In today’s climate of technology startups, the need for capital is in high demand. Funding and accelerator options are becoming more prevalent in some areas. Likewise, many investors find these early-stage opportunities ideal to invest in business startups. However, the traditional venture capitalist models have many problems. For one, later stage funding and opportunities for exits are less common than early stage resources. Also, startup founder interests often conflict with venture capitalist funders.
In light of this, some companies are opting to buy their way out of their venture capitalist situation. Likewise, there are discussions about increased access to private investment opportunities. Considering these recent developments, the future landscape of investing in business startups looks very different from before.
Shifting Trends Between Public and Private Funding
Not long ago, investors enjoyed opportunities to invest in business startups early in the public markets. In many instances, IPOs were indeed the initial chance for investors to gain access to companies at their early stages of growth. Technology IPOs are still relevant but now less than they were previously.
Today, the venture capitalist structure has shifted these opportunities toward private markets. While public markets provide benefits in terms of immediate liquidity should things go amiss, private markets offer access. In fact, early access to invest in business startups is in high demand because of the potential for high returns on investments.
In considering startup funding structures today, private investment markets have expanded significantly to an extent. For seed and early-stage funding, opportunities to invest in business startups abound. In tech sectors specifically, these private markets provide startups the means to launch into a growth phase and to an eventual exit. For those that do exit and go public, they are no longer considered at the ground floor phase for the public investor. Thus, trends have veritably shifted as investors are found willing to pay more for the opportunity to access these companies earlier in the game.
Problems with the Venture Capitalist Structure
While the private venture capitalists structure offers better opportunities to invest in business startups early, it has its issues. For one, the interests of startup founders and venture capitalists often differ from and contradict one another. This situation is notably the case when it comes to acquisitions. Venture capitalists want a venture fund to earn three to five times its amount. Thus, acquisitions for startups that are under $100 million typically pit the founder against the venture capitalist investor. Likewise, venture capital may be limited to some groups, like women business leaders and even worse for diverse leaders.
These are not the only problems with the venture capitalist model. Venture capitalists often demand rapid growth when they invest in business startups. Unfortunately, this can be counterproductive to the health of the business.
For example, Wistia Inc., a Cambridge-based startup involved in video management software, recently bought out its venture capitalist investors. The company needed to slow growth pressures and focus on long-term profitability. Thus, the company took out $17.3 million in debt to escape their venture capitalist stranglehold.
Buffer, a progressive startup involved in social media management tools for small businesses, recently pursued a similar strategy. This startup negotiated a buy-out deal where the majority venture capitalist received a premium interest rate on their investment. In return, Buffer was able to focus on long-term growth, company values, and organizational culture. While the funding was great, the growth pressures and assurances provided were well not worth it.
Increasing Access to Invest in Business Startups
The struggles faced by Buffer and Wistia are not uncommon. However, buying out a venture capitalist may not work for many startups. For one, revenues have to be substantial in order to be able to take off the funding training wheels. However, there is good news.
Recently, the SEC made moves that make it easier for small investors to invest in business startups. A recently signed proposal allows small investors to invest in business startups up to $1 million.
In addition, SEC Chairman Jay Clayton has publicly announced interest in giving individual investors greater opportunities to invest in business startups. As this evolves, the potential benefit for investors and startups alike is noteworthy. Not only will funding and investment opportunities expand, but interests can also be better aligned. This improvement would help reduce some of the issues now associated with the venture capitalist model.
Determining Which Investment Structures Are Best
In deciding which structures are best for startup funding, potential investors see that the diverse needs among startups can be a challenge. Funding is needed, yes. However, each startup requires unique considerations.
To date, the venture capitalist structure has provided expanded opportunities to invest in business startups. But it, too, has problems. Increasing access to smaller investors seems like a good move, but it remains to be seen how far the SEC will go in this regard. Regardless, these are great conversations for business-savvy people to be having, especially in today’s dynamic business environment.
John R. Miles
EVP & Associate Publisher
John R. Miles is Executive Vice President and Associate Publisher of Bold Business. He brings visionary leadership style and talent as an internationally experienced CEO, COO, and Fortune 50 CIO. He is best known for his experience and knowledge regarding digital transformation, machine learning, innovation, big data, and blockchain. John was previously the CEO of Genius Central and ByOwner. He built the number one social brand at Dell as CIO and led technology, e-commerce, and software for Lowe’s Home Improvement. John led the digital strategy at Catalina Marketing as CIO and global head of operations and currently leads tech, healthcare and media investments at Virgo Investment Group. Miles is active on Linkedin and Twitter has been published in a variety of media, and has delivered Key Notes at venues such as SalesForce’s DreamForce Conference, Diversity MBA, and Oracle Open World. Miles graduated with honors from the U.S. Naval Academy where he was a multi-sport varsity athlete.