News & Analysis

driven by the PitchBook Platform
exitfull.jpg
VC Exits

Q&A: An ‘exit to community’ offers startups a different path

MEDLab director Nathan Schneider talks about why the community offers another exit route for startups.

Request access to VC exits data

A growing movement of founders and academics are advocating for a new way to exit. The idea is to give more control to those who have helped build or benefit from the startup: an “exit to community.”

exitmug.jpg

Schneider


Unlike an IPO or acquisition where one or a few external investors buy a startup, an exit to community transfers ownership, decision-making and profits to a larger group of people that includes employees and users.

Media Enterprise Design Lab, which is a think tank at the University of Colorado, Boulder, known as MEDLab, and Zebras Unite, a founder cooperative, have set up the Exit to Community project to explore ways startups can transition from being investor-owned businesses to community-owned.

PitchBook spoke with Nathan Schneider, who leads MEDLab and is also an assistant professor of media studies at the university, about this alternative exit route.

PitchBook: What does exit to community mean?

Schneider: There isn’t a specific model or a set of steps. It really depends on each company and who their community is.

It could be creating a cooperative, a trust or, in the case of blockchain startup Gitcoin, they created a decentralized autonomous organization with tokens that were distributed to the people who had helped build the project. The community may be in the position to buy the company outright in cash or finance it externally on the expectation of future growth.

Each company needs to figure out how to transition that ownership or rights to the communities that are the best stewards for the future of the project in a way that suits them.

Why did you come up with the concept?

The whole startup trajectory is not about how you build a successful and flourishing company but, instead, how you plan to exit—because that’s the moment where your investors get their payoff.

The mainstream exit options have worked for building a startup economy, but they often don’t work for founders, society as a whole or for users. They end up subjugating all of those interests to investor interests, and to producing maximum return for investors.

Exit to community is an invitation to explore other options for exits that are based on putting accountability and ownership where it should be, depending on the particular context of the company.

What are the potential barriers for this type of exit?

Convincing investors is obviously a challenge because it is often going to mean lower returns for them. For me, you have to really think about who you’re getting involved in your project early and try to find investors who are willing to experiment and look at different strategies. Exit to community is a strategy to achieve liquidity and not necessarily outstanding returns.

We also need better tools for collective financing and more recognition that user ownership is not as readily available as it should be. A really critical example of this is when, in 2018, Uber and Airbnb were getting ready for the IPOs and they tried to distribute equity to their users. They asked the SEC to let them do it but were told no. That was a very clear signal that our system doesn’t know how to tolerate community ownership.

If we really are serious about sharing wealth among the people who are producing it, we need a better framework for how to do it. In the meantime, we can figure out ways to hack community ownership, but it’s gonna be hard to be a systemic alternative without serious policy support.

Is exit to community suitable only for certain types of companies?

I don’t think exit to community is something everybody should be doing. It’s not a universal solution but just one possible strategy.

The really critical thing is that before any ownership changes, the company should really have a culture of strong community empowerment. You need to bring your community, whether that’s employees, users or something else, into the conversation and build the company with them.

On the technical side, you can’t be over-leveraged. If you’re sitting on zillions of dollars of venture capital, you’re not going to be able to pay that off in any reasonable way with an exit to community. Companies that haven’t raised too much funding will have more control over their set of options than those with a lot of investors, which really locks them into a standard exit path.

Do you have any examples of where this concept has worked?

This idea has really most taken off in crypto because it is the place where a lot of the rules have not been written yet and where the technology is kind of shared ownership by default. In crypto, there’s the idea that as a project matures, its ownership becomes distributed more widely.

To the extent that crypto is kind of living in its own regulatory gray area right now, it’s able to do things that are not as easy elsewhere, or not as available at least, and so it has been a really important space for experimenting.

Featured image by Green Color/Shutterstock

  • leah-hodgson-photo.jpg
    Written by Leah Hodgson
    Leah Hodgson is a London-based senior reporter for PitchBook covering venture capital across Europe and the Middle East. Leah graduated from the University of Surrey with a BA in international politics with French. She has previously been a radio reporter in France. She later turned to financial journalism, covering the wealth management industry. She joined PitchBook in 2018.
Join the more than 1.5 million industry professionals who get our daily newsletter!