Why I Said “No Thanks” to Venture Capital and Did Things My Way
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This article was originally published on 02/04/2019
Since early 2018, I have been going pretty hard at fundraising for my smart vending tech company, PopCom. I’ve also been quite deliberate in sharing how alternate sources of funding are desirable to me as a founder, making sure to be as transparent and relatable as possible in the way I share my journey through my personal blog and across all of my social media outlets. The self-education, the discovery, and most usefully–the trial and error–have defined a significant portion of my experience in entrepreneurship. However, I intentionally avoided publicly sharing details around some of the events, which led me to seek investment in PopCom, outside of the VC structure.
Fact is, I had some extremely disappointing, perception-altering experiences with venture funding. However, I am not alone. Many of my contemporaries share similar stories, each with varying degrees of intensity, and in some cases, severity. As a female founder of color, the inherent bias that’s built into the system is already a nearly impenetrable barrier to obtaining adequate funding, if any at all. This has become common knowledge–with stat after stat advising the global founder community– if you’re a minority, a woman, or (*gasp*) both–bootstrap it up, because access denied.
So when I found PopCom in the position of having access to VC–despite warnings from colleagues–I felt excited and accomplished. I drank the “venture kool-aid” as I’d like to call it.
Beyond the commonly acknowledged and even more commonly accepted biases around race and gender–are the lesser known, unchecked, business damaging behaviors that exist in VC culture.
I raised over $900,000 from accredited angels and VCs for my seed round, and just enough to reach my next milestones and valuation goals for the next round. If I knew the VCs didn’t have the follow-on that sold me on the deals–I never would have taken the money. They definitely misled me.
Follow-on funding is wildly attractive, and necessary, to early-stage businesses for whom education and support are equally as necessary as cash. For instance, marketing, design, legal–and the list of vital guidances goes on. As it is being revealed, many VCs over promise–or lie–about what type of support and how much of it they are capable of or willing to give. Negative experiences behind the VC curtain have led many founders to conclude that all funds, aren’t good funds. Yet, for cash strapped ambitious entrepreneurs–the allure is understandable and in many cases, irresistible. Investment firms can identify a remarkable early stage company with late payrolls from a mile away–and feel free to engage in what looks a lot like predatory behavior around investment, in response.
Recently, more founders like me have come out in support of what is being called the beginning of a grassroots VC reform movement–calling out the industry and openly sharing stories around negative experiences in seeking, and accepting, VC investment. In what could be considered a formal announcement of the movement, the New York Times ran a story at the beginning of 2019 titled, ‘More Start-Ups Have an Unfamiliar Message for Venture Capitalists: Get Lost.’
Founders are getting fed up with VC behavior–from the racial and gender-motivated discrimination and bias to the now “new normal” trend of unicorn chasing, which is at least partially rooted in cronyism. In 2018, it increased early-stage investment amounts while decreasing the number of actual deals. Essentially, this is worsening the investment famine for meaningful, crony-less startups.
Despite my experience, I do believe that there are good VCs. I had a great experience with Backstage Capital. Plus, experiences with others who are creating a lane for a new VC culture, wherein meaningful businesses with real solutions are funded by investors who care about the mission and long-range outcomes.
I haven’t given up entirely on VC, but I believe that founders are establishing new expectations and boundaries, as well as looking to non-traditional ways of raising capital–including equity crowdfunding and no longer being at the mercy of the silicon valley machine.
For PopCom, that meant taking advantage of a new law that allows startups to take money from anyone, not just accredited investors. We chose an increasingly popular option called a secure token offering (STO) using the SEC exemption Regulation Crowdfunding (CF), which is an offering for the general public, with the caveat being that there is a limit of $1,070,000 we can raise under this law in any given year. With an expected growth of up to $10 trillion by 2020, the STO is emerging as a powerful and valuable alternative to private equity and venture capital financing for companies globally. A security token can be backed by the company’s assets such as shares, the right to receive dividends or grants for voting power. This clearly provides a much more solid and safe investment for the investor who believes in the company’s future. Despite the capital limitations, a security token has a lot of advantages since financial regulators consider them securities. Ultimately, this protects token holders. They also mitigate the divergence of interests between project investors and project users. Finally, they give real rights to the token holders.
By tokenizing our cap-table we now have a more flexible version of a regular security— and blockchains offer a unique and highly-efficient medium for ownership and trading of digital tokens that can represent securities. Although the exchanges are not yet supporting the security tokens, big names like Coinbase, TZero, GBX, and AlphaSwap are investing massively in the STO ecosystem and plan to open their doors in 2019.
When I announced that PopCom would raise capital in this way, most of my existing investors, who either could not or would not invest follow-on capital, wildly objected. They would honestly rather see us shut down. I was not sure how the general public would respond because most people are not familiar with equity crowdfunding and talking about a security token is like speaking a foreign language. Understanding the risks associated with taking the road less traveled, I decided to go for it, and I am so glad that I did. We launched our campaign on December 20, 2018, and passed the $100,000 mark after 45 of the 90 days. Our campaign will be live on Start Engine. Our total raise is $943,000 and although we are far from that goal, I feel that we have already won. We are demonstrating the power of the community and of founders when we have the ability to raise money from both accredited and non-accredited investors.