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This, at its core, could further encourage disruption of existing traditional financing models that would open up new and different future pathways, similar to how Yunus's model led to further adoption of micro-finance principles online as well as ...
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We Need More Innovations In Finance And Investing, Not Just Startups
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Guest post written by
Pilar Stella
Cofounder of Alchemy P4, a hybrid fund investing in real estate and startups.
Currently, over 565,000 startups are
launched each month in the U.S. They raise an average of $78,406, which
translates to over $531 billion per year. Yet, less than 1% ($42
billion) of that is from venture capital and angel investors, and over
95% from friends and family or personal savings and debt.
Basically, for the entrepreneur that means if you don’t have money or
don’t have access to investors and capital, you have a much more
significant uphill battle. For investors, that translates to only a
small sliver of the brilliance and innovation that is out there being
captured. Imagine the lost opportunity and passed-over winners as a
result to our economy and planet at large.In the fund world, several new models are popping up to address this need and opportunity. By the numbers, these new models may only increase the amount invested slightly in the short term. However, the potential to shift the trajectory away from solely investing in companies to identifying new and different funding mechanisms could have a similar long term influence on future financing streams as innovations such as Mohammed Yunus’s micro-finance model. This, at its core, could further encourage disruption of existing traditional financing models that would open up new and different future pathways, similar to how Yunus’s model led to further adoption of micro-finance principles online as well as offline, which has subsequently increased funding globally.
Some of these new models include:
Frost Data Capital is a fund that is creating more win-wins between investors and entrepreneurs. Considering themselves “parallel entrepreneurs,” Frost Data Capital is redefining the way compelling big data startups are created. They identify gaps in the big data technology marketplace by partnering with major corporations, including Intel INTC +0.49%, GE, Accenture and others. This enables them to start with ideas that are already identified as needs, grow those innovations and then structure fair and equitable exits for both parties more rapidly than traditional companies and funds.
The Vegas Tech Fund is further pioneering the investment model by expanding that “sliver” to new audiences by incorporating a values-based lens with seed stage companies. The fund focuses on founder passion and community impact, in addition to the more traditional vetting criteria. The fund is not only having a positive impact on the Downtown Vegas community, but also on the diversity of entrepreneurs it invests in with over 33% of funding going to women and minority founders – more than doubling estimates of the traditional VC community at approximately 13%. While the model needs to further refine its vetting process to enhance outcomes, it demonstrates leadership and vision in attempting to take a non-traditional approach to a traditional model that, with enhancements, could provide valuable insight into how to capture and attract new and different types of entrepreneurs and companies.
TriLinc Global is a woman-founded fund that has combined impact investing with asset management using a mixed debt-equity model. They assemble a diversified portfolio of strategic debt investments in Trade Finance, Senior Secured Loans and Collateralized Loans to existing, expansion-stage companies in developing economies. They took a traditional asset management model and adapted it to demonstrate the power of using investments to improve society, while still generating competitive returns to illustrate that investors can do well by doing good.
Additionally, foreign investors provide a growing source of capital through which to fund U.S. innovations. Countries including China, Korea, India, Brazil and others are looking for ways to deploy capital in the U.S. and globally. The EB-5 Visa Program is one mechanism that is increasingly being explored to tap into some of these sources of funding. The program enables foreign investors to invest $500,000 to $1 million in U.S. enterprises return for their visas, so long as 10 jobs are created. Currently 10,000 visas are available annually which translates to upwards of $5 billion in new capital sources to the U.S. Once these investors get their visas, they can become future domestic sources of capital further expanding the capital pool with new investors.
While the model has traditionally been used to invest in real estate and manufacturing, new models are popping up to blend real estate with other areas to expand capital for entertainment, technology and beyond. Hollywood Film Capital (HFC) is one such entertainment investment fund that provides studios and producers with debt and equity capital from foreign investors through this program.
As the demand for new entrepreneurial solutions grows, so will the need for capital. Finding new sources of funding, as well as innovating new models for deploying capital, to create more aligned values and win-wins between investors and entrepreneurs are needed to not only create positive returns, but also result in more innovation, opportunity and impact to meet the growing challenges of our economy and planet.