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Problem Defined 

A Hole in the Investment Landscape 

Currently, the standard venture capital model offers a means of bringing a group of investors together in a fund to pool resources to share in an exit strategy, typically represented by an acquisition or an IPO (initial public offering).  

 

What does not currently exist is a means for investors to pool resources in a broadly standardized manner that enables participation over time.  Specifically what is needed is an industry-wide, generally accepted legal structure that encapsulates certain clear parameters that all in the industry can understand and agree to. 

 

The various ways to provide start-up funding or additional working capital to existing companies in order to nurture growth, expansion or new products in all these various ways:  venture capital, private equity, angel groups, friends and family, debt instruments, hedge funds, growth capital or mezzanine capital, merchant banking, SBA’s, Institutional Investors, royalty funds, incubators, investment banks, credit unions, crowdfunding, etc.

 

Note that not one of these approaches uses revenue shares in their structures, but instead deal exclusively in securities equity and debt. Why is that? All company value inherently originates from revenues and profits earned from the original intellectual property. 

 

Therefore, this is an artificially created dynamic that does not represent the truth, and yet this perspective decisively closes off other available options for inventors. The implications of this far exceed what initially meets the eye. It has led us collectively in a direction that does not serve us. It has also led us to monopoly.

 

The entire financial industry and its regulatory agencies are primarily focused on high investor returns or protecting investors, while inventors are left to fend for her/himself. An inventor can do well,  as long as they know how to aggressively negotiate a good deal with their funders, but their well-being is often much less of a priority. But this is a skew in our priorities, with disastrous long-term effects for us all.

Image by Naresh Nayak

A Secondary Burden on the
Backs of Inventors

The Venture Capital Model Itself

K.I.S.S. represents the principle that most systems work best if they are kept simple rather than complicated. Therefore, simplicity is a key goal in design with unnecessary complexity avoided, which certainly bears true in the case delineated below.

 

Independent of one’s view of the strengths and weaknesses of the venture capital (VC) model, one must point to the inherent and ubiquitous flaw of the VC structure itself. A respectable standard return expectation for any VC is 20% compound return. Fees include a 2% management fee annually, and a 20% share of the upside. Because the average VC performance expectation is that 8 of their 10 portfolio companies will ultimately flounder or fail, they really need 2 companies in their portfolio to perform as home runs. They are on a perpetual search for the ever evasive ‘unicorns,” which do happen of course, but not all that often.

 

Angel Blog and many other observers argue that when VC funds enter the scene, exit timeframes can often dramatically increase from  7-12 years. As more and more time goes on, more dilution naturally occurs for equity investors due to additional higher financing rounds. The pressure keeps building, as more money in means a higher exit price is necessary for respectable investor returns. It is not uncommon to hear that some VC’s have actually blocked an earlier opportunity to sell if they cannot achieve their goal of 10-30x returns.

Why is this dynamic added onto the back of an inventor who needs some simple startup capital? One is  being forced to prove the viability of 2 business models, when only one is needed. This is where the VC design has a remarkable ‘fly in the ointment.” All these agendas are operating behind the scenes, when an inventor may not ever want to sell their company, or may at least have the right to make that choice. These various inherent complications make things a bit twisted regarding competing agendas and outcomes.

 

VC’s need the Unicorns, and yet the Unicorns often do not like or want this cumbersome arrangement. So, Unicorns remain hard to find. The VC model at its core is counterintuitive and often works against its own success, and often, against those it was designed to support.

 

Sagesse LLC has found that really big disruptors are not interested in exits forced upon them by a VC. They will avoid it if they know they can truly disrupt an industry, often waiting underground for the right situation to present itself. Sometimes they die with their inventions never seeing the light of day. And that is a tragedy for us all.

Enjoying the Nature

Conclusion

if an inventor or company wants to stay sovereign or wants to keep options open regarding a possible exit in the future, they would not be advised to use the vc model initially.


An inventor needs some leverage to navigate this landscape. The Sovereign Revenue Trust Entity® provides that.

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