Venture capitalists can also finance traditional small businesses. Here’s how. – News from Crunchbase
By Dustin Betz
Over the past year, we’ve seen small businesses and startups converge like never before.
Small businesses and local businesses have had to move online in the digital rush, removing the physical brick and mortar walls that once hindered their growth. Now, in the online space, these companies have greater scalability potential and, essentially, are startups. But they still don’t have access to capital in the same way as trendy startups.
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Small businesses get a tiny slice of the venture capital financing pie, often having to finance themselves through alternative means such as commercial lenders or government loans and grants. This despite small businesses to supply 1.6 million new jobs in 2019 and producing nearly a third of total US exports.
As the boundaries between startups and small businesses shrink, VCs are starting to sit down and pay attention to SMEs, which offer a huge opportunity not only for returns, but to generate real local impact and create a sphere. more inclusive business.
Here’s why we should focus on closing the gap between venture capitalists and small businesses, and how.
New investment vehicles widen the spheres of opportunity
Many of today’s new investment vehicles have a community and local focus. These vehicles can be organized into spheres, each representing pathways to capital as part of the career path.
The standard route for startups is to seek a successful exit. To make this happen, they bring funds through friends and family, VCs, and angel tricks. Other alternative funding avenues – such as crowdfunding and revenue-based funding – already offer different entry points for founders who have had difficulties on the traditional path.
The funding opportunities that exist to support small businesses can be seen as less ambitious. These include SBA loans, grants, traditional community support and the general sales growth that has started.
There is an excellent opportunity to insert venture capital into these community layers, allowing SMEs to develop beyond the local level.
Venture capital firms could leverage both alternative and community funding channels to create small, highly specialized or localized offices to help SMEs access targeted grants and other tailor-made financial support, as well. than strategies to increase sales through new channels or market opportunities.
If venture capitalists created targeted funds that not only financially supported SMEs, but also offered a strong mentorship match, then previously only local businesses could benefit from the learnings of the global venture capital industry. tech startups to achieve better growth results in their own communities.
The overview and contacts offered by VCs would, at the very least, show the founders what is in their power to accomplish, even if they have not had such opportunities in the past.
Community as its own vertical
It is inevitable that VC will increasingly recognize communities as their own types of verticals.
For VCs, this represents a new source of income which, for now, is not optimized and requires much less seed capital to get started.
Niche communities can grow digitally to become entire “micro-economies” on their own, with their own internal audiences and business models. If capital is proportional to the number of people in a given community, larger communities mean more businesses can each have a good slice of the pie.
Likewise, if a community is responsible for appointing its own capital, for example through crowdfunding, rather than mobilizing external investors, power shifts to those who build and actually benefit from the creation of the community. business within their community.
These non-geographic community businesses are perhaps the types of SMEs with the greatest potential for scalable growth, as well as the most ground-level impact on their own critical issues – whether it’s strengthening business chains. ‘sourcing locally, reducing the carbon footprint or seeing more founders under-represented. in executive leadership roles.
Already, environmental and social issues are becoming a priority for venture capital firms that wish to operate ethically and remain relevant.
Inclusiveness should focus not only on the founders, but also on providing various opportunities for different types of businesses. Venture capital firms should embrace the idea of ’community verticals’, with investors focusing on companies located in particular community areas, be they geographic or digital. VC would still be on the same hunt for future unicorns, but should provide more “How can I help you?” »Added value.
It is still a conventional CV model, but with a shared community component. The Community Fund is a great example.
Enabling community buy-in within the investment sector
People are looking for different ways to support initiatives and projects within their community, created by people they know. Hence the success of crowdfunding. To help them do this, we need regulations that empower existing and budding community investors.
Working capital allow fund managers to raise new capital in the form of automatic quarterly commitments, allowing them to start investing earlier and with only a fraction of the traditional amount required. Angel Unions allow new investors to join forces with seasoned angel investors and learn from their experiences through transactions.
RareBreed Ventures is an example of a pre-seed fund offering founders outside of large tech ecosystems an open door they wouldn’t typically get from traditional venture capital firms. The fund allows angel investors to become limited partners for larger funds over the long term. This is important, because it gives angel investors – typically investors with a more human contact approach and closer proximity to emerging companies – the power to make higher-level capital decisions.
Backstage Capital, a venture capital industry leader in investing in women, people of color and LGBT founders, enables accredited investors to close deals through its Crowd backstage syndicate, and even organize crowdfunding opportunities of its portfolio for people who are not accredited investors under Security and Trade Commission regulations, or are not in the United States.
These new and more open types of funds and opportunities each provide examples and inspiration of how venture capital can increasingly share the stage with the community, enabling local supporters to join the investments that matter. most for them, and democratizing the dollars that flow from business growth and impact.
Venture capital has a huge responsibility in ensuring that the businesses of tomorrow generate significant environmental and social impact, from the community level and upwards. Investors must embrace the emerging convergence between startups and small businesses, and empower people in all walks of life to play a role in building a stronger and fairer future.
Dustin Betz is the community manager at Founding Institute, the world’s largest pre-seed startup accelerator, which recently launched VC Laboratory, a free virtual program that helps aspiring VCs launch their first funds.
Drawing: Dom guzman
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