Sources of New Venture Finance Hidden in Plain View
In order to meet the demand for information about becoming an entrepreneur, a great deal has been written on the basics of new venture formation, product ideation, and start-up finance.
However, as with so much of life, the reality of entrepreneurship is more nuanced. In particular, one of the more elusive areas is new venture funding, especially for first-time founders.
Most people know about the range of risk capital options for new ventures, running the continuum from earlier-stage Angel investors (Angels) to later stage, conventional Venture Capital firms (VCs).
In addition, a layer of seed-stage programs has dramatically grown over the past decade that includes Accelerators, Incubators, Hackathons, and other Pitch Events. Generally, these are all publicly known, their models understood, and the process for participation well-documented.
But, there also exists a "dark web" of capital -- not unlike the vast "dark web" on the internet – that is less well-known. Some examples are Venture Builders, Affinity Groups, and Event-Based Investor Networks.
In some respects, I think of this dark web of capital as a being “hidden in plain view.” The phenomenon reminds me of some favorite movie scenes, from Tomorrowland, Harry Potter, and (a B-movie favorite) They Live.
Just like the protagonists in these movies, first-time founders seeking funding are surrounded by members of the dark web of capital, in and around their community.
However, without direct knowledge or an access point like the Tomorrowland talisman, the Harry Potter work boot, or the sunglasses in They Live, the dark web of capital is largely unrecognized, because it is rarely discussed in the open. (NOTE: More on the subject of dark web access points in a future Part 2 blog post.)
The good news is, once you know how and where to look, it’s quite possible that one of these sources may in fact be an even better fit for getting your new venture funded than the other better-known, conventional alternatives.
Here’s a quick run-down of dark web capital categories, with examples.
Venture builders - also called tech studios, startup factories, or venture production studios, venture builders are organizations that build companies using their own ideas and resources. VentureBeat did a nice job of profiling the category in January, citing a handful of examples like Obvious Corp., which spun off Twitter and Medium. Close to home, some Austin examples are our own firm, Powershift Group, the Source Spring, and Thinktiv.
Affinity groups - these are groups that typically have a shared core, which might be an industry sector, a thematic ideal, or some other area for which they share a passion. The have characteristics of angel investor groups but are less formal and place more emphasis on relationship building among the participants. Examples in Austin include what is affectionately known as “the real estate mafia” and the Conscious Capitalism dinner group.
Strategic partners – better known, but still under-accessed are the corporate development groups for large firms, like Intel, Cisco, Qualcomm, and many others…even more common in Big Pharma, for new life sciences ventures. These groups are using their funds as leverage to reduce their R&D expense and get early looks at technologies they may want to acquire (or neutralize). If you have a taste for “dancing with elephants” then a strategic partner investment could be ideal.
Vendor partners – many service provider vendors, like accounting & financial services firms, attorneys, contract design & dev shops, and benefits providers have fee deferral programs to assist cash-poor new ventures. Increasingly, more of these firms are open to making debt & equity investments in their clients. Among the reasons is the age-old motivation to diversify and find ways to gain leverage above-and-beyond the fee-for-services model, which has limitations for scaling and profitability. An Austin example that has played the vendor-investor card well in the past is Chaotic Moon.
Event-based investor networks – these are programs specifically organized for investors, often who travel from other regions or countries, that include a curated agenda and lots of time and space for deal-making. A great example is the China-US Private Investment Summit held in Austin in late March/early April. Over 100 Chinese business men and women, each paying a registration fee of $25,000 to attend, come to do serious business; Chinese investment in the US will exceed $500B in 2015. Definitely a formidable capital source.
Non-bank lenders – most first-time founders eschew traditional banks because of their collateral and other lending requirements. However, in many communities, there are lower-collateral / higher-risk non-bank lenders – and, I’m not talking about the neighborhood loan shark. A great example is Austin-based PeopleFund. Often overlooked because of their strong association with “small business” lending and finance, lenders like PeopleFund can be incredibly savvy partners, providing sizable financing and assistance that meets the seed funding needs of many new ventures.
Foundations – once upon a time, Foundations were considered sources of capital for nonprofit and community initiatives only – no longer! Foundations like the Austin-based Michael & Susan Dell Foundation (MSDF) and many others have evolved to a very mission-driven, solutions-oriented, evidence- & metrics-based worldview, which means they are just as open to investments in for-profit ventures as they are non-profit.
These are some of the more obvious sources of dark web capital. In a future Part 2 post, I’ll talk about access points to the dark web of capital and attributes that make new ventures and their founders more accessible to these source of finance that are hidden in plain view.