Exploring sources of capital that do not impose the dogma of growth and scalability
Investing capital in a business is a risky venture — particularly so when the company is in its infancy stage and has neither track record nor securities. Common investors accordingly expect a high risk premium added to the returns on their capital contribution. To yield the necessary revenues und profits, startups are required to generate high growth rates. These growth rates often cannot be achieved organically and in a thorough manner, but through rapid and unsustainable expansion of in- and outputs (Manigart et al. 2002). The ability to do so is called scalability and it is what most investors are looking for.
There are, however, alternative motivating factors to financially support a startup. These include but are not limited to the notion of bona fide and believe that the startup will improve the social and ecological status quo on a micro and / or macro level.
The means to invest capital into a business are manifold, ranging i.a. from loans, via convertible bonds, to stock options. A principal line of distinction can be drawn between debt and equity financing, which is commonly also connected to (a) liquidation preferences and (b) voting rights. The shared element of prevalent financing methods is a required return excelling quasi risk-free investment options such as selected state bonds. At least in the Western World, it is not uncommon that returns required from startups are as high as 300 or 400 percent the investors’ original investment (Metrick & Yasuda 2010) — an astonishing rate especially when compared to contemporary interest rates.
Alternative types of financing do not follow this primacy. Some of these methods have almost faded into obscurity though as they seemed unable to come up with the amount of capital demanded by industrial capitalism. Others were only enabled by technological advancements such as the Internet, thus leading to a deep embeddedness with capitalist, growth-seeking, and globalisation-embracing systems.
Alternative financing types’ relevance for the post-growth era does not necessarily stem from the “deep and long philosophical, cultural, anthropological and institutional critique of the notion of growth and development” (Kallis 2010, 874) directly, but more so from its function as a key means to arrive at this state. Multiple elements discussed in today’s post-growth and degrowth debate can be connected to financing concepts: for example, collective efforts to monitor and move economies’ actors to presumably more desirable demeanor (North 2010) could be connected to crowdfunding, as could the notion of gift giving and the deviation from the capitalist modus operandi of reinvesting surpluses into the generation of further surpluses (Harvey 2007).
In future, an investigation of startup financing methods marked by a high degree of investor involvement (financial and non-financial), lower than average returns, and a selective, diminished or non-existent demand for growth of the business will be necessary. New typologies will have to be developed and assessments made, regarding the benefits and shortcomings in respect to startup financing. The Innovation & Entrepreneurship Team at HIIG will keep you posted.