No.19: The rise of alternative venture financing
A newsletter about entrepreneurs building sustainable businesses and the investors who want to finance them.
Good morning friends,
When I started writing this newsletter in March 2019, alternative venture funding wasn’t a real thing. A few courageous investors were promoting alternative financing models to venture capital, but they did not exactly achieve product-market-fit - until recently.
Photo by Alexander Schimmeck on Unsplash
For context
Since Mereo’s birth, things have started to change. WeWork, the $47b co-working space, exploded on its way to IPO, showing the fundamental difference between public and private market investors. As a result, everyone and their mother quickly changed their pitch deck: the time for growth-at-all-costs was over, now it is all about being a profitable company. As being profitable is now en vogue, I had to remember why I cared about alternative venture funding in the first place:
While venture capital is great to build multi-billion dollar companies, only 1% of VC-backed companies actually reach the $1B valuation.
Today, the market is aware that only a few companies are fitting the venture model and that there is a massive need for alternative funding models which can finance tech companies that don’t fit the VC mould.
Getting momentum
Earlier this year, I mentioned Canada-based Clearbanc when the firm launched its revenue-based financing offering to (mainly) eCommerce entrepreneurs. Yesterday, London-based Uncapped announced a GBP 10m fund with a similar model:
Uncapped says it will enable founders to access working capital between £10,000 and £1 million for a flat fee of 6%. It’s being pitched as a smart alternative for growing companies that don’t want to give away equity in return for capital to help grow.
Like Clearbanc, Uncapped investment seats between capital and debt, allowing entrepreneurs to fund operations at a cheaper cost than capital while requesting less guarantees than debt.
Meanwhile in the USA, Indie.vc opened the application for its “12 month program designed to fund and support founders on a path to profitability”. Bryce Roberts started Indie.vc in 2015 out of its classic VC firm Oatv. Four years later, when the firm is about to launch its latest batch, Roberts decided to create scout program where selected scouts can refer relevant companies to the program. The result? More than 2,000 people applied to be a scout to their investment program, showing the strong interest in alternative venture financing. Indie.vc deserves a full profile in Mereo, so stay tuned.
Next to new firms and models emerging into the space, existing players are also getting momentum. It’s the case of Founders First Capital Partners, a revenue-based investment firm which last month raised a new $100m for a new debt fund. The firm aims to finance underserved and underrepresented founders with a less dilutive form of capital.
“At Founders First Capital Partners, the new financing will expand its lending operations to companies that are already generating between $1 million and $5 million in annual revenue. The new program is set to launch in January 2020, expanding the firm’s footprint as a financial services firm for minority and other underrepresented founders, the company said in a statement.”
Coming to life
After more than 9 months writing Mereo, it’s great to see that more and more talents and money are going into this category of “sustainable and profitable” businesses. As mentalities start shifting, people realise that those companies are not “lifestyle” businesses but possibly a promising new asset class that can exists alongside venture capital. I can’t wait to see what 2020 reserves for the alternative venture funding space.
About Mereo
Mereo is a newsletter-driven publication about entrepreneurs building sustainable businesses and the investors who want to finance them. Mereo is written by Michel Geolier, an entrepreneur and former venture investor based in Munich, Germany.