Investors discuss legacy financing and the role of venture capital

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There are so many ways to raise capital for your startup beyond traditional venture capital, from crowdfunding to debt financing to revenue share agreements. But is all money the same when you are on your way to becoming a billion dollar business? Dr. Astrid Scholz, co-founder of Zebras Unite; Sydney Thomas, director of Precursor Ventures; and Brian Brackeen, the founding partner of Lightship Capital, joined us on TC Sessions: Justice to discuss alternative funding routes and whether the democratization of capital is a facade.

About the decision to stay away from traditional venture capital

Scholz is currently expanding Zebras Unite, a founder-run cooperative that focuses on making startups more sustainable, ethical and inclusive. During the panel discussion, she mentioned that Zebras Unite’s capital arm could have been a traditional fund, but the organization ultimately decided to pursue more creative alternatives such as: Future Economy Lab. This lab, which focuses on helping founders find funding tools that fit their sectors, was held in Montreal with an emphasis on climate technology.

Scholz shared why she took this path in contrast to a traditional fund:

In the grand scheme of things [VC] is really just a tiny drop in the large pool of capital that is out there. And then at the other extreme, you have bank loans. This may or may not be accessible to startup founders, especially if they come from a certain demographic in that country. Of course we have a massive racist wealth gap and access to capital.

That sounds like two flavors of capital to me: vanilla and chocolate. It’s not interesting, if that was an ice cream parlor it wasn’t interesting. At Zebras Unite, we want to increase the diversity of capital as well as the diversity of capital managers. Therefore, we are very interested in revenue-based financing mechanisms. We are very interested in early stage, non-dilutive forms of support for entrepreneurs who have no friends or family assets. We looked at new types of character-based credit instruments and a number of mixed approaches so that the capital spectrum beyond the two ends of the spectrum has more room for coloring. (Timestamp: 3:52)

Why venture capital paths can be built around a more inclusive strategy

Well venture capital is not the devil, and in a market as hot as it is now, it is clear that there is great demand to support great ideas. The problem begins when you look at which ideas are supported and which are not, and underrepresented founders lose disproportionately more often than white founders.

Standards help everyone get on the same page, and for companies, any clarity about how one investor cuts checks compared to another can help contain signal risk and set expectations of early stage founders. Lightship Capital uses traditional venture capital but applies it in ways that Brackeen thinks is more inclusive for founders.

Often times, VCs talk about designing your product for your customer, but then they don’t evolve around the customer. They completely ignore what they say to people. And so we are designed for the underrepresented founders. And for us that means women, minorities, LGBTQ and disabled people. And so the capital path for this founder differs from that of the white-male Zuckerberg founder. A Series A is often very, very difficult, so let’s bridge that. We’re going to write a smaller check – half a million dollars first – and then we reserve $ 1.5 million so they can go out and do a Series A. To do that, we don’t need board seats and things like that, we need strong cooperation. (Timestamp: 7:03)

How your first check might affect your next check

Thomas noted that Indie.vc, an alternative funding program aimed at slow-growing, bootstrapping founders, closed last week, could be a lesson for founders looking to fund their businesses from the plethora of programs.

They were at the limit of access to new capital. I think one of the things we saw when we spoke to founders who were thinking about Indie.vc capital versus our capital was, ‘Does the investor you want after you have this Indie.vc funding? when you decide to go? a more traditional VC company? Can they actually make income-based financial investments, some people legitimately cannot because of the regulatory limits of their fund.(Timestamp: 16:28)

She went on to explain that this is not just a one time problem that could arise. The founding partner of the forerunner, Charles Hudson, wrote a post about the months ago Early stage clutter in cap tables.

I don’t mean to say it’s unfair, but you need to make a final decision pretty early on as to what type of company you want to build into. And I don’t think this allows for the flexibility that is a reality when building a startup. If you swivel five to ten to 20 to 30 times before you finally get to something that matters. So how can we allow more flexibility between several different types of revenue structures? I just don’t think it exists now. (Timestamp: 17:12)

Brackeen added that his form loves non-dilutive funding before and after they’re nicest. Pitch competitions can help a startup, but it won’t help founders move from phase to phase. This banter essentially answers the question I asked early on: Is all capital created equal in the eyes of investors? A cap table filled with various types of funding structures and notes, as Thomas mentions, could cause your next check investor to refuse to invest due to semantic or lack of belief in your vision. A side effect that we see here is Recapitalizations, an event where startups are restructuring their entire capitalization table to crowd out old investors, attract new ones, and change the way equity and debt are managed.

Scholz interfered in how startups should think about capital limits, but also other corporate structures that could shape the path of a startup.

I think the point that founders are basically locked into a business structure and investment strategy before they even know what they’re building or how it’s being sold is just so important. I’m always joking, you know, 99 out of 100 corporate attorneys will tell you to start as a Delaware C. [But] that may or may not be the correct answer. There can be good reason to join a cooperative, and listing as a Delaware C will make your life very difficult. (Timestamp: 17:46)

Whether VC will be even more relevant in five years

The conversation turned into a broader discussion of whether venture capital will be as relevant in five years’ time as it is today. While Scholz said she doesn’t even consider venture that important today, the two venture capitalists on the panel – Brackeen and Thomas – were good sports about the future of the asset class they bet their careers on.

Thomas: The IPOs just keep going and they keep getting bigger. It’s crazy. I think immense wealth is being created and we have to be thoughtful, we have to be careful. And we just have to be considerate of this fact. And so I plan to be in venture for the next 10 years. But I think, according to Astrid, we are not the only ones on the island. We are connected to all of these other different capital structures and different communities. But my bet is still there. (Timestamp 25:14)

Bracken: Capital will continue to play a major role in capitalism because the two go hand in hand. And venture capital is a version of that. Watch what we do. To see billions of dollars pouring into these regions, these communities, these groups, the added value is outrageous. Morgan Stanley and others say that racism and sexism cost this country between $ 4 trillion and $ 16 trillion in unused value. So venture capital can be an important lever to open that faucet. (Timestamp: 25:52)

You can read the entire transcript here.

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