Venture Capital – a market of hype which hopefully will adapt to necessary changes in the near future

A few months ago, a group of 50 start-up founders gathered in the dank basement of a Lower East Side bar in New York. They scribbled notes at long tables, sipping coffee and sparkling water while a stack of pizza boxes gove off 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 ware lengths” about the trajectory of his business.

Seph Sherriff, the founder of Proper Cloth, a clothing company, said that the hype around raising money was a trap. “Venture capitalists try to make you feel inferior if you are not playing the game”, he said. The event had been organized by Frank Denbow, 33, a fixture of New York’s tech scene and the founder of the 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, venture capital can make them “accelerate straight into the ground”.

“Failure is Silicon Valley’s No.1 strength”

The Venture Capital business model, on which much of the modern tech industry was built, is simple: start-ups raise piles of money from investors, and then use the cash to grow aggressively – faster than the competition, faster than regulators can update the rules, faster than most normal, traditional businesses would consider sane. Larger and larger rounds of funding follow.

“Build it first and ask for forgiveness later”

The end goal is to sell or go public, producing astonishing returns for early investors. The setup has spawned household names like Facebook, Google and Uber, as well as hundreds of other so-called unicorn companies valued at more than 1 billion US-Dollar.

But for every unicorn, there are countless other start-ups that in our opinion 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 venture capitalists or were forced to raise too much venture capital – something known as the “foie gras effect”. Now, finally a counter movement takes place, led by entrepreneurs who are jaded by the traditional playbook and who are rejecting that model. If with success, there would be in our opinion a possibility, that venture capital finally turns out to be more “human”. 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.

We should ask ourselves in this context some serious questions:

Would Facebook’s leadership have ignored warning signs of Russian election meddling or allowed its platform to incite racial violence if it hadn’t, in its early days, prized moving fast and breaking things? Would Uber have engaged in dubious regulatory and legal strategies if it hadn’t prioritized expansion over all else? Would the tech industry be struggling with gender and race discrimination if the investors funding it were a little less homogeneous?

In our opinion venture capitalists and corporates have also an ethical responsibility to play and a leadership role to take in integrating these perspectives. The set of institutions which are generating through their investments the next generation of leaders in the technology sector have in our opinion all got to get on this train. The tool of venture capital is so specific to a tiny, tiny fraction of companies. We can’t let ourselves be fooled into thinking that is the story of the future of entrepreneurship, arising from America.

The first advocacy organization called Zebras Unite is a good sign. Its members include start-up founders, investors and foundations focused on encouraging a more ethical industry with greater gender and racial diversity. The group now has 40 chapters and 1,200 members around the world.

Some of the groups are rejecting venture capital because they’ve been excluded from the traditional venture capital networks.

Other founders have decided the expectations that come with accepting venture capital aren’t worth it. Venture investing is a high stakes game in which companies are typically either wild successes or near total failures. In our experience big problems have also occurred when you have founders who have unwillingly or unknowingly signed on for an outcome they didn’t know they were signing on for.

We are happy at Calvin·Farel that companies were embracing alternatives to venture capital. Before, venture capital companies were selling jet fuel and now some entrepreneurs’ start-up companies don’t want to build a jet anymore. Right now, as the availability of jet fuel seems to be unlimited, venture capital investments into United States-based companies ballooned to 99.5 billion US-Dollar in 2018, the highest level since 2000, according to CB Insights, a data provider. And the investments have expanded beyond software and hardware into anything that is tech-adjacent – dog walking, health care, coffee shops, farming, electric toothbrushes etc.

But we at Calvin·Farel believe that we currently facing a tipping point and that venture capital and entrepreneurship will dramatically change over the next decade. Entrepreneurs will still be aggressive about growth, but their start-up companies will not chase growth anymore at all costs like today. In our opinion, future entrepreneurs want to build a company that lasts all put far more ethics at the heart of everything they do. Future entrepreneurs and their companies will involve far more ethically charged decision-making like what kind of products they choose to develop and what kind of policies they adopt around user data to please their clientele.

Already today, entrepreneurs are finding ways to return the money they took from venture capital funds. Wistia for example, a video software company, used debt to buy out its investors last summer, declaring a desire to pursue sustainable, profitable growth. Buffer, a social media – focused software company, used it profits to do the same last August. Afterward, Joel Gascoigne, its co-founder and chief executive, received more than 100 emails from other founders who were inspired – or envious.

Venture capital wasn’t always the default way to make a company grow. But in the last decade, its gospel of technological disruption has infiltrated every corner of the business world. Old-line companies such as Campbell Soup and General Electric started venture capital operations and accelerator programs to faster innovation. Sprint and UBS hired WeWork to make their offices more start-up-like.

At the same time, start-up culture entered the mainstream on the back of celebrity investors like Ashton Kutcher, TV shows like “Shark Tank” and movies like “The Social Network”. Only a few questioned the Silicon Valley model for creating the next Google, Facebook or Uber. Those who tried to buck the conventional method experienced harsh trade-offs. Bank loans are typically small, and banks are reluctant to lend money to software companies, which have no hard assets to use as collateral. Founders who eschew venture capital often wind up leaning on their life savings on credit cards.

Jessica Rovello and Kenny Rosenblatt, the entrepreneurs behind Arkadium, a game start-up founded in 2001, initially avoided venture capital. It took four years before ·business earned enough to pay them a salary. The sacrifices were “very real and very intense”, Ms. Rovello said once in an interview. Nevertheless, the business grew steadily and profitably to 150 employees. By 2013, though, as investors poured capital into some rivals, the lure of easy money became too tempting to pass up, and the company raised 5 million US-Dollar. Tensions ensured as Arkadium’s investors expected the company to continue raising money with the goal of selling or going public. Ms. Rovello wanted to keep running the company profitably, growing revenue at 20% per year and developing a new product that could take years to pay off. In September last year, Arkadium finally used its profits to buy out the investors, allowing the company to remain independent and grow on its own terms. Ms. Rovello said she had no regrets about stepping off the venture capital path. “If your end game is having a business that you love and continuing to thrive and making careers for people”, she said, “then I’m winning”.

We at Calvin·Farel like to say, “Pride in what we do also comes from pride in what we do not do.”

Calvin·Farel’s New Kinds of Capital:

In September last year, Tyler Tringas, a 33-year old entrepreneur based in Rio de Janeiro, announced plans to offer a different kind of start-up financing, in the form of equity investment that companies can repay as a percentage of their profits. Mr. Tringas said his firm, Earnest Capital, will have 6 million US-Dollar to invest in 10 to 12 companies per year. Hundreds of emails have poured in since the announcement. Earnest Capital joins a growing list of firms, including Lighter Capital, Purpose Ventures, Tiny Seed, different ways to obtain money. Many use variations of revenue – or profit-based loans. Those loans, though, are often available only to companies that already have a product to sell and an incoming cash stream.

We at Calvin·Farel are currently developing a crowd funding platform for the upcoming start-up market in the region of the Middle East, covering all aspects of start-up funding possibilities like revenue share crowd funding, donation funding, loan funding, equity funding and invoice financing. Based on the high youth rate of the Middle East, as much as 54% of the GCC’s population for example is less than 25 years – a statistic that bodes well for economic development.

For decades, the economic prospects of the GCC have been primarily measured by its hydrocarbon resources. Recent years, however have witnessed a clear acknowledgment of the need to diversify the economic model. In the UAE for example SMEs dominate, making up 95% of all enterprises, employing 86% of the private sector workforce and contributing to over 60% of the country’s gross domestic product, according to Ministry of Economic figures. SMEs are also second biggest contributor to GDP in the GCC, following oil and gas – accounting for 30% of UAE GDP, and 22% of Saudi Arabia GDP – serving as a platform for job creation and innovation.

Across the UAE, a new physical landscape has sprung up – airports, iconic buildings, cutting-edge infrastructure and unrivalled retail and leisure facilities. This is happening at the same time as business reforms, which are laying the groundwork for a new wave of Middle Eastern entrepreneurship.

The new growth models represent a tiny percentage of the broader start-up funding market so far. And venture capitalists still continue to aggressively pitch their wares – even to companies that aren’t interested. We at Calvin·Farel are raising our hands and are saying “Wait a minute, let’s really think about this. We should, as investors, take seriously our role in driving some of these destabilizing forces in society.”

Therefore, we are entering the upcoming start-up market in an early stage in the Middle East to hopefully be able to rewrite the venture capital rules, to be able to build a new future of entrepreneurship.

“Let’s put ethics at the heart of everything we do – Let’s measure up”

Together, Towards Tomorrow