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Re-plumbing business financing with alternative capital structures

ImpactAlpha, October 10 – As many as four out of five young U.S. businesses feel they’re “falling through the cracks” as they struggle to access venture capital or bank financing.

Last month’s Alternative Capital Summit in Denver collected “a whole roomful of people ready to roll up their proverbial sleeves and go to work figuring out the why, what, how of alternative capital structures,” report Sphaera Solutions’ Astrid Scholz and Candide Group’s Aner Ben-Ami. Some of the emerging solutions:

  • Financing based on revenue or profit-sharing can be suitable for companies earning  enough in profits to sustain growth and cover distributions to investors. These deals can be structured with revenue-based dividends, royalties, or share buybacks.
  • Recapitalization schemes can allow companies to buy out their investors, using either cash or debt.

Both approaches prioritize profits over growth and reflect a completely different way of thinking about early-stage funding than typical venture capital. For some of the participants, “alternative structures such as revenue-based finance are just one small part of a broader agenda of alternative ownership and governance, which would support mission-first businesses,” say Scholz and Ben-Ami.

Organically Grown Co., a Pacific Northwest produce distributor, for example, is working on a trust ownership structure that repays investors via dividends and profit shares.

The Kauffman Foundation’s Victor Hwang told the summit that capitalism is like a 100-year-old house with plumbing that’s not fit for 21st century needs. “When you replace the plumbing in an old house,” say Scholz and Ben-Ami, “you need to do everything.”

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