“Venture capital” brings to mind Silicon Valley and the Scrooge McDuck piles of money created by the lucky few who made early bets on Uber or Facebook. That traditional approach, in which VCs make a number of equity bets in one portfolio in hopes of finding a unicorn, is great for high-risk, high-reward ventures with huge potential markets. But it’s not a good fit for funding many of the emerging solutions to the myriad elements of the coronavirus pandemic. The lived experience of the coronavirus varies even from county to country, meaning that needed solutions will also vary — and require more than one type of investment.
“If you’re an entrepreneur working on a solution well-suited for a $50 or $100 million market, you could be a great company but not an equity-investable one,” explained Heather Matranga, Senior Director of Strategic Innovation at Village Capital, a nonprofit supporting entrepreneurs building solutions to systemic challenges, including the ones that COVID-19 is now exacerbating. “Your company is likely to have different financing needs.”
Taking an equity stake in an early-stage company à la Uber is a high-risk investment — one that’s only worth it if that company does become the Next Big Thing. That often means a massive push by investors to scale in what Sabena Quan-Hin of Flow Capital calls the “foie gras effect”: ‘force-feeding’ capital to a startup in hopes of huge growth, while ignoring health and sustainability. (The “foie gras effect” is also part of the overall monoculture in VC.)
Luckily, impact investors have been experimenting with ways of issuing venture capital to founders who are addressing a global pandemic, not trying to become the next Uber.
Five ways to use venture capital amid the coronavirus pandemic
1. Revenue sharing
Much like an investment in the production of a Hollywood film will eventually lead to revenue when the film is released to the public, revenue sharing grants an investor a future stake in the company’s revenues without tying it to an equity stake. VilCap Investments (the early-stage investment arm of Village Capital) and Candide Group are among those who have experimented with this model and found it a good fit for companies that will likely build to a predictable cash flow.
2. Simple Agreements for Future Equity (SAFEs)
For early-stage companies, SAFEs push the negotiation about the details of the equity stake until after the initial early-stage investment is made and the growth path becomes clear. Mexico City-based Adobe Capital is among the firms using this tailored alternative to fund social enterprises and alternative energy startups throughout Latin America. As MIT researchers race to make open-source designs available for ventilators, investors who want to support experimentation can do so without a premature valuation.
3. Convertible notes
Convertible notes begin as a debt investment (more on that later) but give the investor the option of converting the remaining balance of the loan into an equity stake at a later date. This makes it a good structural fit for early-stage healthtech companies, where the true value and scalability are less apparent until it hits the market. Sevamob, which began with a convertible note from VilCap Investments, is deploying its mobile healthcare technology to create pop-up clinics for coronavirus patients in rural India. SHIFT’s Conscious Venture Lab also uses this model as part of its work to fund underrepresented and minority founders tackling the future of work.
4. Co-investment syndicates
Having one single early-stage investor can mean that one person’s ideas run the show, and create an imbalance that can make future fundraising more challenging. Syndicates for early-stage ventures allow a wider array of investors to support the venture without making too many unique commitments to individual investors. Many investors participate in syndicates, which also help with diversity: AVP in Lima, Peru has a syndicated process that resulted in 46% of their investments going to women-led startups.
5. Loans (and other debt-based investments)
Now that much of the liquidity in the market has been sapped by the coronavirus crash, debt is the new equity—and it was always a solid instrument, particularly for female founders whose ideas have been less likely to attract equity in the status quo. Given that more than 91% of nurses are women, they’re a likely source of better ways to handle a pandemic. For existing companies, debt can also help meet new demands: “If all the sudden a company has to ship a higher volume of products because of a new, large contract with a medical facility, debt financing tools could be an appropriate way for them to finance a surge in production,” said Matranga.