Watching the Future of Financing
There is change afoot in how startups fill up their gas tanks in Silicon Valley. Recent cycles have shown venture capital as the popular weapon of choice to finance startup ambition. The success of venture financing has led to great power accumulating in the few hands that deploy it. Through multiple waves of innovation across computing, the internet, mobile, and now decentralized networks equity has proven to be a powerful tool for growth. But the pendulum is swinging back. Capital, after all, is a commodity.
The same disruption that enables new technologies and platforms is also coming to venture. These alternatives may not replace it, but the introduction of competitive financing options is where things get really interesting. The cost to run a business continues to fall and equity becomes more expensive to sell as a company grows > a problem looking for a solution. A couple subtle but soon to be major innovations have picked up traction that could fundamentally change how startups finance their growth. It really seems like they could bust through to the front page menu of financing options.
Now, it is naturally up to the founders or company CEO to determine the capital structure of your employer. Still, as managers evaluate both current and future opportunities…understanding how businesses are financed, the worth of your equity, and how to think through these tradeoffs is more important now than ever.
What are they? And what has changed?
Equity Crowdfunding
$1M was just not cutting it. On March 15th of this year the SEC announced that startups can now raise up to $5M in regulation (CF) crowdfunding per year. The previous base was $1M. That’s a big jump! And covers…a lot of business needs. Especially those with an audience who can mobilize a fanbase. Fans are likely to provide cash with less dilution due to the terms the company dictates, perks can be shared at different investment levels, and you can covert customers into shareholders. A pretty powerful, now larger idea.
Consumer startups like Gumroad* took advantage of the new rules, raising $5M at a $100M valuation with a 20% discount alongside some top institutional investors in…24 hours. Woah. Backstage Capital*, a venture firm for companies run by underrepresented founders, sold a piece of their venture firm and future distributions to the public raising $5M rapidly too within a matter of days.
Two different but very interesting examples of how equity crowdfunding could continue to explode over the coming years. Power to the people, right?
“Dilutive Free” Financing
Founded in 2019, Pipe gives companies dilutive free financing that operates like debt. They operate a marketplace that trades company revenue contracts for cash. Institutional investors on one side of their marketplace purchase revenue streams (fixed income) from startups. Companies share simple metrics around their subscription business and, depending upon the predictability and stability of the revenue, tomorrow’s revenue becomes cash you can use today to grow your business. This post by Alex Danco really well summarizes the opportunity for Pipe and their other competitors like Clearbanc in this rapidly growing alternative financing space.
And those are just two venture capital alternatives!
Why is this so important? Since you hopefully own a piece of your company’s pie…you better understand the other pieces too. If part of your compensation is based upon ownership of a future outcome it’s probably best to understand what those outcomes could be based upon the capital foundation that’s been built. And how the company needs to grow in order to realize an outcome!
With interest rates remaining low, the startup economy continuing to proliferate virtually and globally, more variety will be the spice of life. The future of financing and running businesses? You better watch, it will affect your career and wallet too!