New Trade Group of Startup Investors Focuses On ‘Builder Capitalism’ Model As Alternative To VC-Style Flipping
Venture capital has been a well-hyped part of the growth story for many well-known companies, but less than 1 percent of businesses ever raise VC. The long shot gets even longer for African American founders, who get 1 percent of VC along with Hispanic founders, according to the Kauffman Foundation.
Focusing on “spray and pray” model, venture capitalists often bet on a lot of companies while hoping for a few big wins, encouraging founders to take big risks. But risk-taking isn’t always an option for Black founders who face historical wealth gaps, Bloomberg reported. In 2016, for example, Black household wealth was 9 percent of white.
A new trade organization is betting on a different approach to funding called “builder capitalism.” The nonprofit Buildercapitalist.org says it will advocate for investors who want to invest in entrepreneurs via private holding companies, revenue-sharing arrangements, and equity and debt financial structures that could be more supportive of founders trying to build long-term wealth.
“Right now venture capital is the only form of capital being sold to communities that have been left out,” said Nathalie Molina Niño, founding member of Buildercapitalist.org and CEO of the impact investor O3.
“Builder capitalism is a long-view alternative to venture — a model based primarily on building companies rather than exiting.”Nathalie Molina Niño, founding member of Buildercapitalist.org and CEO of the impact investor O3
Venture capital isn’t the only option for entrepreneurs but it gets most of the attention, Molina Niño says. Builder capital methods aren’t new — they’ve been used for years by investors and wealthy families to build wealth.
Venture capital evolved in the 1940s to encourage investors to back businesses led by returning World War II soldiers. It took off again in the dot-com boom of the 1990s, Bloomberg reported.
In the VC model, chances are slim for Black founders to hold onto their company for as long as they want and build multi-generational wealth, Molina Niño said.
The goal of Buildercapitalist.org is to be a place for investors who identify as builder capitalists, and to support their work with best practices, sample contracts, case studies and investor contacts, said Dave Furneaux, also a founding member of the organization and CEO of Boston-based investor BlueIO.
Unlike the large VC firms with stakes in hundreds of companies, BlueIO focuses on a handful of companies at a time. The investor can take large stakes and focus on building the company alongside the founders. “Too much capital coming from too many different types of investors can push a company to grow too fast and increase risk dramatically,” Furneaux said.
Founders don’t necessarily have to be held to arbitrary exit timelines forced by venture funds.
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Building companies with funding sources other than venture capital could solve the problem of the lack of public companies with Black and women founders. Ideally, more Black founders can find a way to stay with the companies they create and grow them until they go public, said Anne Richie, venture partner at JumpStart Inc., a Cleveland nonprofit that advises and invests in early-stage companies.
“Women build companies to keep,” said Richie, who is planning to focus more on builder capital strategies for her next fund. That model works better for Black- and women-owned businesses that aren’t necessarily tech companies, but often retail, food, health care and service businesses, Richie told Bloomberg.
“We need to maintain and build to grow a Fortune 500 company, and that’s how we are going to change the wealth gap,” Richie said.