Startups Venture

Venture Capitalists Can Fund Traditional Small Businesses, Too. Here’s How. 

By Dustin Betz

Over the past year, we’ve seen small businesses and startups converge like never before. 

Small and local businesses had to move online in the digital rush, removing the physical brick and mortar walls that once constrained their growth. Now in the online space, these businesses have greater potential to scale, and essentially, be startups. But they still don’t have access to capital in the same way that trendy startups do.

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Small businesses get a tiny slice of the venture funding pie, often having to finance themselves through alternative means like commercial lenders or government loans and grants. This is despite small businesses providing 1.6 million new jobs in 2019, and producing nearly a third of the U.S.’ total exports. 

As the lines between startups and small businesses thin, VCs are starting to sit up and pay attention to SMBs, which offer a huge opportunity not only for returns, but for generating true local impact and creating a more inclusive business sphere.

Here’s why we should focus on closing the gap between VCs and small businesses, and how.

New investment vehicles expand the spheres of opportunity

Many of today’s new investment vehicles have a communal, local focus. These vehicles can be organized into spheres, with each representing pathways to capital within the business journey.  

Image credit: Founder Institute

The standard route for startups is to seek a successful exit. To get there, they bring in funding via friends and family, VC and angel rounds. Other, alternative funding routes — such as equity crowdfunding and revenue-based financing — already provide different points of entry for founders who’ve had difficulties on the traditional path.

The funding opportunities that exist around supporting smaller businesses may be considered less ambitious. Those include SBA loans, grants, traditional community support and general bootstrapped sales growth.

There’s a great opportunity to insert venture capital into these community layers, empowering SMBs to expand beyond the local level. 

VC firms could tap into both alternative and community financing routes to create small, highly specialized or localized offices to help SMBs gain access to targeted grants and other tailored financial support, as well as strategies to grow sales through new channels or market opportunities. 

If VC firms created focused funds that not only backed SMBs financially, but also offered strong mentorship matching, then previously local-only businesses could leverage the VC industry’s learnings from the tech startup world to achieve greater growth outcomes in their own communities. 

The bigger picture and contacts offered by VCs would, at the very least, show founders what is in their power to achieve, even if they haven’t been afforded such opportunities in the past.

Community as its own vertical

It’s inevitable that VC will increasingly recognize communities as their own types of verticals.

For VCs, this represents a new revenue stream that, as of yet, is not being optimized and requires far less seed capital to get started.

Niche communities can grow digitally to become entire “micro-economies” in and of themselves, with their own internal audiences and business models. If capital is proportional to the amount of people in a given community, larger communities mean more businesses can each have a fair slice of the pie. 

Likewise, if a community is responsible for appointing its own capital — such as through crowdfunding, rather than raising from external investors — power shifts toward those who actually build and benefit from the business creation within their community. 

These non-geographic community businesses are perhaps the types of SMBs with the greatest scalable growth potential, as well as the most ground-level impact on their own crucial issues — whether that is strengthening local supply chains, reducing carbon footprint or seeing more underrepresented founders in executive leadership roles. 

Already, environmental and social issues are becoming a primary focus for VCs who want to operate ethically and stay relevant.

Inclusiveness should focus not only on the founders, but on affording diverse opportunities to different types of companies too. Venture firms should integrate the idea of “community verticals,” with investors focusing on companies within particular community areas, whether geographic or digital. VC would still be in the same hunt for future unicorns, but would need to provide more of the “How can I help you?” added value. 

This is still a conventional VC model, but with a shared community component. The Community Fund is a prime example.

Enabling community buy-in within the investment industry

People are looking for different ways to support initiatives and projects within their community, created by people they know. Hence the success of crowdfunding. To help them do that, we need regulations that empower existing and budding community investors.

Dustin Betz

Rolling funds allow fund managers to get new capital in the form of automatic, quarterly commitments, which allow them to start investing sooner and with only a fraction of the traditional amount required. Angel syndicates let newer investors join forces with seasoned angels, and learn from their experience across deals.

RareBreed Ventures is an example of a pre-seed fund providing founders outside of large tech ecosystems with an open door they wouldn’t usually get from traditional VC firms. The fund allows angel investors to become limited partners for larger funds down the line. That’s important, because it gives angels — typically investors with a more human contact approach and greater proximity to emerging business — the power to make higher-level capital decisions.

Backstage Capital, a VC industry leader on investing in women, people of color and LGBT founders, allows accredited investors to join deals through its Backstage Crowd syndicate, and even curates select crowdfunding opportunities from its portfolio for people who are not accredited investors under Securities and Exchange Commission regulations, or are not in the United States.

These types of new, more open-access funds and opportunities each provide examples and inspiration for how VC can increasingly share the stage with community, letting grassroots supporters join the investments that matter most to them, and democratizing the dollars that flow from growing and impactful businesses.

Venture capital bears a huge responsibility in ensuring the businesses of tomorrow are generating meaningful environmental and social impact, from the community level and upward. Investors need to seize upon the emerging convergence between startups and small businesses, and empower people of all means to play a part in building a stronger, fairer future.

Dustin Betz is the community manager at Founder Institute, the world’s largest pre-seed startup accelerator, which recently launched VC Lab, a free virtual program that helps aspiring VCs launch their first funds.

Illustration: Dom Guzman

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