment decision-making. The organization solicits input from communities members on which businesses should receive funding. Before the Ujima team makes a final investment decision, residents who join Ujima as members vote on priorities in their communities—which businesses they love, which ones their communities need, and which ones are predatory or destructive and need to be replace.

Boston is a growing hub of global – and local – impact investing

Village Capital’s peer-selection model, in which entrepreneurs in its accelerator program, rather than investors, select which firms would receive an investment, has changed who gets funded. A quarter of the companies backed by the venture firm are led by a founder of color (compared to an industry average of 2%). Almost half are female-led (vs. 15% for all venture investments).

Melissa Bradley’s 1863 Ventures (formerly Project 500) has recruited, trained and connected more than 525 Black and Latino founders from the east side of the river in Washington D.C., an area where poverty rates track at least three times higher than the rest of D.C. The group has helped founders grow collective revenues to $268 million and created 2,800 local jobs.

In West Virginia, Brandon Dennison and the Coalfield Development Corp are helping generations of coal miners build career pathways by solving the state’s current problems: wasteful construction, fossil-fuel dependence, and a weakened food supply. The company offers steady work, training and education, mentorship and a pathway to ownership in a company that is building homes, installing solar, and growing and selling food.

ImpactAlpha has profiled dozens of such New Revivalists in communities across the country who are implementing intentional strategies to make entrepreneurship more than a get-rich quick scheme for a well-connected and well-placed few.

How are they doing it? Going to overlooked places. Spotting hidden and underestimated talent. Solving real problems. Giving entrepreneurs space to grow. Filling the “friends and family” capital gap.

And building businesses on revenues, not venture capital.

New Revivalists are using these six strategies to revive entrepreneurship and the American Dream

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