A Hitchhiker's Guide to the New Risk Capital Landscape
The old and still predominant risk capital landscape is an equity monopoly.
Sand Hill Road was built on the backs of a subset of a subset of companies who were a fit for venture capital–and then executed brilliantly. These are magnificent success stories that provided magnificent, deserved returns for their investors and employees.
Unfortunately, all current day methodologies, classes, events, frameworks, and vocabulary in the startup world are created to perpetuate this one specific paradigm for funding, growing, and exiting .1% of companies. As a result, countless startups have sold equity to raise funds when it is not a fit for the business they aimed to build.
Evidenced by the explosion of seed-stage VC funds, founders face mounting pressure to reach a billion-dollar exit, resulting in fewer modest successes along the way. “Startup culture” has deified the .1% of companies providing VC returns, and left founders and ideas that don’t fit this paradigm out.
One block off of Sand Hill Road, there once was a graveyard of companies that were not a fit for venture capital and died of indigestion. Countless brilliant founders took their bold ideas and followed the advice of many smart investors, advisors, writers, tweeters, and friends to raise venture capital. Rumor has it that this graveyard has since been paved over with management fees.
Since when is a $30M company not worth celebrating?
There are audacious opportunities that need risk capital, but not necessarily venture capital-style equity investment. Or at least not to start.
The new risk capital landscape provides audacious founders and their businesses the funding they need. Not the other way around.
It includes venture capital for high-growth startups. It also celebrates and supports audacious founders who may have:
Bootstrapped great businesses and want to pour some gasoline on the fire
Never heard of Crunchbase, AngelList, and don’t read Medium (until you share this post!)
Started providing high-paying jobs in their community and don’t want to take unnecessary risk to jeopardize those jobs
A great shot at becoming $20 million dollar businesses with some outside capital, but probably not $200 million
Profitability, growth, and no exit plan
The New Risk Capital Landscape
Innovative funds like Indie VC, Earnest, and TinySeed (to name a few) have courageously stepped into voids within the capital landscape by creating funding structures that fit the founders they each noticed were left out by VC 1.0.
Make no mistake, these structures have nothing to do with lowering standards for investability.
As Bryce Roberts of Indie VC, puts it, “we are not a halfway house for the unfundable.” The new risk capital landscape allows founders to declare their own destiny and then provides economic alignment from investors to achieve that ambitious destiny.
If that destiny is to remain true to your bootstrapping roots, with a little extra capital, talk with Earnest Capital. Or maybe it is to one day sell your b2b SaaS company, but with a limited initial market? Try TinySeed. And if you’re simply trying to build a great company in your Colorado hometown, that’s us.
Creating a Sandbox for New Risk Capital In Colorado
Rural Colorado is home to audacious founders who fit all of these profiles and have a healthy dose of topophilia. As service providers (yes, that’s really all VCs are), this has forced us to learn about new capital structures as quickly as possible. It is up to us to offer the correct growth capital services to our Rural Colorado founders. After all, VCs should act like startups, understanding their customers and adapting to their needs as well.
We’ve analyzed over a dozen term sheets, negotiated these structures with founders, spoken with the investors behind most of these new instruments, and even gathered over sixty of the leading venture innovators for the first ever Alternative Capital Summit. Our goal is to accelerate the adoption of these new risk capital structures for our fund as well as our entire Colorado capital ecosystem.
Perhaps in the process, the larger capital ecosystem may use our findings to accelerate these instruments in their capital ecosystems. All together, we can better serve an entire segment of founders that are currently overlooked by yesterday’s funding paradigm.