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Step Zero for Innovative Capital Providers
Welcome to Volume One of the Innovative Finance Newsletter. Building off of the Innovative Finance Playbook, this is a twice-per-month exploration of the future of finance.
This impressive audience includes 1,296 capital entrepreneurs, founders, and community leaders who are building a more inclusive economy and future. If you know someone who may appreciate these ideas, please forward this along to them.
Now let’s get to it:
Before there is a deal, a company, or a founder, there is a person who decides to start a company.
The answers are endless. I’ve seen founders start businesses to prove a point to a parent, pay rent, create generational wealth for their kids, reinvent their local economy, build a team, or just for the sake of full-contact learning through doing. Whatever the reason is, uncovering it is crucial to rebuilding our entrepreneurial finance ecosystem.
Innovative capital providers need to be deliberate in uncovering the Whys of the founders they talk to and fluent in translating those Whys into financial guidance.
Let’s start with a well-worn entrepreneurial finance pathway - venture capital.
The work of a venture capitalist, and any capital provider, is often simplified into four steps:
In a traditional startup ecosystem, where VC is (often mistakenly) the default first financial step, these four buckets adequately encapsulate the work of a VC. The first fund I raised existed at the center of the Denver/Boulder startup ecosystem, so nearly every founder we encountered sought venture capital specifically. Venture capital managed to brand itself as the only deal in town for early-stage risk capital, so our work started with “accessing” deals.
A quick click around the Innovative Finance Playbook’s 219 pages worth of financial wisdom makes it clear, there are other financial pathways. This Innovative Finance audience doesn’t need another lecture on why this isn’t healthy for entrepreneurs or our economy as a whole.
However, innovative finance is not just a matter of clever finance. That’s how we got into this mess. Instead, take the four steps above and add in Step Zero. As Simon Sinek would say…
Start With Why.
For the capital providers of our future economy, all work comes downstream of this critical, non-financial work.
Capital strategy has an undue influence on the direction of a business.
Before a capital provider decides if a deal is financially feasible, they should know what financial structures are (and are not) compatible with the founder’s Why.
In its best form, capital unlocks outcomes for a business that line up with a founder’s Why. If a founder’s Why is to pay for college for their kids, that critical line of credit may allow the company to build inventory and scale to a point where it spits off a room and board’s-worth of cash. Or perhaps a venture round buys the sales and marketing hires that put an Ivy League-sized-exit on the table. That is capital working for the Why.
In its worst form, capital distances a business’s outcomes from a founder’s Why.
All too often this is a founder realizing, years into the journey, that their VC requires an exit. The chance for a founder to get filthy rich is used as a filler Why. It’s flimsy, but it gets a lot of deals done. When one side or another feels scarcity, say a company is out of runway or a VC is afraid to miss a deal, aligning over potentially getting filthy rich lets you jump into the deal phase quicker.
Did the founder actually want to hand this business off to their kids? Or exit to employees? Or exit to a steward ownership structure like Patagonia? Well, the filthy-rich-fantasy-Why just closed those offramps years ahead and committed the business to one financial pathway - an exit. VC is an easy example to point to, but this riddles all of finance. As opposed to financial mistakes, these worst outcomes often start with a lazy understanding of Why from both parties.
In reality, most deals get done somewhere between these idealistic best-forms and the worst-forms. Founders often have to weigh their motivations and stubbornness with the capital at the table and decide the best, not perfect, path for their Why. Discovering the Why puts helpful bumpers on the deal to ensure neither the capital provider’s financial goals nor the founder’s core motivations get irreparably violated. Those are the lose-lose situations that hurt people, ruin relationships, and earn finance its evil-empire branding. Don’t skip Why.
Step Zero in Practice
I’ll tell you how NOT to discover a Why first.
“With the Greater Colorado Venture Fund, we invest via traditional VC structures (priced equity/convertibles/SAFEs) as well as redeemable equity, using a variation of the Indie VC V3 terms. We’re one of the only funds that incorporate an alternative structure into our venture fund, and we do so to allow for founder optionality and to widen the aperture of our risk capital to partner with the best founders in our market.”
That is utter finance gibberish. I’ve regrettably said a version of this to a founder or five. The Innovative Finance audience may still follow along, but most founders will not. There is usually financial information asymmetry with a deal, and this gobbly gook just flagged me as someone who might flex this asymmetry to take advantage of them and their business. I’m skipping to dealmaking.
The “Why” phase is about listening.
As a rural Colorado-focused capital provider, I have to show up as a fellow rural Coloradoan to understand the worldview of our founders. Before any dealmaking, I should be immersed in the affordable housing crisis of their town, the soil collapse of their land, or the value of family within the community. I listen for their Whys.
And then, delicately activating my finance brain, I track how their Whys do or don’t fit with our capital products. Did I hear something about cooperative ownership? Is the goal to innovate and disrupt or to provide stable local jobs for decades to come? In the back of my head, or even after I meet the founder, I reconcile their Whys with the needs of our equity and redeemable equity products.
The Whys are telling me if there is a relevant deal here or not.
For capital providers, there is one key sign of a successful Why process:
You will pass on fantastic companies that you deeply admire.
For every deal case study highlighted in the Innovative Finance playbook, there are numerous anti-deal case studies.
With the Greater Colorado Venture Fund, we are constantly growing our anti-portfolio of amazing companies that we do not have the right funds to support. Delta Brick and Climate Company creates tiles from the silt that fills a local reservoir and plans to scale by firing its tiles with methane released from improperly capped mining sites. Incredible! I’d be honored to have our capital supporting that, but it is not compatible.
Forcing a deal that violates a founder’s Why is a disservice to the founder, but it also undermines the innovative finance ecosystem as a whole. The explosion of online revenue-based lending is a potent anti-example, as predatory terms crept into the market and are now being revealed in the macro downturn. The demand for a VC-alternative was so ripe that these hasty RBI funders didn’t have to add a Why function to get money deployed. They just had to brand as non-dilutive, presume riches were a good enough “Why”, and wire the money.
There was no empathy, no Why; just spreadsheets with good branding. That is not innovative finance if you ask me.
So, for now, I am just a superfan of Delta Brick and Climate Company. There will be another company with a mission that lights me up inside. We find them in the darndest places with GCVF.
And once again, before I can jump into how our funds can support them, I have to pause and listen. Why is the founder starting this company?
Then, I will have to step up as the “finance person” to decide if our capital products are a fit for that Why. Only if this rings true is there a deal to “access”.
Financial innovation starts well before numbers and terms. It starts with Why.
Thanks for joining us for the first volume of the Innovative Finance Newsletter. We appreciate your support and guidance as we build a newsletter for capital entrepreneurs, by capital entrepreneurs.
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