For several years, founder stories in the media would have you believe that pushing profit to the back burner and focusing on growth is the only way to build a business. This belief has been fuelled by venture capitalists that have built the hopes of founders and encouraged them to grow into mythical unicorns, one billion-dollars in valuation. But the probability of a founder achieving this is a mere 0.00006% (David Friedberg) and although this may benefit the owners of that one company, it does nothing for those left behind. Many of those that have succeeded at achieving perfect, hockey-stick style growth trajectories in their businesses, have met this goal at a cost and understandably so. Founders must make their investors happy, no matter what it takes. Invasion of privacy, exploitation of labour, sexual discrimination, racial bias, are only a few examples from a long list of issues overlooked by businesses growing at supersonic speeds. The lacklustre performances of WeWork, Lyft, Uber, Away and Facebook have demonstrated this and there will only be more case studies in the coming years.
This makes sense when you realise venture capital funds are businesses too and they have investors of their own that expect the fund to triple in size. The role of the management team entails increasing the financial value of the fund which means creating the right portfolio that generates carried interest. If the portfolio is not adding value to the fund and is draining resources/financing, the fund often holds the authority to change the founding team or close the business.
The romanticization of entrepreneurship and fundraising has enabled funds to capitalise on startups seeking capital and often it’s at the expense of founders. Most businesses opt for venture capital as a means to take their business to the next level, but taking funding today means you’re taking on a ticking time bomb which comes attached with impossible strings. Businesses that survive, often compromise on their personal principles to maximise shareholder value in the hopes of keeping their business alive.
We see similar issues with other models, for instance, microfinance which is commonly celebrated as a poverty alleviation tool has recently been unveiled as an income smoothing tool that has failed to deliver on the promise of lifting women out of poverty. Farah Ereiqat and Nourhan Shaaban discuss the unintended consequences of microcredit in their piece for Harvard Kennedy School; although well-intentioned, microfinance has pushed women further into debt due to an absence of transparency.
There are traditionally three parties that enable these transactions: funders, founders and consumers. I believe these three parties hold the power to change the current system if we want capital to work to better society.
Funders
Successful fundraising should leave founders feeling empowered rather than exploited and if we want venture capital, microfinance, loan financing or crowdfunding to work successfully for the economy, we need to prioritise justice, ethics and transparency in our transactions. Providers and receivers of capital should work hard to share the risk and investments should not be solely made in pursuit of increasing wealth, but rather enabling individuals to stand on their feet.
After the downfall of recent unicorns, the industry has taken a hard look at current practices and it has found a ray of hope in alternative capital structures like Indie.vc and Earnest Capital that are built with the interest of founders and community at their core. The industry needs funds that doesn’t force founders to raise follow on funding, go public or exit but rather help them build profitable businesses that all stakeholders can benefit from. Instead of banking on monopolies or one out of ten businesses to succeed, these funds can increase in value thanks to a diversified portfolio of businesses bringing in regular income. Other examples include Kindred Ventures – they make portfolio founders partners in the fund so that they can share in the growth of the fund. Purpose ventures invest in steward-owned companies which makes a binding commitment to keep the company independent and mission-driven. Funds are diversifying their portfolios and teams, focusing on impact over profits and supporting tech-led social transformation.
While there is much innovation happening in this field, there is still a lot of work to be done to move towards options that spread the risk between founders and funders. In time, we’ll hopefully see more examples of innovative funding mechanisms that deploy capital on the understanding that one round of financing is sufficient for a business to build a profitable business while providing sustainable returns to its investors.
We find similar issues existing in the crowdfunding industry; the biggest problems plaguing the $2B industry are low success rates and harmful products. Campaigns on most crowdfunding platforms suffer from limited curation, lack of personalised support and are mass-market focused. Leading platforms are generally venture-backed and rely on sensational stories and one-offs for their success. Hence, 56% of Kickstarter and 90% of Indiegogo campaigns fail, while 9% of Kickstarter campaigns have failed to deliver a single reward to supporters, essentially pocketing the crowdfunded money. Furthermore, products funded on these platforms are not held to any ethical standards. These platforms may have a large audience, but you may find better chances of success running a crowdfunding campaign on a platform with the right support and guidance. Platforms that are dedicated to ensuring all of their creators succeed at taking their impactful idea to market are often better tailored to your product or service.
UpEffect believes crowdfunding can and should be delivered differently. We created a crowdfunding support service and platform catered to the unique challenges of social entrepreneurs. Instead of simply providing another platform for campaigns to raise money without any help, UpEffect employs industry best practices to ensure founders are creating exceptional campaign pages and building a “crowd” to back their projects. In essence, UpEffect allows smaller fish that get neglected on larger platforms to convert their powerful ideas into successful campaigns, not only to meet a funding target but also to successfully launch a product to a loyal customer base. This is especially important for social entrepreneurs who have powerful ideas but don’t know where to begin.
Founders
For founders, it boils down to one question: are you building a temporary solution that affects lives for only as long as it takes for you to achieve a windfall exit or do you want to have a long-lasting impact? Having an impact on this scale that genuinely changes lives may take years of work but the upside is if you’re successful, it will survive beyond you and benefit future generations to come. If this is your goal, then before you jump to looking for external investment and giving up vital pieces of your company, do your best to break free from dependence on aid and investors, and do all you can to innovate a solution that is able to pay for itself and more. A business must have a revenue model that is capable of not only sustaining costs but of generating enough surplus to scale its impact through profits. After having fought so hard to make your dream a reality, you then need to fight to ensure reality does not kill your dream. Focusing on profit is what will equip you to withstand the turbulent journey that is running a business.
Consumers
Finally, as consumers, we’ve failed to probe entrepreneurs on their internal practices and instead, we’ve chosen to celebrate founders who have “hustled” their way to the “top”. We’ve accepted what has been presented to us and have bought into mission statements claiming to change the world but how often have we paused to understand what changing the world really entails? Aggregating user data for monetisation sold under the guise of “connecting the world”, exploiting vulnerable humans in pursuit of creating organic products, building durable luggage that invests in international peace programmes but torments its own employees are not changing the world but all have built billion-dollar empires while claiming to do so. Every time we use or buy from these companies, we’re agreeing with them and are granting them a space in our economy. This must change and as consumers, we hold the power to demand transparency and ethics in businesses that we buy from.
Today’s environment has been perpetuated by one goal: to increase wealth. And while there is absolutely nothing wrong with making money, how we get there should never be at the expense of others. The truth is, we can build sustainable and socially responsible businesses while making a profit and we need to look towards examples embodying these principles, like Patagonia, Qima Coffee and Samasource.
After engaging with hundreds of founders, it’s become increasingly clear that there is no single way of building a business. Every business is unique with different experiences, dreams and communities. Creating one funding mechanism that serves one type of founder will no longer work. This sentiment has been welcomed by a growing community of Zebras. Zebras Unite has attracted over 4,000 members globally in its infancy and over 200 members in London where founders, investors, service providers and ecosystem supporters have come together to amplify businesses prioritising cooperation, shared prosperity, generating revenue and positive outcomes for society.
This approach is championed at UpEffect; we believe founder success lies with equipping them with skills and tools to facilitate natural transactions that take them closer to customers and communities before investors. Crowdfunding is a powerful vehicle for this as it allows businesses to raise capital directly from customers, build a community and gain market validation.
We deliberately choose to move slowly and remain small at UpEffect; this has allowed us to test, iterate, improve and create services that serve our founders on terms that work to their interest. Without taking external investment and prioritising organic growth, we’re able to lead by example and demonstrate to our creators that building a profitable business is possible. Yes, this has resulted in a long, slow and patient four-year process but while retaining full autonomy over how we run our operations, we’ve able to adapt to changes in the needs of our creators. This position allows us to equip our founders with the right tools, funding and knowledge to solve global poverty, illiteracy, social injustice, climate change and more.
Together we can carve a new world where businesses work to better society while generating positive financial returns for the economy and all of its stakeholders. We can build a world of financial equality and economic prosperity by using business as a force for good.
