Venture capital funding no longer provides a fair and prosperous economy. Here’s what should change.

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The capital risk (VC) funding model is often described as the new version of the American dream — a brave start-up founder invents a disruptive new technology, catches the attention of venture capitalist, sells the business for hundreds of millions and spends the rest of his days sailing in the Mediterranean. It’s a great story for the 0.01% of owners who can – or want – to achieve this result.

But the Resume Template is extremely imperfect. Simply put, it will never support a fair, inclusive or innovative approach . What else? More have no interest in starting the type of business that meets the VC definition of success.

Reconsider the VC model

The many problematic issues with the VC model are well documented. More VC backers are white menand startups funded by top VCs are almost 90% male and 72% white. Women entrepreneurs are particularly disadvantaged. While women-led businesses are shown to drive more income, they receive less than 3% of venture capital funding. The women founders too receive less money when supported by VCs and often face further examination compared to their male counterparts. Even at the pre-VC stage where get started, the percentage of female CEO cake is steadily decreasing year after year from 2019 to 2021.

The venture capital model also inherently restricts the type of business that can receive funding. The model requires high growth and rapid exit (via sale of the business or IPO) so that venture capital fund investors (LPs) can earn the extremely high returns they have been promised. “Impact-driven” VCs, while caring about the positive impacts of the companies they invest in, have the same growth expectations as all other VCs. The imperative that venture capitalists must work to have their portfolio companies grow an average of 10 times in five to seven years to meet investor expectations is embedded in venture capital models.

Related: 9 Ways a Venture Capitalist Can (and Should) Help Startup Founders After the Deal Is Closed

Firms that can achieve the venture capital ideal fall into a narrow niche – usually tech startups and sometimes mainstream brands. This deprives our economy of a diversity of business models and companies that provide other essential goods and services, which could meet the world’s greatest challenges, and instead focuses only on companies that have the potential to achieve growth. disproportionate and to dominate the market. In short, the cultural dominance of the venture capital funding model reinforces a top-down economy, defining rapid growth and exit at a multiple of 10x (at least) as the only measure of business success.

Paradoxically, the imperative for rapid growth drives the failure of most companies that choose to pursue this funding model, destroying vast amounts of economic value in its wake.

But here’s the good news: We don’t need to rely on VC financing to build the economy of the future. Trillions of dollars out there are not beholden to the imperative of rapid growth at all costs. In fact, 99.7% of investors in the United States are not part of the venture capital ecosystem, and entrepreneurs only need support, tools and connections to access it.

Related: 3 Ways To Play VC Game If You’re Not A White Guy

Explore better alternatives

Venture capital is fair a model to attract investment, which is false for 99.9% of companies. Most social entrepreneurs pay little attention to the demands of the VC business model. They care about solving problems, treating workers well, giving back to their communities and being respectful of the environment. While they also prioritize financial success, they are unwilling to put the goal of an exit (and a big investor payday) ahead of their entire vision to change the world. And they are not interested in starting a business for the sole purpose of making those who are already extremely wealthy even richer.

There are many other proven ways to raise investment capital. Non-VC funding models allow entrepreneurs to create their own definition of success while providing investors with a competitive financial return that is not dependent on a “liquidity event” (sale of the business or IPO). And because investors themselves are more diverse, wealth creation is more widely distributed and not concentrated in the hands of the top 1%.

It is entirely possible for funders to raise investment capital in line with their mission and vision and retain control of their business. The key is to design a custom strategy and reject VC’s one-size-fits-all approach. Entrepreneurs and the legal, advisory and support teams around them must be creative about potential investors, design investment offers that suit the business and its ideal investors, and choose legal compliance strategies that allow entrepreneurs to reach investors. best suited to them, not just the usual suspects.

Related: The rise of alternative venture capital

Culturally and professionally, we must embrace and celebrate these variants. By increasing non-VC business funding models, we can help increase the flow of money to underrepresented entrepreneurs, ensure that all stakeholders benefit from business success, and support businesses to flourish. more diverse and innovative.

Social entrepreneurs work to solve the world’s problems and build a thriving, inclusive and regenerative economy. Let’s make our funding models as diverse and solutions-focused as they are and develop fair and sustainable funding models that support the world we aim to create.

Related: 3 Alternatives to Venture Capital Funding for Startups

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