Poptel: how one workers' co-op was taken over by its investors

This article by Andrew Bibby, in a slightly different form, was first published in the Financial Times, 2003

One of Britain's highest-profile workers' co-operatives, the internet service provider Poptel, is a co-operative no longer. An innovative partnership with private capital that tried to reconcile investors' interests with employee democracy has ended with the investors in full control.

In its first 20 years, Poptel earned a reputation as an online pioneer. As its website reminds visitors, it set up e-mail services for the African National Congress and hosted the Labour party's first website. More recently, Poptel has been instrumental in launching the international .coop web address suffix, as an alternative for co-operatives to the more traditional .com tag.

Poptel also sought a way for co-ops to escape the financial straitjacket that legally obliges them to finance expansion through retained profits and loan capital, rather than through equity.

In 1999, Poptel's employee-directors negotiated a £1.5m loan from the private equity capital company Sum International Holdings. The deal involved creating a new holding company in which the investor held 25 per cent of the share capital while the workers, through their co-op, held the remaining 75 per cent.

Malcolm Corbett, then an employee-elected Poptel director and now an independent consultant, says: "We needed to raise substantial amounts of capital. We did approach the traditional co-op movement, which didn't have any mechanisms for investment at that time. We were in the lonely position of blazing a trail without a road map."

There followed a series of cash flow crises that required further financing. The workers' holding fell, to 51 per cent. Then, last year, the crunch came for the co-op when Sum International invested yet again and in the process took effective control. "When more funding was required, the only people at the table were Sum," Mr Corbett says. Mr Corbett maintains that the partnership with equity capital could have worked, had the market been kinder. He cites the dotcom crash and delays in launching the .coop service as contributing factors.

Nevertheless, Poptel's attempt, and apparent failure, to marry the interests of labour and capital has focused attention on the capital needs of employee-owned concerns. The issue is topical, not least because the established retail co-operative movement wants to extend its reach into new business areas (including care homes, energy generation and childcare) and is exploring new financial mechanisms. A research study, launched in May at this year's Co-operative Congress, will explore whether multi-stakeholder co-operatives, where the role of investors is formally acknowledged, are a possible way forward.

For David Erdall, executive director of the Baxi Partnership, one problem for smaller employee-owned businesses is that the availability of what he calls "employee-friendly capital" is limited.

Baxi Partnership, a £20m capital fund, has recently invested in a number of employee buy-outs, including Loch Fyne, a Scottish specialist seafood producer. Its experience at Poptel, where it injected £2m two years ago to try to maintain the element of worker ownership, was more painful and Mr Erdall says it now works alone, rather than with other equity partners.

The issue, according to Mr Erdall, is that conventional investors have expectations that can come into conflict with the interests of employees.

"A venture capitalist who's going for, say, 30 per cent return on capital will get this only by ramping up the company and then exiting. This has got to be in conflict with the interests of employees, who have longer-term concerns. A company making 10 per cent return can be perfectly viable for a very long time. Trying to make a 30 per cent return on capital can be quite destructive," he says.

The complicating factor in the Poptel story, however, is that Sum International's founder partner Yoram Amiga, now Poptel's non-executive chairman, professes himself to be a strong supporter of co-operative working. He points out that Sum International has already demonstrated that it has a long-term commitment to the Poptel business, adding that in his assessment the company fell down in the past partly through inadequate management: "Sometimes you need to have leadership. Managers need to take a view on what's best for all the shareholders," he says.

Poptel, with Sum International now the dominant shareholder and with a new managing director, is developing broadband and Wi-Fi services, targeting particularly the voluntary sector and the social economy.

But the old co-operative history of the business has not been lost. A small web design division, Poptel Technology, has been spun off and its workers, now independent, have chosen to re-establish themselves as a formally constituted workers' co-operative.