Alt Cap 101: The 81%
81% of entrepreneurs are unserved by traditional capital markets.
According to the Kauffman Foundation, 1% of companies in America raise venture capital and 18% use bank loans.
Sure, some companies will never need any outside funding–true bootstrappers. And more power to them. The rest are stuck, unfunded, in Capital Purgatory. The “debt-equity chasm.”
We’re betting there are a lot of founders within the 81% who would do some pretty amazing things if they had access to risk capital.
We, the Greater Colorado Venture Fund, have found these founders in all corners of our state.
There are great reasons to fall within the 81%. On one hand, traditional lending is often predicated on predictable revenue and may require collateral. If you fit that mold — go for it. This is often the cheapest, simplest form of capital. In contrast, if you are building something that takes millions to get off the ground and will take years to reach profitability, you might raise venture capital. There’s nothing wrong with either of those funding options — if you’re within the 19% who fit those mold.
The Equity or Debt Funding Model is Outdated
Bank loans do not play the same role in business creation as they did in the economy our parents grew up in. Community banks, which play a disproportionately large role in lending to agriculture, residential mortgage, and small businesses, have been in a long-term recession for decades. Moreover, an increasing percentage of businesses rely on bandwidth instead of collateralizable assets. Even if debt is accessible, it is often not a fit for the new businesses of today.
However, only .6% of companies ever raise venture dollars (yes, we rounded up earlier in this post — 81.4% is less memorable). Most companies don’t align with the aggressive return profile dictated by a venture portfolio. And that’s okay.
As we started to explore term sheets to serve companies the chasm, our favorite question for fellow venture investors was:
Can you share details on some of the companies you had to turn away because their growth potential was just not big enough?
There are hundreds of thousands of companies that are not pursuing ‘venture scale’ (whatever that means), but could still use growth investment. Somewhere in between the 18% and 1% are a lot of great founders with great companies to build.
Permissionless entrepreneurship will not exist until we have funding structures for founders who:
Want to build a business to pass on to their kids
Want to build a business to support their community
Want to build something risky and want control of their destiny
Have faced systematic discrimination based on race, gender, sexual preference, geography, or socio-economic class — you get the picture.
In Rural Colorado, our founders struggle to access capital based on their geography. It’s not that investors despise rural founders — they’re simply operating within a flawed system. What’s more, many rural founders are building a business explicitly not to sell (how VCs get returns). They want to pass it onto their kids or ensure they are a long-term employer in their community.
The broader economic environment makes a similar case for new funding structures. Our governments spend billions on rural economic development each year, yet the outlook remains bleak. Rural communities have eddied out of capitalism and into charity-cases as far as the mainstream press is concerned.
Meanwhile, we find great rural companies simply needing an injection of growth capital every day. Finding investment opportunities has been the easy part.
We are venture capitalists aiming to rewrite the playbook for rural economies.
We need funding instruments to fit our founders — not the other way around.
>>Next: Creating VC 2.0