Some Start-Ups Probing Alternatives to the Traditional VC Funding Model

Last week, New York Times writer Erin Griffith reported that, “On a sunny Saturday morning in New York a few months ago, a group of 50 start-up founders gathered in the dank basement of a Lower East Side bar. They scribbled notes at long tables, sipping coffee and LaCroix while a stack of pizza boxes emanated the odor of hot garlic. One by one, they gave testimonials taking aim at something nearly sacred in the technology industry: venture capital.

“Josh Haas, the co-founder of Bubble, a software-writing start-up, told the group that he and venture capitalists ‘were pretty much totally on different wavelengths‘ about the trajectory of his business.

“Seph Skerritt, the founder of Proper Cloth, a clothing company, said that the hype around raising money was a trap. ‘They try to make you feel inferior if you’re not playing that game,’ he said.”

The Times article stated that, “The event had been organized by Frank Denbow, 33, a fixture of New York’s tech scene and the founder of T-shirt start-up, to bring together start-up founders who have begun to question the investment framework that has supercharged their field. By encouraging companies to expand too quickly, Mr. Denbow said, venture capital can make them ‘accelerate straight into the ground.'”

After briefly describing the V.C. business model, the article noted that, “But for every unicorn, there are countless other start-ups that grew too fast, burned through investors’ money and died — possibly unnecessarily. Start-up business plans are designed for the rosiest possible outcome, and the money intensifies both successes and failures. Social media is littered with tales of companies that withered under the pressure of hypergrowth, were crushed by so-called ‘toxic V.C.s’ or were forced to raise too much venture capital — something known as the ‘foie gras effect.’

“Now a counter movement, led by entrepreneurs who are jaded by the traditional playbook, is rejecting that model. While still a small part of the start-up community, these founders have become more vocal in the last year as they connect venture capitalists’ insatiable appetite for growth to the tech industry’s myriad crises.”

Last weeks article also pointed out that, “In September, Tyler Tringas, a 33-year-old entrepreneur based in Rio, announced plans to offer a different kind of start-up financing, in the form of equity investments that companies can repay as a percent of their profits. Mr. Tringas said his firm, Earnest Capital, will have $6 million to invest in 10 to 12 companies per year.

“Hundreds of emails have poured in since the announcement, Mr. Tringas said in an interview. ‘They’re almost entirely from people who assumed there was no form of capital that matched any version of their expectations,’ he said.”

Nonetheless, the Times article added that, “Still, the new growth models represent a tiny percentage of the broader start-up funding market. And venture capitalists continue to aggressively pitch their wares — even to companies that aren’t interested.”

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