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October 14, 2019

Venture Capital is Like Skinny Jeans (Or Why We Need a New Language for Capital)

My genes make it tough to find jeans. I’ve got short legs, and finding a pair of trousers to fit them can be a challenge. They are either too short, too long, too tight or too baggy, so when I find a pair that actually fits, I end up buying several of them to stock up. This means I’m not a big fan of current fads: I do not look good in skinny jeans.

I’m hardly alone in facing this challenge — we’ve all got different body sizes and different body types — and yet, unless you’re able to buy your Japanese raw indigo custom cut to your measurements, we’re all forced into the same small range of jean styles and sizes.

We get frustrated when our clothes don’t fit. If we really like them, we have some options to adjust to them: cuffing them, taking them to a tailor, losing some weight to squeeze into them.

But otherwise, if a pair of jeans don’t fit, we don’t wear them.

If we take this approach to jeans, why don’t we take this approach to venture capital?

Constrictive capital

Only a few entrepreneurs — less than 2% — access venture capital equity investment. This can bring a host of benefits: in theory, by doing so, those entrepreneurs can grow their ventures up to 30% faster than companies who don’t have equity backing.

Yet venture capital, the current fad for financing new businesses, comes with strings (or raw indigo denim threads) attached. Venture capital is risky, and investors seek returns that reward that risk, at multiples of 10x, 20x, and 30x.

There are plenty of strong growth-oriented businesses that won’t (or don’t want to) reach that level of scale, and forcing them to do so could undermine their sustainability and weaken their value proposition. And even if they are, a ready exit might not be visible. Not unlike trying to squeeze into skinny jeans when your body type (like mine) just doesn’t work with them.

Viewing the world through the lens of venture capital not only limits the types of companies that can access funding to grow, but it also limits the range of opportunities investors can access for returns. Good businesses miss out on critical support and good investors miss out on needed opportunities. Combine that with the geographic and demographic biases inherent in investment decision-making, and you end up further limiting access for both investors and entrepreneurs.

An emerging movement

This has led some people to find new ways of investing differently, using different types of strategies and structures to go beyond the confines of venture capital equity, and outside the small pool of hyper-growth-focused companies.

Village Capital’s affiliated fund, VilCap Investments, has deployed revenue share structures, as have a number of other early-stage investors, such as Novel GP, RevUp Capital, Adobe Capital, and Candide Group. Nor are they the only ones: — one of the frontrunners in this space — recently raised their second $30 million profit-sharing fund, while Lighter Capital has financed over $150 million to 300 startups using revenue-based structures.

And increasingly, these investors are working together to build out the space. In the past year alone, we’ve seen Zebras Unite and the Kauffman Foundation pull together an Alternative Capital Summit; we’ve seen Transform Finance and Lighter Capital release reports exploring non-equity structures (something we’ve done as well); we’ve seen Candide Group lead workshops around exit structures; and we’ve seen Novel GP lead the development of a revenue-based working group for investors.

Yet in spite of this growing activity, there are still a lot of questions around this ‘beyond venture’ capital. When does it make sense? What businesses are the best fit? Where can entrepreneurs find it? How should investors deploy it?

A snapshot from our prototype v0.1 taxonomy document (find the link to the full taxonomyhere)

To help answer these questions, Village Capital and Zebras Unite, together with investors and entrepreneurs like you, are working to develop a new, common language of capital, to identify best practices around return expectations, ticket sizes, and capital needs. To that end, we’re developing a taxonomy and, eventually, a dynamic user map so that both entrepreneurs and investors can not only understand which capital strategies and structures make sense for their interests, but also how to use them and where to find them.

We began workshopping the v0.1 prototype taxonomy in spring at the SEED conference in San Francisco, It is still very much a work in progress, and we’d love your input! Here is how you can help:

  1. Review the prototype and provide comments on how it could be improved (please include your name and contact info);
  2. Share your term sheets and any other templates you use for making investments that are not vanilla VC;
  3. Join the Zebras Unite community of founders, investors, and others interested in alternatives to venture;
  4. Sign up for Novel GP’s revenue-based working group of investors.

If you have thoughts on how this could be better organized, developed or fleshed out, please let us know! We’ll continue workshopping this in September, at Village Capital’s Pathways to Capital event in Philadelphia.

Building this shared vocabulary will be hard and will involve a lot of experimentation and some failure, but we believe it is possible. What’s important is that we coalesce, build a community of practice to harmonize standards, and create a common language that advances the field.

As investors, we often talk about why we invest, or what we invest in, but we too rarely talk about how we invest. It’s time that we, the investors, innovate ourselves.

Rob Tashima is VP and Head of Innovations at Village Capital. Astrid Scholz is CEO of Sphaera and co-founder of Zebras Unite.

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