A Vision for a Global Fundraising Model
How many new ideas would surface if the friction to raising capital was much lower?
In the first entrepreneurship course I took as part of my economics degree many years ago, we looked at various methods of raising money for new ventures.
The typical ‘textbook’ fundraising journey looks something like this: registering the company, obtaining initial capital from family and friends, moving on to business angels, and then graduating onto venture capital through various funding rounds (Series A, B, C, and so on). Further along, companies might consider private equity, which often involves trading some control and equity, eventually leading to an exit strategy, such as an IPO or a sale. Although this process may sound straightforward on paper, it intrinsically comes with its own unique challenges1.
However, in reality, it turns out that the textbook fundraising path isn't the one-size-fits-all solution it's made out to be. It works for some companies, but only a specific type, in certain sectors (e.g., technology), with particular characteristics (e.g., fast growth, and founders with the right networks (e.g., Y Combinator). There the path is well-trodden. But what about everyone else? The startup restaurant, a book publisher, a vineyard, a t-shirt designer, or an indie game studio? They don't neatly fit into this formula. There are, of course, other routes to drum up capital, tapping into a wide spectrum of niche investors and pockets of local capital for each of these unique ventures. But, on the whole, these opportunities are like pieces of a puzzle spread far and wide, extremely tough to identify and capitalise on.
So, why is fundraising generally so challenging? There are many reasons, but they fall into two broad categories that expose us to various structural issues in the current model.
First, the availability of fundraising products that are well-understood (think of it as fundraising missing ‘good UX’) and accepted is extremely narrow, serving only a handful of business cases. The textbook example I mentioned earlier is one such instance. A relatively newer model is ‘crowdfunding,’ although it has serious drawbacks, including regulatory and cultural2 ones. Many founders who find themselves unable to raise capital through the textbook method often try their hand at crowdfunding or scraping their LinkedIn networks trying to find an audience with anyone who could be interested.
Second, as I discussed in detail in an earlier post, crafting an appealing investment story and finding and engaging the right investors is to some extent a broken process, even for the largest companies around the world. Furthermore, while large listed companies can benefit from support from an array of investment banks and advisors, if you're starting out on your own, you don’t have access to any of these resources and are on your own to figure it all out.
However, if we had a blank piece of paper to start with (and we do here!), I believe a new and improved fundraising model could look something like this:
Initiation: A founder kicks things off by putting forward an idea. The founding team’s credibility is key. An idea presented by Jeff Bezos, for instance, would naturally carry a different weight than one from a 16-year-old student. And by registering, I'm not just talking about formally incorporating it as a C-corp or a limited liability company. Sure, that's one route, but it could be as simple as registering just an ‘idea3 in waiting’, ready for some initial seed funding to test a hypothesis, or setting it up as a DAO. There must be other paths that strike the appropriate (for a given idea and its timing balance) between representation, regulation and protection.
Story building: As the founders outline their idea, product, or service (perhaps by answering a set of questions or chatting with an AI powered virtual assistant), an investment story comes to life – think of it like an automatically generated investor deck, with the characteristics of the company and the investment case converted into ‘code’ that is machine readable, grouped and searchable globally level (think word vectors). Crucially, the associated cash flows cash flows (with relevant conditions, e.g. dividends, coupons etc.) associated with the investment and its risk are encapsulated in the proposal.
Investor matching: Based on the nature of the project, founders are shown the most promising funding avenues– and those with the highest chances of success and alignment with their goals. This model prioritises matching founders with the right investors interested in their funding proposition. I imagine this process involving some sort of a smart scan of investors' preferences (such as mandates, risk tolerance, geographies, investor types, etc.) to create an qualified target list. The investors could also be early clients A virtual roadshow could be organised to showcase the idea, answer any questions and run an automated on-chain bookbuilding exercise.
Funding: Receiving funding won't require the painful process of setting up a bank account, complete with tedious due diligence and risk assessments – a common hurdle even in developed markets. This is because the existing banking infrastructure wasn’t built with entrepreneurs in mind! In our model, funding would go directly to an online wallet, potentially with certain conditions attached to each pay out (e.g. number of clients, revenues, project milestones etc.).
Support ecosystem: Post-funding, founders often need advice, most typically on product, sales and hiring. Today, many venture capital investors attempt to fill this role but arguably fall short. I envision an ecosystem of advisors with relevant skill sets being paired with founders for specific tasks, with some incentives or reward framework in place.
Investor Relations: Finally, an easy-to-use dashboard would allow founders to stay informed about their backers: who they are, what they expect, and a simple template to manage and develop this relationship (or to facilitate follow-on rounds) efficiently as their company grows.
A new fundraising model will not develop itself nor it is something we would eventually slide into. It is an exciting opportunity that rests on us to create it!
When entrepreneurs exchange company shares for capital, they set the expectation of a future exit, which could be a new offering for early investors to sell their shares or another liquidity event like an IPO. However, as it often happens, the founder's timeline for its business development may not align with the investors’ obligations to their limited partners, or the business might not display the metrics needed to attract further investment (or simply does not require it). Sophisticated investors typically assess two things: the exceptionality of the founder/company and the ability to exit. I have come across cases where venture capital investors want to stipulate an exit in an investment agreement (e.g. exit on junior market of a stock exchange). When young companies say “we had to pitch to 500+ investors to find the two that eventually invested”, they are really testifying that finding this ‘investor-company-exit expectation’ alignment is very tricky.
Outside the US, the culture of equity investment is often in its infancy. Many individuals, even in developed European countries, lack experience with equity investments, preferring traditional savings in their bank accounts or real estate. This hesitance extends to venture investing, where capital is tied up for extended periods without a clear exit option. Add to that domestic biases (the tendency for investors to invest in topics in their own jurisdictions) many investors do prefer not to invest outside their own comfort zone. Consequently, the responsibility of this sort of an early investment falls on angel investors – which often are friends and family who support the founder's vision more than seeking financial gain.
What if there was a global market for ‘ideas ready to be worked on’ ? For example, this could be a student wanting to try something out while he is in school or an employee of a large insurance trying to do project on the side without quitting her day job.