Capital Expectations: Ask Your Funders’ Intentions

Jen van der MeerCapitals

Thanks to all that responded to the launch of the Reason Street Capital Library launched just a few weeks ago. I’ve heard from founders, funders, and students all over the world requesting us to do more deep dives on emerging capital types and to explain how capital works.

The excitement for alternative capital stems from founders who are deep in the game of angel and VC fundraising who want to know if there is a different way. Particularly for founders interested in addressing deep climate change and social justice issues, the question of capital type and organizational structure is no longer obvious. There are also emerging founders interested in shared ownership models like worker or customer-owned cooperatives, but who want to know how to start and get funding if they don’t fit the standard structure. 

Yet for the most part, whether we are asking for a grant from a foundation or government agency, or preparing a pitch deck for the next high-growth company, we are still at the mercy of capital holders and managers.

For example, one commonly requested capital type for us to describe is “Patient Capital” sometimes called “Impact Capital” or “Social Impact Capital.” The concept of Patient Capital starts to get to this idea that our time horizon and expected returns of capital are shaped by investors with intentions.

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On one side of the capital continuum is a focus on shareholder returns over all other stakeholders, traded algorithmically to maximize short-term gain.

On the other side are grants given from governments and foundations which are distributed to address long-range societal benefits or systemic issues unaddressed by markets.

More capital than ever before has been promised to fund companies and organizations addressing climate change and social justice in the US. But it has become massively confusing if you are a founder seeking funds to support an organization that addresses systemic root causes through social and environmental change.

It’s clear that we want our collective capital to do more for people and to face the existential threat of climate change, but we are working within an old dominant logic about the purpose of capital and its role in addressing systemic transformative change.

We cover four types of capital in this weeks’ additions to the Capital Library that all have different capital expectations:

Equity Crowdfunding: As part of the 2012 Jobs Act, the SEC on March 15 raised the cap individual private companies may fetch from crowdfunding investors to $5 million, up from $1.07 million. Equity Crowdfunding has been popular with Black-owned businesses like CurlMix, Pop Com, and Supreme Foods Financing to build community-backed businesses.

SAFE Notes: They seem so “safe” – a legal document created by Y Combinator, the Simple Agreement for Future Equity, designed to speed early-stage funding processes and drastically reduce legal fees. Yet the SAFE has expectations built-in. SAFEs require that the company is a C-Corp, and YC SAFEs presume that the accelerator has already taken their 7% standard equity stake in exchange for seed money, advice, and connections. Make sure you’re aware of the expectations, tradeoffs, and the concept of the equity clock before you sign.

Asset-Backed Loans: Loans for assets like accounts receivable, inventory, marketable securities, and property, plant and equipment (PP&E) like a new robot. These loan terms are more favorable than credit card debt, but less favorable than traditional loans. Check the terms and compare to other loan types. 

Patient Capital: Mentioned above, Patient Capital is more of a philosophy for different capital types and may include loans, equity, or grants. Also called “impact capital,” patient capital providers are willing to wait longer and give more time to early-stage organizations to pursue larger systemic issues. It’s a murky space and if you are a founder of an organization seeking patient capital, make sure you are vetting the intentions of the funder, and that those intentions are reflected in the terms of the capital agreement.

We launched the Capital Library not to promote any singular new capital type as the silver bullet, but as an exploration to learn and explore all of the ways that innovators are rediscovering or developing new capital types to address these rising critical questions and needs. What we need are multiple types of arrangements that attempt to better suit the needs of communities and allow more of us to live well within planetary boundaries. We look forward to hearing from you if you are building one of these organizations.

Thanks for reviewing the latest additions to the Capital Library, give us feedback, and let us know: what type of capital are you exploring, and what should we cover next?