Creating VC 2.0
We’re not the first people to think of how to fund the 81% of companies in the debt-equity chasm.
Mezzanine financing often utilizes a combination of funding mechanisms for mid-market companies. Impact investors have been creatively providing risk capital to companies for years. Investors and founders will be problem-solving to get the right capital to the right ideas forever.
As a venture fund, we’re interested in founders within the chasm who need risk capital specifically. Creating an environment that encourages new, risky ideas, of all kinds, is central to the health of our national and local communities. According to the Economic Innovation Group, since 1992, firms under 1-year-old have provided an average of 2.9MM net jobs per year, while older firms have been net job destroyers (-.3MM to -.5MM jobs/year). Furthermore, technology has continually lowered the cost to start a company. Starting a company is easier than ever before, but financial institutions have lagged behind.
The lack of risk capital options for early-stage companies stifles opportunity in every startup ecosystem, especially ours (Rural Colorado).
And how many more companies would have been founded if they access to the right type of risk capital?
That’s why we’re joining a new class of early-stage investors who:
Respect founders’ motivations for building a company — family, community, passion, whatever keeps the fire burning
Can help them grow towards a healthy, profitable company
Can get returns without demanding a billion dollar exit
Are long-term partners (equity actually does this really well)
Are willing to share in the upside and downside (that’s how we define risk capital)
Starting a company is easier than it has ever been in human history. We believe a lack of innovation in risk capital is becoming the new bottleneck of entrepreneurship.
VC as the trailblazer
Venture capital is often painted as the evil empire, but that is neither accurate or fair. It may have some systematic issues that have prevented equal access, but many of these issues are simply because it was the first product of its kind. It would have been strange to find a venture fund focused on rural or distressed urban ecosystems ten years ago–before tech infrastructure became distributed. Nobody blames Blackberry for not inventing the iPhone. The underlying resources to build high growth companies weren’t equally distributed to start. If anything, blame Amazon for not creating AWS sooner. It is simply time to iterate on VC 1.0.
VC as a long-term innovation driver
VC has played an outsized role in the innovation that powers our economy and advances our society. VC aligns funders and founders to build for the long term. Being locked-in until the company sells or goes public forces investor and founders to think well beyond quarterly earnings (a growing concern in the public market). Moreover, no asset class spurs innovation like venture capital. According to one study, in 2014, 17% of public companies are venture-backed (despite funding less than 1% per year) and accounted for 44% of the nation’s R&D spending. VC plays a crucial role in the advancement of our economy and society.
VC as a model citizen asset class
That’s right — model citizen. Venture is often criticized for the number of people it does not serve. It is painted as a wealthy club that caters to the privileged and profits by hijacking companies. That is not how real investment decisions are made nor how consistent returns are generated.
Venture capital has taken impressive steps to increase its accessibility.
Decent legal docs for investor and founders are available for free thanks to open-source efforts from Cooley GO, Series Seed, and the NVCA.
Leading VCs have created transparency and de-risked financing for both sides of the table such as Brad Feld and Jason Mendelson’s Venture Deals or Mark Suster’s blog, “Both Sides of the Table.”
The Kauffman Foundation helped seed a generation of angel investors that were otherwise left out of high-risk capital through the Kauffman Fellows program.
Cambridge Associates created its annual Venture Capital Benchmark Report, which has allowed the entire venture capital industry to learn from Cambridge’s massive portfolio data set to establish baseline metrics and accountability in an otherwise opaque private market.
Organizations like the National Venture Capital Association and Angel Capital Association have helped educate regulators about venture’s role in society while ensuring fair policy.
The #OpenLP movement, bolstered by content like the Origins podcast, have begun to reveal how institutional investors operate, further decreasing information asymmetry for fund managers and founders.
Thanks to initiatives like these, and countless more, early-stage financing (including equity, convertible debt, SAFE, and KISS funding) has become magnitudes cheaper and best practice guidance is only a Google search away. While it is only a fit for 1% of companies, venture capital has become the premier asset class for audacious ideas.
Taking a cue from VC, we need the same level of transparent and professional capital stewardship for “Alternative Capital.”
In fact, let’s ditch “Alternative.” We’re talking about funding for the MAJORITY of founders.
NEXT: A Hitchhiker’s Guide to the New Risk Capital Landscape