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Edison Complex Funding
Have bulbs, need grid.
I have ideas, lots of ideas. That doesn't make me an inventor.
Some founders think inventing is where value is. They have an idea so good that it is already valuable. What do we tell them? It's not the ideas that matter; it's how well you can execute an idea that solves a problem enough people will pay for.
Edison was an inventor, but he wasn't the first to patent a light bulb. He didn't come up with incandescent lighting... it had been around for 79 years. The problem was that it had very limited applications and was only accessible by a few wealthy individuals.
Of course, Edison was a successful inventor, but his name is synonymous with invention because he was an innovator. He made lighting practical and accessible. He helped innovate the light bulb and the power grids that helped power the industrial revolution and populate cities.
Venture funding isn't a new invention. It just happens to be very narrowly defined and only applicable to a very small group of companies. (Less than 8,000 first checks in 2021, according to Pitchbook).
We don't need to "re-invent" venture capital. We must continue to innovate and improve on what already exists, moving toward broad, practical applications. After ten years of fits and starts, that is what we are starting to see. A lot of innovation that is beginning to unlock broader adoption.
So many of us misfits are seeking to make funding practical for more than a few companies. We are tweaking different versions of equity & debt to apply to more and more situations. No longer does equity just mean an all-or-nothing 1 in a thousand shot at success for founders and one in 100 for investors.
We are building power stations, conduits, transformers, outlets, and fuse boxes so more and more businesses can plug in to power their businesses.
As fund managers, we need a better understanding of what we are powering. The more fund managers there are on this frontier, the fewer blind spots there are. This group continues to innovate with funding that fits more companies. Innovative deals are being made, alternative funds are being created, funds are returning capital, and funds II and III are being raised.
But it still feels like a bunch of inventions in the lab instead of innovations in the market.
That’s the gap now. Founders aren’t yet aware that they can avoid the pressure of changing their business model to fit funding. There are more options beyond their usual “go-to” options.
Right now, nine out of ten founders I talk to only discuss one or two types of deal structure to fund their next inflection point. Other options are usually a big surprise to them.
We feel like misfits right now because more people should be in the conversation. That's just bad marketing.
The only power option founders see is the one that fits one specific factory type, so they try to build that factory. The standard VC agreement turns out well for all parties in the unique case of a 10-100x transaction in the future. This is the story most founders base their future on.
When founders say they are raising, they usually mean they need money now (before customers can give it to them), and the checks they've heard about are called venture capital.
But mainstream venture doesn’t usually fit. It can be like plugging a single lightbulb directly into the power grid, lots of sparks, and then it’s out.
The design of funding mechanisms should follow the needs of the market. What the tradeoffs are and what success looks like. What’s the finish line?
A company might be a good fit for standard VC terms IF…
Obvious hypergrowth potential
Initial no/low revenue & high burn rate
Clear shot at being dominant in a large market
Line of sight to what an exit might be
My first VC-backed company was not a good fit.
Of course, we (founders and investors) only realized that once we were already on the path and only had two choices: exit big or lose big. There was no off-ramp if one of those success requirements disappeared along the way. In our case, an external economic shock took away half our customers. After nine months of battling to get the company into the black to survive, none of the existing investors had the appetite to take on more risk for growth. And given the deal structure, no one even had that choice.
But now, there are so many other funding choices that can create optionality. Suppose a company isn't targeting an exit through acquisition/IPO. In that case, it can still deliver an investor return using different mechanisms based on revenues, profit, earnings, distributions, founder compensation– the innovations keep coming.
Some funding structures fit CPG better; some fit SaaS better. Some are designed for transactions, short-term cash flow, or large customer inventory demands. Some fit mid-term needs, R&D, or project financing. Some are better aligned with overall long-term company exit.
We continue to create a fantastic variety of funding mechanisms. The limitation now is visibility and application. We created a number of lightbulbs, but they still depend on an old delivery structure, the current funding landscape.
Daily interactions with early-stage founders make it obvious these new funding options are critical, new light bulbs that fit more applications.
And the next step is to ensure we have a power grid compatible with all these funding options. We have built some prototype power grids at a small scale... but we need radical transparency and a power grid to light up the market.
The most valuable work Edison did wasn't inventing; it was innovating for broad access. It wasn’t a single light bulb that lit up cities… it was a power grid.
Let's get the word out... and turn the lights on.
Innovative Finance Amplifications
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