‘There’s such a thing as having too much money’: The entrepreneurs turning away from venture capital

The Start-Up: Companies are experimenting with alternatives to venture capital that forces them to sell up, go public or go bust. Alternatives must scale up to meet demand

The 741 employees of Riverford Organics, a vegetable box scheme, who have owned 74 per cent of the company since June 2018

Emma Back has spent three years developing her idea for the social care platform the Equal Care Co-op (or eccoo) and growing the business to a size where it can attract major funding. But unlike other startups vying for the attention of venture capitalists, Back and her co-founders are raising money through community shares on Ethex, which calls itself an ethical crowdfunding platform, and shunning venture capital that would force them to grow as fast as possible to generate returns.

“There’s definitely such a thing as having too much money,” Back says. Rather than raising money to employ salespeople, the Equal Care Co-op is raising money to train and employ people within communities to organise and manage care.

“Other care platforms have massive advertising budgets, so instead of community relationships it’s all about customer conversion,” Back says. “It gives people a transactional perception of their work in the world. We’re not going to be employing salespeople, we will be employing carers and people who understand their community from the ground up. That will make us resilient, not sitting there with a VP of marketing for our community campaign.”

Startups are increasingly looking for alternatives to venture capital funding that leads them to choose between selling up, going public or going bust. Stefano Bernardi, a founder and investor working as an angel scout for Atomico, says there has been some experimentation in alternative models, but nowhere near the scale needed to meet demand from startups.

“The reasons are simple: not every company is a unicorn-potential company [valued at £1bn] and given the rise of average entry valuations, venture capitalists now need absolutely massive outcomes to achieve the returns [partners] require,” he says.

Venture capitalists invested more than £1.19bn in UK startups in the first three months of 2019, according to KPMG. The money was invested across 161 deals, including £150m for iwoca, a financial technology company, and £58m for GoCardless, a direct-debit payment company, to expand the company overseas. “Late stage” companies like these two find it much easier to attract investment because they are generally considered to be beyond their startup-phase and have a better-established business model.

This means that entrepreneurs who want to grow a business fast and then exit at a profit have a harder time attracting early investment. It can put greater pressure on founders to squeeze margins at the expense of wages, company culture and even the vision that they set out with. The ultimate goal for many – just like Facebook, Uber and Google before them – is to grow to a size that when they sell or go public, early investors cash out with huge profits.

But if a company realises it does not have this kind of potential, it cannot back out of a venture capital deal, Bernardi says: “If they find that they have a good business but not monopoly-like, they can either close shop or try to scale anyway and then go bust. Not really a great situation.”

In June 2018, Guy Singh-Watson, the founder of vegetable box producer Riverford, sold 74 per cent of his company to employees. The transition means that dividends will be passed on to staff rather than to external shareholders, giving them an incentive to make the company more productive.

But it also makes Riverford practically impossible to sell, because it has so many owners – a fact that many young entrepreneurs, eager for venture capitalist funding to grow fast and then cash out, might find shocking.

“When I go to London to meet the bright young food brands of the future, before they have even sold their first smoothie or whatever, they are thinking about how they will exit,” Singh-Watson says. “It makes me really depressed and angry. They are just going to build it and sell it. When I started my business, I did it because I wanted to make something worthwhile.”

Lisa Ashford, chief executive of Ethex, says younger founders, in particular, are interested in doing business differently. “They want to access capital that can support them in their mission and many of them are shunning the traditional models of raising finance in favour of models where everyone benefits,” Ashford says.

Ethex works with organisations that have a social mission. The platform gives them access to 15,000 investors and several investment structures including ISAs, charity bonds and equity. Ashford says: “Venture capital funding can often be about financial performance and short term returns and exit strategies, sometimes to the detriment of the other impact aspirations of an organisation. That’s not what our investors are about.”

In the US, Indie.vc is offering startups a route to profitability without venture capital funding. The platform gives entrepreneurs access to revenue-based loans with the option to start buying back shares out of a percentage of their monthly sales after one to three years. Bryce Roberts said that when he founded Indie.vc three years ago, it received two or three applications a week, mostly from venture capital rejects. Now it can get as many as 10 applications a week from companies that have decided not to go down the venture capital route.

“We think there is going to be a tsunami of entrepreneurs who have experienced the one-size-fits-all venture model and want to cherry-pick the pieces of it that work for them,” Roberts said in an interview with The New York Times.

Forty per cent of millennial consumers polled by Deloitte in 2018 said the goal of business should be to “improve society”. Singh-Watson believes that it’s going to take businesses embracing alternatives to put a stop to the overconsumption associated with capitalism.

“Capitalism is destroying our world,” he says. “It’s 25 years since I did my first conference on corporate social responsibility and I don’t think much has happened since. We need something different and we need it fast.”