I remember being 12, walking the streets of downtown Vancouver with my entrepreneurial uncle. He was pointing out prime retail spots, underused locations, overlooked gems. After two or three blocks, he stopped and quizzed me. “What businesses are missing, Shafin?” 

He was always looking for opportunities. As Ismaili refugees from Uganda, my father and his brothers had to make it on their own when they landed in Canada. Fast-forward to the present, and I work with entrepreneurs everyday as an investor and advisor, including many people in the expanding creator economy. What I’m struck by is how many parallels there are between the successful entrepreneurs I know today and the immigrants I grew up with. And the more I think about it, the more it comes down to one idea: necessity. 

They’ve been locked out

My family fled Uganda after dictator Idi Amin took control in 1971 and forced Ugandans of Asian descent out of the country.

Many of us eventually settled in Canada, with families to support and no time to waste. My father was a trained pharmacist, but didn’t have the certifications he needed to practice in Canada. While he worked on that, he and his brothers hustled at low-paying jobs and set up their own businesses in Vancouver. I don’t think they ever considered themselves to be entrepreneurs — they were just doing what they had to do.

Many of the most successful entrepreneurs I know today faced distinct but related hurdles. They turned to entrepreneurship, in large part, because they were locked out of opportunities elsewhere. They may have lacked financial resources, family connections or access to a fancy education. So they had to find their own way forward using the tools at hand. 

I don’t think it’s any coincidence the creator economy is swelling at the same time that middle class opportunities are shrinking. Older millennials graduated university with tremendous debt and found a depressed job market after the 2008 financial collapse. Gen Z carries a shocking amount of debt for the youngest generation of working age, and is facing a roller coaster job market amid the COVID-19 pandemic. For many of them, home ownership is a pipe dream. All these problems are magnified for young people of color. 

Against this backdrop, it’s no surprise to see this new way of working emerge — especially considering women and people of color constitute a significant and growing contingent of the creator economy, i.e. all the people creating content and building personal brands on platforms like Instagram, YouTube, Twitch, et al. As this industry takes shape, power is slowly being transferred from the platforms to the creators, giving them more options for monetization and fan interaction. This, in turn, is opening access to the industry for people all over the world.

They hustle like there is no Plan B

My father spent many 16-hour days going between work and school, while my mother worked to take care of three kids. My uncle put everything he had into his video store, and willed it into success. They all exemplified the so-called “immigrant mentality.” They acted like there was no Plan B — because there wasn’t.

Scratch the surface and you’ll find the same spirit underlies the creator economy. The best creators are tireless hustlers — because they have to be. 

Ask any successful YouTuber, Twitch streamer or OnlyFans creator — it’s a grind churning out content, building audiences and finding ways to monetize. Richard Tyler Blevins, better known as Ninja to his legions of fans on Fortnite, built his massive following by streaming himself playing video games at least 12 hours a day, every day. 

It’s also no coincidence the creator economy soared during the pandemic. Behind the surge in musicians using platforms like Twitch is the reality that COVID-19 decimated their entire industry. The same goes for journalists on Substack. Long hours sunk into honing their craft is a testament not only to their work ethic, but to the fact that for many of them, there is no backup plan right now.

They are ruthlessly ‘uncomplacent’ 

Underlying all the challenges my family faced was one constant: gratitude. I saw it in all the adults in my life — an understanding that they were the lucky ones. That manifested itself in a refusal to be complacent. They went from parking cars and cleaning hotels to owning their own businesses and putting their kids through university. They could have stopped at any point and admired how far they’d made it, but they always felt compelled to work harder.

I see that same spirit in so many successful creators today. Forget the cliche of the pampered primadonna. They know perfectly well how lucky they are to be making money doing what they love. They know how many competitors are breathing down their throat. They know they have to continually learn, improve and adapt … or vanish into obscurity. 

You see that kind of ruthless uncomplacency in one of the forefathers of the creator economy — Gary Vaynerchuk, a.k.a. GaryVee. A big name today, he started off doing reviews on YouTube of wines sold in his family’s liquor store. He grew a cult following, but didn’t stop there. He went on to start multiple successful ad agencies and even has launched an NFT line that has grossed $85 million in sales.

All of this isn’t to say that passion — even joy — isn’t a part of the formula for entrepreneurial success. But I think it’s an oversimplification to reduce the creator economy to “passion-preneurs.” Like the entrepreneurs from my childhood, so many are driven by necessity — the need to earn a living, support a family, and improve their lives — and by the inability to find this opportunity elsewhere in the current economy. There’s one last thing I see in the creator economy that reminds me of my family’s story: the optimism that things can change for the better.

Shafin Diamond Tejani is the founder and CEO of Victory Square Technologies, which supports technology startups through sustainable growth.

In Part I of this series, readers met Geoff Chapin, the founder of C-Combinator, a climate-tech startup that removes rotting, methane-emitting seaweed from Caribbean beaches and turns it into sustainable products. Chapin considered funding his company through traditional venture capital, but ultimately took other routes.

“Mostly, we’ve done convertible notes from family offices and angel investors, doing checks between $50,000 and $250,000,” Chapin told me. “We’ve raised almost $4 million in that way.”

The rationale for bypassing traditional VC was twofold. One, he didn’t think there were many VCs who were well-positioned to intelligently back C-Combinator’s mission. But perhaps more important, why should a founder surrender the substantial equity that VCs seize if she doesn’t have to?

Chapin’s funding dilemma illuminates the crisis moment that traditional VC is undergoing. On October 26, Sequoia Capital, one of the oldest and most blindingly successful VC firms in the world (and my former employer), announced that it is making fundamental changes to how its business is structured. Instead of creating a series of funds that open, invest and close after 7-10 years, Sequoia will now put everything it owns—private and public investments—into a single fund that will never close (some call it a “rolling fund.”) Its limited partners will have the freedom to cash out whenever they want.

Roelof Botha, the biggest cheese in Sequoia’s US office, said: “We think the VC model is outdated,” echoing the point made in the first part of this Observer series.

So what has made the historic VC model obsolete, and what will replace it?

Everybody Wants to be Part of the Act

Arguably, the first fissure in the titanium-reinforced 20th century VC model occurred in 2005, with the founding of Y Combinator. Paul Graham’s incubator/accelerator gave money to entrepreneurs in smaller amounts than “Big VC” typically had—often four-figure checks as opposed to seven or eight. But it wrote those checks to more people and also provided founders with services—office space, pitch advice, hiring help—that weren’t usually offered by traditional VCs. (Even then, though, big VCs were in the picture, making sure that they would have an early hand in any potential disruption; Sequoia Capital was an early investor in Y Combinator.)

Since that time, thousands of companies have passed through the Y Combinator gauntlet, and thus begun a democratization of the startup-industrial complex. (Although democratization does not necessarily equal diversification; most of the companies funded by Y Combinator still have white male founders.) That boost of the “supply side” of early startup capital broadened its reach, and helped spread the word about the outsized returns it could yield. In response, the “demand side” of VC has also exploded; as Shark Tank became a monster TV hit, millions of Americans convinced themselves that they knew as well as any VC how to assess the risk and reward of investing in an early-stage company.

Even if they couldn’t. For most of the half-century during which modern VC has existed, there was no easy, systematic way for anyone but the heaviest of hitters—pension funds, university endowments—to get in the startup game without becoming a limited partner in a traditional VC fund. It’s tempting, and not entirely wrong, to attribute that exclusion to “elitism,” but more fundamentally, the hurdle was legal: until quite recently, financial regulators looked at early-stage investing as far too risky to allow the vast majority of Americans to participate.

That exclusion changed profoundly with the JOBS Act, which became law in phases beginning in 2012. Today, millions of individuals and organizations can invest in startups and it’s logistically not much harder than buying shares of Tesla. If you’re a qualified investor, EquityZen will sell you a piece of a hot company (like Zipline) that has yet to go public, although typically you will need at least $10,000 to invest. Yieldstreet, an alternative investment platform, has recently created a channel that allows retail investors to buy chunks of the heavily coveted venture funds run by Greenspring Associates and others.

Milind Mehere, Yieldstreet’s founder and CEO, told me: “It’s impossible to get into their funds, they are incredibly fully subscribed.” When the company announced this in early October, it hailed “yet another advance that we are making to break the exclusive grip that the ultra-wealthy and institutions have.” Others take the social goals further. Another firm called A100x, which focuses on blockchain properties, is reserving a certain number of limited partner seats for women and minority investors.

How Can I Move the Crowd?

Even people with as little as $100 to invest can now easily find their way into startup investing through crowdfunding. Do you want to support the Chilean bakery that just opened up a few blocks from you? Browse through Mainvest and there’s a decent chance you can buy a piece of it.

There are several caveats here. Crowdfunding is unlikely to deliver the kind of 5x returns that draw institutional investors to traditional VC firms. It’s also no simple replacement for VC funding—the logistics of having dozens or hundreds of investors will be daunting to most entrepreneurs.

And of course equity crowdfunding is extremely nascent; for all of 2021, perhaps $500 million will go into US startups through this channel. By contrast, on average, VC firms invest more than twice that amount every single day. Still, the growth is remarkable—70% annually for the last couple of years.

More and more founders are turning to crowdfunding—less, perhaps, as a financial lifeline than as a buy-in marketing method that doesn’t depend on getting press coverage—a benefit that traditional VC firms are not always expert in. C-Combinator’s Chapin told me that crowdfunding is “a real minority of what we’re doing, literally about 5% of our funding. But it allows us to importantly create champions around the world who care about our company. It democratizes investments in solutions. That’s what we really care about.”

Goodbye to the Middleman

One way to read Sequoia’s recent reorganization is that limited partners–the big institutional investors who put money into VC firms–have not always been crazy about having their money tied up in funds for seven or ten years, even when the ultimate payoffs could be phenomenal. In the future, it seems like Sequoia’s LPs will be able to cash out on an annual basis.

Outside Sequoia, an increasing number of would-be limited partners are questioning whether they need traditional VC at all (and lots of non-VC financial players are trying to hone in on the venture space, to tell them they don’t). From the investor’s point of view, if you’re not paying the 2/20 fees, you don’t need the spectacular returns.

Big investors, including little-sung heroes of venture capital like insurance companies and family offices, can invest directly in startups without going through the VC middleman—or paying the fees to do so. One of C-Combinator’s largest investors, for example, is the venture arm of a family office, Baruch Future Ventures. The firm’s Jason Holt told me that he believes BFV’s specific focus on climate projects gives the founders it invests in an advantage they are unlikely to find at most traditional VC firms.

And matching founders and funders has never been easier. Blair Silverberg has created Hum Capital, an AI-driven investment platform that he compares to KAYAK, the travel search engine.

Silverberg, a veteran of legendary VC firm Draper Fisher Jurvetson, emphasizes that while there will always be startups for whom venture capital is the best route, most companies can find more efficient funding—usually in the form of debt/loans—that doesn’t dilute their holdings. Hum Capital takes a cut of the transaction but doesn’t as a rule take equity in the companies.

“We work with some insurance companies that are literally direct investors in over 200 venture capital funds, all the ones that you’ve heard of,” Silverberg told me. “So why don’t they invest directly in those companies? It’s not that they don’t have the interest or capital. They just don’t have the manpower. As it’s become easier to quantify what’s happening in businesses, by connecting into the SaaS systems they use, you don’t need as much manpower.”

Can all these developments overturn traditional VC, force it to change, or transcend its historic blind spots discussed in Part I? Sequoia’s dramatic announcement suggests that the answer is at least maybe.

“I remember being a man and an old school venture capitalist; ‘Does this product for women resonate with me? I don’t know. Maybe I’ll ask my wife’,” Silverberg told me. “It’s really hard to assess that. Now we can just say: the data shows this product is resonating and it’s completely irrelevant what we think about it. ’Cause we’re not the target customer.”

In a recent LinkedIn post, Silverberg contends that Hum’s insistent focus on performance data could remove much or all of the bias that has guided VC investment to date. “46% of companies signed up on our Intelligent Capital Market are outside Silicon Valley and the “coasts,” signifying how there are plenty of opportunities in the US outside of the traditional tech hubs where entrepreneurs with innovative, forward-thinking companies are looking to scale. Removing bias is a huge part of our mission to connect great companies with the right capital.”

Join the Techonomy and Observer Roundtable on The Death (and Future) of Venture Capital on Thursday, November 18 at 1 PM ET. RSVP HERE.

James Ledbetter is the Chief Content Officer of Clarim Media, and the editor and publisher of FIN, a newsletter about the fintech revolution. He is the former Head of Content at Sequoia Capital.

Glasgow – The first week of the UN’s COP26 climate conference in Glasgow, Scotland, has been packed with news and announcements from within the official venue and from the streets of Scotland’s second city. But on the symbolic level, it’s possible that no event was more important than the Net Zero EDGE startup contest that took place here today.

In a high-profile event at Glasgow Science Center, on the River Clyde opposite the COP26 conference venue, Scottish EDGE, the UK’s biggest funding competition for startups, presented awards to entrepreneurs who made their pitches to a panel of judges for the Net Zero award. The biggest winner was Faisal Ghani, CEO of Dundee-based SolarisKit, which develops and sells a compact solar water heater. He got £100,000. Two other entrepreneurs got £50,000 each. “We hope that this new award category offers well-deserved recognition for startups leading the way in the transition to net zero—and inspires others to do the same,” says Steven Hamill, chief operating officer of Scottish EDGE.

While the United States is awash in venture capital and has an abundance of startup competitions, in many corners of the world, including Scotland, such investment money is scarce. That’s a problem, because in order to address climate change, we need explosions of innovation everywhere. Most of the sophisticated technology solutions will likely come from well-funded scientists and organizations located in the usual places, but a lot of the practical, street-level solutions and applications of those technologies will come from creative people in seemingly unlikely places.

Scottish EDGE was launched after the global financial crisis of 2008, with the recognition that Scottish entrepreneurs had very little financial support. The organization now gets funding from the Scottish government, the Hunter Foundation, the Royal Bank of Scotland, support organizations, and private donors. The main competition takes place twice a year and has so far supported more than 400 early-stage Scottish businesses with more than £18 million in funding. Some of the previous special award categories include social entrepreneurs, circular economy, and biotech.

Today’s Scottish EDGE competition was the first to focus on climate change, but startups addressing sustainability have won awards in the past. Among them is S’wheat, a tiny company outside Edinburgh run by a couple of high school sweethearts that won Top Prize in a special EDGE award for startups with leaders under 30, in 2019. S’wheat’s story illustrates the challenges—and opportunities—for small socially-minded outfits to innovate, and potentially to have a positive impact on the world. It developed the world’s first reusable bottle to be made entirely from plants.

Jake Elliott-Hook and Amee Ritchie met in high school in the town of Musselburgh, near the Scottish seacoast, and continued their relationship after they went to different colleges. Jake remembers being troubled by the fact that classmates frequently threw out their reusable metal or plastic water bottles—which seemed like a waste.  “I thought, ‘What’s the use of having a reusable bottle if it ends up in the landfill? Why not have plant-based bottles that are reusable but also biodegradable?’” he says.

Elliott-Hook and Ritchie decided to do something about it. After two years of research and correspondence with potential suppliers and manufacturers, they launched a company to produce and market bottles made from a mix of wheat straw and bamboo.

The couple raised a bit of money through a crowdfunding campaign in 2019, and got startup guidance via Bridge 2 Business, a college-based program offered by Young Enterprise Scotland, a non-profit organization that offers business and financial education programs. The organization serves about 10,000 young people ages 18 to 30 every year.  “I loved their idea. I saw potential in them,” says Lisa Wardlaw, the organization’s college delivery manager, of the S’wheat founders. “They have worked incredibly hard and learned a lot.”

Their second major break was winning the Scottish EDGE contest later that year in the Young EDGE category—which brought them £15,000. “Their passion and drive to do something impactful was quite encouraging to see. Also, they had a product to show and demonstrate, and that helped them,” says Scottish EDGE’s Hamill.

Elliott-Hook and Ritchie went on to win a couple of additional competitions. Their startup-competition fame also landed them an appearance on a UK television show, Buy It Now, which helped spread word about them and their bottles.

The couple designs the bottles, purchases the material from Asia, and has the bottles manufactured in Scotland. They started marketing the bottles online in April, 2020, and have so far sold about 3,000 at $34 a pop. (Expensive, but take a look: they’re classy.) Elliott-Hook says they’re making enough money to support themselves and pay the rent and businesses expenses, but it’s still a micro company with just two employees—the founders.

They recently launched a co-branding effort, hoping to get companies to pay to have their names on the bottles and help with distribution.

Will S’wheat be able to cross the chasm and become a sizable company capable of producing a significant impact? That’s unclear, just as with many bright business ideas that are still in diapers. But it’s clear that without small but meaningful dollops of capital and a lot of encouragement, they wouldn’t even have gotten this far. There’s a lesson here for people who believe innovation can help save the planet: Put up, or shut up.

—

Steve Hamm is a freelance writer and documentary filmmaker based in New Haven, Connecticut, USA. His new book, The Pivot: Addressing Global Problems Through Local Action, about the journey of Pivot Projects, was published in October by Columbia University Press. This is one of a series of dispatches from COP26.

Read more from Steve Hamm’s COP26 Dispatches

October 29th: COP26: Let’s Pivot to Save the Planet

November 1: SustainChain: a Collaboration Platform for Do-Gooders

November 3: How Oil-Rich Aberdeen is Pivoting Away from Fossil Fuels

October 13 was the one-year anniversary of the first FIN post and, coincidentally, the day that FIN (in conjunction with CDX/Techonomy) held our first-ever in-person conference. The three and a half hours of programming yielded some fantastic sessions. One highlight was a fascinating, detailed conversation with Craig J. Lewis and Blair Silverberg about how fintech is changing the way that startups are funded. An edited transcript is below; you can watch an unabridged video of the interview here.

FIN: Both speakers are up from Texas, which is kind of cool. Craig is in Dallas and Blair is in Austin. We’re fortunate to have them here today in New York. Let’s start with 60 seconds from each of you about what your company is, what it does, why you founded it. Craig, why don’t you go first?

Craig J. Lewis: Craig J. Lewis, I’m the founder and CEO of Gig Wage. We’re a payroll company for the gig economy. So we help businesses and platforms pay independent contractors, gig workers, freelancers in a very modern way. You guys may be familiar with a little payroll company called ADP. So imagine the new ADP for the new way of work, right? Super excited about really helping drive economic empowerment and efficiency through the gig economy. There’s a couple of trillion dollars paid out to about 75 million people last year alone. And we want to make sure that money moves efficiently so people can get paid when they want to get paid, how they want to get paid and where they want to get paid. And like it’s 2022 and not 1982. That’s our mission.

Blair Silverberg: I’m Blair Silverberg, I’m the founder and CEO of Hum Capital. We help companies raise five to about a hundred million dollars via an experience that feels a lot more like Kayak than it does calling 50 investors and hustling to get introductions to this closed guarded club of capital. And the only reason that we’re able to do this is because these days, 75% of companies have all of their financial systems of record in the cloud. So there’s no reason to go knock on venture capital’s doors. I used to be a venture capitalist. It’s a fun job, but it’s a terribly inefficient process. Instead, you can just connect your accounting system and your payment processing system. We can objectively analyze how financeable your business is and we can connect you directly with capital that comes from places like insurance companies, where it’s extremely low cost. Oftentimes there’s no dilution. It’s just a totally different model for funding companies.

FIN: And we’ll get into that. Craig, tell us a little bit about your own funding journey. Where were you in the process of founding your company when you decided “I’ve got to go out and raise some money,” and where did you go and, and what made you take the deal or deals that you finally ended up taking?

Craig L.: I don’t take deals. I give them. (Laughs). That’s a different question. I knew I was going to raise venture capital the day I started the business, I’m a big fan of venture capital. So day zero, I knew I was going to raise money. I used to sell technology and I had made a good bit of money. I ended up self-funding the company, for like the first nine months. And then I went and raised money from local angels. Geography doesn’t get enough credit in fundraising. And so wherever you live, typically, within two hours of your front door is where your investors will come from in your angel rounds.

Now that’s changed over the last 18 to 24 months because everything’s so much more virtual, but back in 2014, 2015, it was going to be knocking on doors, having drinks, coffees, et cetera. And so you need to understand how the money moves in your geography. In Dallas, I knew there was a lot of real estate money. I knew there was a lot of oil money and I had to learn to kind of speak that language, right, to get them to write that $50,000 check, that hundred thousand dollar check, understand what their risk appetite was, how do we connect technology to a business or an industry that they know?

No one gave me a term sheet. I literally wrote my own term sheet said I was raising $250k, uh, just to kind of create some FOMO. It ended up turning into $600k. We did get a little bit of institutional capital from Stage One Ventures out of Boston, which had a connection to a family office in Dallas, but I pieced together $600,000 to kind of get us going. And that was the first part of our funding journey.

FIN: It sounds like a lot of work.

Craig L: It was a lot of in-person meetings. Hundreds of meetings. You got to remember, you know, I’m a former athlete, although I had lots of payroll experience, the payment experience, a black guy in Dallas, talking about payments and technology. I got a lot of crazy looks at first. So it took a lot of meetings to really understand how to make the story resonate. But once I kinda got it and you get your first person and your second person, and then you get some believers behind you. I remember the first check was an ex-entrepreneur in Dallas who had ran a company they sold to Xerox for about six and a half billion. The former CEO committed the first $50,000. And that’s when things got rolling. I’m a different founder in that I enjoyed the fundraising process I could spend the vast majority of my time talking to investors, I love it. It was hard, but fun.

FIN: Blair, let’s dive a little deeper into what Hum Capital provides, because if I understand it correctly, you’re trying to make that process incredibly streamlined.

Blair S.: I guess Craig’s version of raising capital on Hum would look something like: He comes to us online, he uploads or connects, maybe in his case, an early stage company, a deck articulating his vision—in 24 hours, he has three commitments. Some of that might be capital that comes from vehicles where we have a lot of discretion. So we can just say, “Hey, we really like this business. Let’s anchor a financing round.” Other capital can come directly from insurance companies or sovereign wealth funds or pension funds that invest directly into businesses. You guys probably know this, but the private markets have been exploding in size. There’s over $7 trillion of assets under management. The US stock market is like $43 trillion. It’s a subset of overall capital that’s growing incredibly quickly.

And the end owners of these balance sheets—like insurance companies and pension funds—they have relatively small direct investment staff. So we help them basically scale up how they invest. It allows us to give capital to companies with just a much lower fee cycle because alternatively, they would be investing through one or two layers of funds. The worst case for an entrepreneur is when your capital comes from an insurance company through a fund-to-fund, to a venture capitalist fund, both layers taking 60 to 70% of those dollars in fees. Sometimes it makes a ton of sense to work directly with a fund. Particularly if they add a lot of value, most of the time capital is a commodity. The cheaper, the better, we just facilitate that.

We use a lot of technology to do this. We try to understand guys like Craig: Does he have a relevant background for the space that he’s in? Is he thinking about the business in the right way? The technology that we’ve created is kind of dramatically applicable to companies that have revenue data. So once you have some revenue, your business immediately becomes quantitatively assessable.

Craig L.: That could be good and bad for the entrepreneur, right? Because I’ve seen people that have some revenue that becomes a point of, “Hey, I can now prove that people want to buy my service or my technology,” but then now the investors have something to measure it against. Right? And so if you’re not growing at this kind of hockey stick up and to the right, it can actually play against you in the funding cycle. And then somebody else will come in with a deck and a background and get a ton of money with zero revenue. That’s a really interesting dynamic that you have to think about.

FIN: I covered the Internet economy in the late ‘90s and for a company to show a profit was like the worst possible thing.

Blair S.: This is exactly right. When you’re just a sexy idea, perversely, it can be way easier to raise money. Then when you were both a sexy idea and $3 million of recurring revenue, if your growth rate, isn’t obviously off the charts…now that makes no financial sense. That’s just a vestige of investors knowing how to assess ideas, but not feeling comfortable with revenue metrics and the investors who are comfortable with revenue metrics being really conservative often. So that should just be a smooth kind of continuum you should, as you make progress, unlock better and better and better terms—by the way, those terms should be non-dilutive. This is how a functional market should work.

FIN: Let’s pause on “non-dilutive”—sometimes it’s easy to let these pieces of jargon wash over you—but can you discuss the importance of non-dilutive?

Blair S.: Non-dilutive capital is like, if you have a mortgage, you didn’t tell your bank, “Hey, thanks for helping me buy this house. I’ll give you 20% of my income forever.” You instead made a different deal. You said, “Hey, I’m going to borrow 80% of the value of my house. I’m going to pay an interest rate of 4%. I’ll pay it off in 30 years.” That’s non-dilutive capital. If you look back historically going back to the 1600s, 1700s non-dilutive capital lending has been around much, much longer than the joint stock company. If you don’t pay your lender back, there’s a vast category of options, but all of those options are, like your mortgage, non-dilutive. So if you’re an entrepreneur, you should start trying to figure out, “Hey, how do I finance this business without giving up a permanent share in some of it.”

FIN: In the traditional VC model, it’s diluted because you’re giving up control of a certain portion of the company in order to get the capital.

Blair S.: Yeah, exactly. Our largest investor, Steve Jurvetson, is an amazing thought partner of mine. I am totally happy as our business succeeds with him getting an obscene return on capital. But that’s not how commoditized capital typically is. You wouldn’t be thrilled that your bank got 70% of the appreciation of your house in a good market like we’ve had. So it really depends on the kind of capital you take on. Nothing wrong at all with taking on equity capital. It’s just, you want that equity capital to be value-added. If you’re just using it for dollars, those dollars could come at 4% from an insurance company. And you should check that first before you permanently sell a share of your wealth.

FIN: So interesting. You’re the first person I’ve ever heard talk about this. I do not think of most insurance companies as wanting to invest in tech startups.

Blair S.: Well, where does venture capital come from? Insurance companies, pension funds, sovereign wealth funds. So they are LPs in venture capital funds. We work with some insurance companies that are literally direct investors in over 200 venture capital funds, all the ones that you’ve heard of. So why don’t they invest directly in those companies? It’s not that they don’t have the interest or capital. They just don’t have the manpower. As it’s become easier to quantify what’s happening in businesses, by connecting into the SaaS systems they use, you don’t need as much manpower. You can rely on a lot of benchmarking and algorithms to say, “This business is objectively financially more efficient than this business.” They both may be financeable, but there’s a difference.

And so exactly to Craig’s point, there are businesses where the data alone doesn’t tell the story. Those are the businesses that should be raising venture capital. For early stage venture, the next Elon Musk, where you’re having to look in someone’s eyes and figure out is this person going to build this crazy robot and send it to Mars? Like Steve Jurvetson is really good at that. And there’s a community of people who are awesome investors, but we just shouldn’t conflate the two types of risks.

FIN: So Craig, if Hum Capital had been operating when you were raising money, would you have used it? What do you think you would have gotten out of it?

Craig L.: No. And to this point, you have to know what type of business you’re building as well. Right? And so depending on the stage and type of business can also determine the types of financing that you should take on. So as an early stage entrepreneur, I had an idea, I had a pitch deck, I had a vision, I had a background and we actually didn’t start off as Gig Wage. We had this other idea, really grandiose, we believe that payroll should be free. And so what I wanted to build was the free version of ADP at first. I was like, we’re going to take a Credit Karma model. We’re not going to make any money. That was not even the point. The point was to build technology, collect data, and then start to monetize that data at scale.

Blair S.: I would have funded that. ‘Cause that sounds awesome.

Craig L.: Exactly, exactly. That business requires capital, it’s super high risk business, right? No revenue, no product, no nothing. So that requires equity. But then the bet is that that entrepreneur or that business model then leads to a certain level of scale at a certain speed that may be traditional capital or non-dilutive capital will not finance and fund. And so it really depends on the type of business you want to build. I was looking for people that believed in a big idea that were in it for, you know, they didn’t need a return. They didn’t want distributions every quarter. This was going to be a seven to 10 year run.

FIN: They call this “patient capital.”

Craig L.: It ain’t that patient. They say that, but it you got about 18 months to get to the next level. It all comes with something, but you’ve got to know what type of business you’re building before you know what type of capital you’re raising. You’ve gotta have deep conviction about that. Then I’m also a guy that just kind of likes the deal, right? I like to sit at the table. I like to look you in your eyes too, and see if I can get you to believe what I’m doing. And so there is that component because along the way, we’ve raised about, about $16 million and a lot more coming.

We’ve raised some venture debt, from Silicon Valley Bank, we’ve raised mostly equity capital from institutions. A lot of the insurance companies are trying to figure out how to get to these 75 million gig workers. They have spun up venture arms so that they can now invest equity type capital into startups. You’re starting to see these corporations—financial services, insurance, etc—create their version of venture capital, but it’s usually tied to strategy of their business development teams, their strategic alliance teams, and how can they further their innovation or their growth through a capital investment.

FIN: So interesting to think about gig workers as a target audience for a corporation. I think that’s not commonly understood.

Craig L.: Every major stodgy, serious conservative company you can think of calls us on a weekly basis, every insurance company, the market caps of the companies that call us, blow my mind all the time. They all want it. Because again, you’re talking about a lot of horsepower here, $2 trillion of earnings, 75 million people and growing at a faster rate than W-2 employees. And none of the financial services are designed for these workers. We do this thing called a proof of income report. What we found was if you’re a gig worker, how do you get approved for any type of financing when it’s based on employment and earnings, right? And so you’re working for three or four different platforms. You’re getting money from here. You’re getting money from there. How do you get a mortgage? It’s a difficult process. How do you get a credit card? That traditional financial services model that is being uprooted and kind of turned on his head. The gig economy is a big part of that.

FIN: So Blair, Hum has been out of stealth for a few months. I’m curious, who are you funding? Who’s coming to you, where’s the money coming from? What, what kind of patterns are you seeing in terms of, who’s getting paid in 2021?

Blair S.: About 50% of our customers are not located on the coastal United States, about 15% of our customers are international, but so just focus on the US it’s a pretty big audience of noncoastal entrepreneurs. 80% of venture capital is allocated in side the San Francisco Bay Area. So it’s a pretty big delta between where the entrepreneurs actually live versus who’s a two hour drive from your front door. If you happen to not live around San Francisco, you’re kind of screwed historically. That’s changed I think, with us. In terms of sectors, it’s pretty broad. So 30% are like tech, anything from e-commerce to SaaS, 20% are financial services company. I think it’s like 15% industrial companies. So factories manufacturers, we have a bunch of services, businesses like insurance agencies. I think the point is that the reason that we’re able to offer the cheapest capital, the fastest to companies is because we have a broad, diverse network of companies and that’s very attractive for capital sources. It creates this flywheel. It attracts diverse capital sources. The more suppliers of capital you have, the more options entrepreneurs have, the more entrepreneurs we have more options the investors have. That’s created this interesting virtuous cycle, pretty rapidly after coming out of stealth.

FIN: And how does Hum make money?

Blair S.: Like most marketplaces, we charge a percentage of the transaction. That’s the dominant way that we make capital. We basically charge two to 6%.

FIN: And you don’t take equity in the companies.

Blair S.: Not systematically. If you see something you like, you might invest, but it’s not part of the model. Sometimes we can really help businesses because we’ve just seen a lot. I mean, you know, if you think about like your typical investment firm, you might have four to six partners who specialize in an area and they hear a bunch of knowledge and rumors and ideas from the conversations they have.

If you think about how our system works, we’ve got thousands of companies that are streaming and data every day. So we have quantified, verified a super-granular picture the economy. We can draw conclusions like, “Oh, this region is really experiencing a lot of growth after COVID businesses starting up or moving to this region are going to have a bunch of tailwinds from subsidies.” That can help us make good investment decisions and it can help us point entrepreneurs in directions that are fruitful for their companies.

Audience question: I have one quick question for Blair. To me, Hum sounds like it should be a phenomenal tool to remove bias from capital. Do you have data on that? Is that a part of your mission?

Blair S.: Yeah, that’s a huge part of the mission. You’re exactly right. When a business has data and can stand on its own, it doesn’t matter what the gender, or color of the entrepreneur’s skin, is. I remember being a man and an old school venture capitalist, you’re kind of sitting there and you’re like, “Does this product for women resonate with me? I don’t know. Maybe I’ll ask my wife.” It’s really hard to assess that stuff. Now we can just look at the data and say, in fact, the data shows this product is resonating and it’s completely irrelevant what we think about it. ’Cause we’re not the target customer. Sometimes it’s gender, sometimes it’s race, sometimes it’s just industry and sector—like you have very few VCs who were working at NASA. And so why do we only have one Space X instead of 10? There’s a lot of sources of bias in investing.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

Recently the Observer and The Information have published essays arguing that venture capital as practiced over the last half century is becoming obsolete (even while there is more of it available than ever before). What forces are at work that are compelling venture capital to adapt? What ways will startups in the future find the funding to grow their businesses?

On November 18, join Techonomy and the Observer in an enlightening, video roundtable discussion with VC industry experts. 

SPEAKERS:

• James Ledbetter, Chief Content Officer of Clarim Media and editor & publisher of FIN 
• Blair Silverberg, Founder and CEO of Hum Capital
• Sam Lessin, General Partner of Slow Ventures and Columnist at The Information
• Moderator: Meg Marco, Editor-in-chief of Observer 

RSVP TODAY:

As many experts expected, the fraud trial of Elizabeth Holmes began to heat up on Wednesday with testimony from whistleblower Erika Cheung.

Cheung, already well-known in innovation and technology circles because of her wildly popular TED Talk on her Theranos experience, took the stand on Wednesday in what was a palpable stepping up of a reasonably sedate but also occasionally bizarre trial so far. 

The issue the court needs to address, not only with the Cheung testimony, but that of any other witnesses the prosecution may seek to bring, is how many degrees of separation exist between the actions or inactions being described at trial and Elizabeth Holmes herself. 

While many people tend to think of this as the Theranos trial, it’s not. It’s actually and legally the trial of Elizabeth Holmes. To hold any startup founder legally responsible for everything their company did or failed to do is simply not a bar that a United States District Court is going to set. That is why lawyers for Holmes are trying to draw a line in the sand this week. One way they are attempting to do this is by framing testimony about what Theranos as a company did as being far removed from Elizabeth Holmes herself. 

Where the judge allows this to go and how much leeway the prosecution is afforded, will be critically important for the rest of this case and for the January trial of co-defendant Sunny Balwani. 

What is interesting from Wednesday is that in cross-examining Cheung, one of Holmes’ counsels read through the qualifications of the scientists and laboratory directors employed at Theranos. This was obviously done in an attempt to minimize the weight and validity of less-senior employee Erika Cheung’s testimony. But this strategy lays the foundation for what should be an important part of the Holmes defense – the experience and qualification of her board members and investors. 

It’s one thing for a “self-described ‘starry-eyed’ 22-year-old scientist” to be fooled by Elizabeth Holmes, yet another thing entirely for the prosecution to prove that the adults in the room were fooled. But if there was ever a “they absolutely should have known” moment in startup history, l’affaire Theranos presents it. If senior scientists, managers, investors, and directors knew what Holmes knew, then the deception becomes a company deception, not a personal one. During Cheung’s six hours on the stand on Wednesday, she shared that she and fellow whistleblower Tyler Shultz met with Theranos Board member George Shultz. As we remember, Shultz was former Secretary of State, but also reputed to be a very active, hands-on board member at Theranos. 

Shultz, who died early this year at 100, was remembered for a life of service marred by the Theranos scandal. In a very kind and certainly charitable perspective on Shultz’s involvement with Theranos, back in February, The Critic observed: “Perhaps the defining story of Shultz’s life was a scandal which overtook his later years: the Theranos fraud. His involvement with the company attested to his willingness to trust even those who were unworthy of being trusted.”

It is going to be very difficult for prosecutors to argue that a 19-year-old Stanford dropout set out to defraud some of the most savvy investors, advisors, and board members in the world and actually succeeded. Painting Holmes, as the media has often done, as an evil Jobs-ian character in relentlessly-black turtlenecks is an easy œuvre, but it takes as its logical corollary that a large number of (almost all) men with great track records of success and extremely high net worth were all deceived. Yet this is all inextricably intertwined with what the prosecution needs to do here in proving their case, perhaps further proving the thesis that they set their bar far too high here. Again, unless they can show that Holmes herself was the fraudster, not the overall company, the prosecution will fail.

As we move from Cheung to Tyler Shultz to George Shultz, we are creating degrees of separation between them and Elizabeth Holmes, not actually bringing her more closely into the center of the case. 

No one should lose focus on the fact that this trial is not about Theranos as a failed startup. It is specifically about whether Elizabeth Holmes defrauded investors out of hundreds of millions of dollars and deceived hundreds of patients and doctors. The more separation Holmes’ counsel can place between her and what happened, the better it will ultimately be for her. 

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Aron Solomon, JD, is the Head of Strategy and Chief Legal Analyst for Esquire Digital. He has taught entrepreneurship at McGill University and the University of Pennsylvania, and was elected to Fastcase 50, recognizing the top 50 legal innovators in the world. Aron has been featured in CBS News, TechCrunch, The Hill, BuzzFeed, Fortune, Venture Beat, The Independent, Yahoo!, ABA Journal, Law.com, The Boston Globe, and many other leading publications.