The Future of Funding: Changing the Landscape of Investing

Zebras Unite London hosted an interactive panel at Better Space on January 24, 2022 with investors from across the funding landscape on how investment is changing, the challenges and barriers to change, and what good could look like.

We’re facing big global and social challenges, and there are many businesses forming to tackle them. These businesses are often exploring new business models, new ideas, new sectors, or new ways of working. We explored with our panel some of the problems with how funding is done today, how they see funding shifting or changing already, and some of the barriers to change. We also explored with all of our participants what good funding could look like.

Watch the video below for a full recap on the event, and read on for our highlights and insights:

Insights and highlights

What are some of the problems with how funding is done now?

Systemic barriers

The big, overarching, structural issue is legislation, particularly for impact investors. When prioritising where to invest, ventures with high impact but lower/slower financial returns can lose out because of the fiduciary duty of the fund.

On the venture side, whilst there are more investors looking for impactful ventures, impact businesses are often legally set up in a way that prevents them from accessing certain forms of investment capital.

The panel also noted that, in the UK, there is more conservatism in investing, one hypothesis being that we have far fewer successful founders recycling their returns into the system unlike the US. We are beginning to make progress in the UK and EU, but we still have some ways to go.

Transparency

Another challenge is the process of founders trying to find the right funders. Many VCs do not provide enough information and support on what they are looking for, including transparency on what stage of businesses they are likely to invest in.

Funders also make it difficult to understand the funding process so founders are put off from applying, believing they are not a good fit. Often funders have to scout really hard to find the right ventures because they’ve made the process complicated to the exact founders they want. The panel emphasised a bad habit amongst investors of using too much jargon and not enough clarity on criteria.

On the philanthropic side, again, there is a real lack of transparency as to who the funders are and how they allocate their funds, which suggests that that ecosystem is heavily reliant on networks. This creates a huge systemic bias in where funds go. Accessing philanthropic funds are very application based which creates another layer of bias towards those who excel at written communication.

Phoebe noted that research has stated the average charity spends 10–40% of their time applying for funding, which is time that could be spent doing more impact work. Should it be the job of the funders to find the people doing the work and ensuring funds get to the places it’s needed?

Inaccessible ecosystem

There is a real challenge around narratives, building ventures and what investors are looking for. The current perception is high growth blitzscale businesses are prized above all else, which attracts certain types of founders and startups that fit this mold. Thus, this causes more impact-driven, sustainability focused founders and investors to write themselves off because they don’t see themselves as a good fit within the ecosystem.

Whilst we are moving in the direction of having more diverse forms of capital, we don’t have enough good examples of businesses who have utilised a more blended approach successfully, which others can then easily emulate.

Education

Founders need to understand the different types of capital and which will suit different types of businesses, founders and their models. Pure equity funding for example is not suited for everyone; only for a minority of high growth, high scale SaaS startups. Everyone else building slower growth, sustainable businesses (including Zebras) need alternative models.

What are the shifts and changes you see that the funding ecosystem is making in response already?

There is a lot more capital flowing in Europe to ventures that have ‘purpose’ attached to it in some way. However, the vast majority of this is going into Climatetech, with other industries lagging behind. We’re also seeing more charities and foundations getting into impact investing too.

The US is leading the way in more creative models of financing early stage ideas and founders, from Revenue Based Financing to Future Earning Agreements and more. These need to be adopted more widely. Current examples of funds that are pursuing alternative financing routes in Europe are Village Capital, Calm Fund (Shared Earnings Agreements), and Horizan VC (Convertible Future Earnings Agreements).

VCs are thinking more about how they can attract founders and provide additional value and support in addition to capital injection. Notion Capital, as an example, has a platform team to support founders with things like hiring to introductions and business development.

Decentralised Autonomous Organisations (DAOs) are ones to watch for the future as democratising ownership and returns is one way to redistribute power and wealth in the ecosystem. Let’s not forget the Co-Op model that has existed for hundreds of years, which was a precursor to blockchain-powered DAOs.

Regenerative finance is investing large amounts of capital to do things like buy large pots of land and rewild the area in a fast, bold and radical way.

We’re also seeing exciting participatory funding and decentralised governance models emerge, giving people with lived experience to have a say in how funds are allocated in the philanthropic sector.

In addition, initiatives are being developed to lengthen the funding period and increase flexibility for funds(eg. Cassie Robinson’s experimental 10 year fund).

What can founders do to challenge what exists and how should they go about that?

• Don’t sign the first term sheet/offer you get! Hold and use the power that you have as a founder.
• Talk to other founders about experiences with different funders to share knowledge of positive and negative experiences.
• Shake off the zero-sum narrative (win-lose). There is more to gain by sharing information and experiences rather than keeping everything to yourself.
• Think hard about what you value and figure out where you are most likely to get that.
• If you’re a founder, get into investing! The best, most empathetic investors are people who have been in the position of being a founder.

Ideas for what good funding could look like

Funding the founder — The current system enables only a select few privileged individuals to take the risk needed to enter the world of entrepreneurship. What are the possibilities when funders give founders the safety net or basic income to then be able to go and innovate? What would the impact be on access to entrepreneurship and impact if we just removed barriers from future founders’ paths? An example of this is Sam Lessin’s ‘Investing in People’ idea.

We need more low stakes, early stage funding to support idea generation and accessibility into the ecosystem.

Founders need more support through the process of finding funding — connecting founders to other sources of funding and making the process and ecosystem easier to navigate, to ensure people aren’t put off or prevented from accessing the funding they need and would be eligible for.

Current funding models are not set up to act at the root cause of many of our current challenges, so how do we move towards a system that funds the long term, future orientated, risky systemic innovation?

Investors have to put in the time to work with founders and support them rather than make them do the vast majority of the work themselves.

Connect with our panellists to keep the conversation going!

Louise Marston, (Director of Ventures, Resolution Foundation): The Resolution Foundation, an independent think-tank and social investor focused on improving living standards for those on low to middle incomes. Louise has previously worked at Doteveryone, Nesta and Blenheim Chalcot.

Sebuh Mesfin (Co-founder of Angel Investing School and Funnel Marketing Manager at Notion Capital): Sebuh comes from a growth marketing background with 4+ years of operating experience across startups, scale-ups, agencies & VC. A straight talker, he is passionate about supporting founders and democratising access to the world of investing.

Phoebe Tickell (Civil society strategist, philanthropy consultant and decentralised governance expert): She has worked across multiple societal contexts such as technology, governance, education, and farming introducing regenerative, systemic approaches that draw on biology and complexity science. She also worked as a fund manager at The National Lottery Fund.

Amina Ahmad (European Programs Lead, Village Capital): Amina is Non Executive Director at The Social Investment Business and European Programs lead at Village Capital, the venture impact investor, where she has launched their flagship sustainability accelerator program, the first of its kind to focus on female founders exclusively.

Jonathan Sun (Founder of Horizan VC): Horizan VC, an innovative alt-VC utilising Convertible Future Earnings Agreements to invest in idea-stage founders. Jonathan is excited to ultimately democratise investing in the UK and EU, using these vehicles to help aspiring entrepreneurs create profitable businesses and jobs.

You can join the London Chapter of Zebras Unite here. We’d love to have you!