Comment: Where did all the money go?

Andrew D'Souza breaks down revenue-based funding, an alternative way of raising capital that could level the playing field for under-represented business owners.

Andrew D'Souza is the co-founder and executive chairman of fintech firm Clearco.

In 2010, Christina Stembel set out to build a modern, online flower business. As a woman from a small town in rural Indiana with only a high-school degree, she didn't fit the typical founder mold. And, even after nearly a decade of bootstrapping Farmgirl Flowers, she was rejected by more than 100 venture capital firms. 

Christina's story is a common one – which, if anything, makes it more important to tell. Business owners being denied the capital to succeed based on where they live or where they went to school is a problem that's existed for decades and continues to negatively impact people to this day. Given 2020's explosive boost in business launches and surge in venture cash, we should have seen a proliferation of funding for new companies and innovation. Instead, capital went to the same types of businesses and owners. 

Americans started more than 4 million businesses in 2020, a 24% increase from the year before. Venture capitalists are competing to hand out cash as valuations continue to smash records. There's been a lot of talk about the pandemic unleashing a tidal wave of entrepreneurial activity – but where did all the money go? 

In 2020, 73% of venture capital funding in the US went to businesses in just three states: 

California, New York and Massachusetts. More black-owned businesses were launched in 2020 than at any time in the past 25 years – according to business education non-profit Kauffman Foundation – but less than 3% of funding went to people of color during the first half of that year. Global venture capital funding stood at more than $300 billion in 2020, the second highest in a decade. But funding to female-founded companies fell by more than a quarter on the year before. 

As someone who spent nearly a decade raising venture capital for tech startups, I've seen first-hand just how opaque and siloed the fundraising process can be. So, I started Clearco in 2015, which uses artificial intelligence to offer fast, unbiased, revenue-based financing, which gets business owners the capital they need without requiring them to give away equity in return. 

Revenue-based funding can remove the barriers of traditional funding – bias, dilution and grueling fundraising cycles – to hopefully release more innovation that might otherwise be overlooked by venture capital. The idea is to create a clearer path to growth for early-stage businesses, regardless of where they live, who they know or how early they are in their business journey. 

Unlike the industries it supports, venture capital is still largely an analog business. Venture capitalists can take only so many meetings in a day, can evaluate only so many deals and can sit on only so many boards at a time. When the demand for capital is greater than the supply of investors' time, they must rely on shortcuts. Traditionally, venture capitalists aim to pattern-match, seeking business owners and colleagues who look and act like them. And, so, the ecosystem remains largely closed to those who don't fit the profile. 

With revenue-based financing, 20,000 business owners can input their information on a website in a single day, and a comprehensive algorithm can blind-assign their financing potential. An entire venture capital firm couldn't book that many meetings in a lifetime. 

Someone who has benefited from this revenue-based funding model is – as you may have guessed – Christina Stembel. For years, she couldn't get a seat at the table. And, yet, she still managed to build a multimillion-dollar empire that helped revitalize a stagnant industry. While Christina's story is the true American dream, it's not the reality for many people who are denied the same opportunities through traditional funding simply because of their background. 

This should be troubling. Entrepreneurship is the bedrock of all economies, and the more businesses that have access to growth resources, the better off our economy – and society – will be. If we care about the future of business, we must remove the scarcity model that plagues venture capital and democratize wealth-building opportunities for business owners. 

There are problems in the world that need solving, and venture capital no longer seems up to the task of funding those solutions. What I've learned as a business owner and leader is that great ideas come from every corner of the world and all walks of life. Some of the best come from people facing hardships and looking to build solutions – but they have to do so without access to capital, networks or support. 

Thankfully, venture capital is no longer the only source of financing for new and ambitious businesses. Revenue-based financing is one, but there's room for improvement there, too. The most important thing is to create opportunities for the next generation. If we don't, we will miss out on economic growth, as well as a future of ground-breaking innovation.

This article was first published in Courier issue 46, April/May 2022. To purchase the issue or become a subscriber, head to our webshop.

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