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New trade group of startup investors who don't focus on flipping

New trade group of startup investors who don't focus on flipping

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5 -min read
Listen to this article

[NEW YORK] Attracting venture capital (VC) has rarely been easier for well-connected tech guys in hoodies, but it's still a long shot for everyone else.

The kind of investment that has created great fortunes for billionaire founders like Mark Zuckerberg and investors such as Marc Andreesen is far from a perfect system.

Only 2.2 per cent of VC funding goes to female-founded teams, according to PitchBook. And black and Hispanic entrepreneurs get just 1 per cent of startup financing, according to the Kauffman Foundation.

Even if it were available, VC is not necessarily the best option for entrepreneurs who aren't able or willing to take the big risks that could create the next "unicorn" with a billion-dollar valuation.

A new trade organisation launched on Friday is betting the key to addressing the disparities in funding will be a different approach altogether: "builder capitalism".

The nonprofit group, Buildercapitalist.org, says it will advocate for investors who want to make closely-held bets on entrepreneurs via private holding companies, revenue-sharing arrangements, and equity and debt financial structures that could be more supportive of founders trying to build long-term wealth.

"Right now venture capital is the only form of capital being sold to communities that have been left out," said founding member Nathalie Molina Niño, chief executive officer of the impact investor O3 and an adviser to female entrepreneurs.

"Builder capitalism is a long-view alternative to venture - a model based primarily on building companies rather than exiting."

She is announcing Buildercapitalist.org at an Art Basel event in Miami on Friday.

UNDERAPPRECIATED PATHS

While television shows like Silicon Valley and Shark Tank have sometimes made it seem like VC is the only option for entrepreneurs, other tried-and-true methods of building companies haven't gotten as much attention in the past few decades, Ms Molina Niño says.

Builder capital methods have long been used by wealthy families and investors to build fortunes.

VC itself isn't even that old of a model. The industry evolved in the 1940s to encourage investors to back businesses led by returning World War II soldiers, then took off again in the dot-com boom of the 1990s.

More recently as venture capitalists have focused on "spray and pray" models that bet on a lot of companies while hoping for a few big winners, they've also been encouraging founders to take big risks. That's fine for those individuals who can do so. But women and people of colour face disadvantages in taking risks because they lack deep support systems and face historical wealth gaps. In 2016, for example, black household wealth was just 9 per cent of white households.

"In the VC model, the likelihood of a black founder being able to build multi-generational wealth and hold onto their company for as long as they want is pretty slim," said Ms Molina Niño.

The group isn't anti-VC, says Dave Furneaux, chief executive of Boston-based investor BlueIO, who is also a founding member of the organisation.

"The venture capital model stimulates the economy and creates a lot of entrepreneurial activity - thousands of companies get started that way - but it doesn't mean there's not another model that can't co-exist," Mr Furneaux said in an interview.

HOW FOUNDERS BENEFIT

The goal of the trade organisation is to provide a place for investors who identify as builder capitalists, and to support their work with best practices, sample contracts, case studies and investor contacts.

Mr Furneaux sees builder models as a way to get more alignment between company founders and investors. Unlike the large VC firms with stakes in hundreds of companies, BlueIO focuses on only a handful of companies at one time, so the investor can take large stakes and really focus on operationally building the company alongside the founders.

"Too much capital coming from too many different types of investors can push a company to grow too fast and increase risk dramatically," Mr Furneaux said.

He said founders can be more efficient with matching the types of capital they raise to their business, and don't necessarily need to be held to arbitrary exit timelines forced by venture funds. The strategy has paid off in his own business: He was an investor in Appnexus, when it was acquired by AT&T last year. Mr Furneaux was also a founding investor of Montreal-based Lufa Farms and has been working on growing the urban agriculture business for years - even after it turned profitable in 2016, he said.

Some founders are eager to build businesses in other ways. Take Andee Harris, a serial startup CEO in Chicago who's sold several software companies to VC firms. When she wanted to start a new business this year, she wasn't seeking venture support.

"I wanted to go back to the earlier days before venture capital, where it was great to build a business just for the pure love of building that business and using operational expertise," Ms Harris said in an interview. "In the VC model it's very much about getting a company in a position to sell it."

She is setting up her new company, Franklin Heritage, as a holding company focused on tech and manufacturing and planning to expand the startup by investing in and rolling up other businesses.

Focusing on building companies with other sources of funding could be a solution to still another problem: the lack of public companies with minority and women founders. Ideally more minority founders can find a way to stay with the companies they create and grow them until they go public, says Anne Richie, venture partner at JumpStart, a Cleveland-based nonprofit that advises and invests in early-stage companies.

"Women build companies to keep," said Ms Richie, who is planning for her next fund to focus more on builder capital strategies. She sees that model working better for women-owned and black-owned businesses that aren't necessarily tech companies, but often retail, food, health care and service businesses.

"If you build a company for five years and sell it, you might take your millions, but you also might go sit on the beach with your millions, and then a great woman-owned business goes away," Ms Richie said.

"We need to maintain and build to grow a Fortune 500 company, and that's how we are going to change the wealth gap."

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