Opinions expressed by Entrepreneur contributors are their own.
The venture capital (VC) funding model is often portrayed as the new version of the American Dream — a plucky start-up founder invents a disruptive new technology, catches the eye of venture capitalists, sells the company for hundreds of millions, and spends the rest of their days sailing the Mediterranean. It’s a nice story for the .01% of business owners who can — or want to — achieve that outcome.
But the VC model is tremendously flawed. Simply put, it will never support a just, inclusive or innovative economy. What’s more? Most social entrepreneurs have no interest in starting the kind of business that meets VCs’ definition of success.
Reconsidering the VC Model
The many problematic issues with the VC model are well-documented. Most VC funders are white males, and startups funded by the top VCs are nearly 90% male and 72% white. Women entrepreneurs are at a particular disadvantage. While women-led enterprises are shown to drive more revenue, they receive less than 3% of VC funding. Women founders also receive less money when backed by VCs and often face higher scrutiny compared to their male counterparts. Even at the pre-VC stage where angel investors jump in, women CEOs’ percentage of the pie is steadily decreasing year over year from 2019 through 2021.
The VC model also inherently restricts the type of business that can receive funding. The model demands high growth and a fast exit (via the sale of the company or IPO) so that the investors in the VC funds (limited partners) can get paid the extremely high returns they have been promised. “Impact-oriented” VCs, while caring about positive impacts from the companies they invest in, have the same growth expectations as all other VCs. The imperative that VCs must work to get their portfolio companies to grow an average of 10 times in five to seven years to meet investor expectations is embedded in VC models.
Related: 9 Ways a Venture Capitalist Can (and Should) Help Startup Founders After Closing the Deal
Businesses that can achieve the VC ideal fall into a narrow niche — usually tech startups and sometimes consumer brands. This starves our economy of a diversity of business models and businesses that provide other essential goods and services, which could be addressing the world’s biggest challenges, and instead solely focuses on companies that have the potential to achieve outsized growth and market domination. In short, the cultural dominance of the VC funding model reinforces a top-down economy, defining rapid growth and an exit at a 10x multiple (at least) as the only measure of business success.
Paradoxically, the fast growth imperative results in the failure of most businesses that choose to pursue this funding model, destroying vast amounts of economic value in its wake.
But here’s the good news: We do not need to rely on VC funding to build the economy of the future. Trillions of dollars out there are not beholden to the fast-growth-at-any-cost imperative. In fact, 99.7% percent of the investors in the United States are not part of the venture capital ecosystem, and entrepreneurs only need support, tools and connections to access them.
Related: 3 Ways to Play the VC Game if You’re Not a White Guy
Exploring better alternatives
Venture capital is just one model for bringing on investment, which is wrong for 99.9% of businesses. Most social entrepreneurs have little interest in the business model VC demands. They care about solving problems, treating workers well, giving back to their communities and being environmentally responsible. While they also prioritize financial success, they are not willing to put the goal of an exit (and big investor payday) ahead of all of their world-changing vision. And they are not interested in building a business for the sole purpose of making the already extremely wealthy even wealthier.
There are many other proven ways to raise investment capital. Non-VC funding models allow entrepreneurs to create their own definition of success while offering investors a competitive financial return that does not depend on a “liquidity event” (sale of the company or IPO). And because the investors themselves are more diverse, wealth creation is more broadly distributed and not concentrated in the hands of the top 1%.
It is entirely possible for funders to raise investment capital in alignment with their mission and vision and stay in control of their business. The key is to design a customized strategy and reject the VC one-size-fits-all approach. Entrepreneurs and the legal, consulting, and support teams who surround them need to be creative about who potential investors might be, design investment offerings to fit the business and its ideal investors, and choose legal compliance strategies that allow entrepreneurs to reach out to the investors who are the best fit for them, not just the usual suspects.
Related: The Rise of Alternative Venture Capital
Culturally and professionally, we need to embrace and celebrate these alternatives. By increasing non-VC business funding models, we can help increase money flow to underrepresented entrepreneurs, make sure all stakeholders benefit from business success and support the flourishing of more diverse and innovative enterprises.
Social entrepreneurs are working to solve the world’s problems and develop a thriving, inclusive, regenerative economy. Let’s make our funding models just as diverse and solutions-oriented as they are and expand just and sustainable funding models that support the world we aim to create.
Related: 3 Alternatives to Venture Capital Funding for Startups