Too Many Good Companies Are Trying To Fit Venture Capital Model, Not Enough Growth Capital Options

The year hasn’t been kind to startups. Startup funding dropped drastically in 2022, according to Crunchbase data. Harlem Capital Partners co-founder Henri Pierre-Jacques says too many good companies are trying to fit the venture capital model, not enough growth capital options.

In total, startups received $62.7 billion from investors to work in seed through growth stage deals in Q2, the year’s second financial quarter, which ran from April 1 to June 30. This figure marks a decline of 27 percent from Q1 of this year and a decline of 25 percent from the year-ago quarter. 

Things fared worse for Black-owned startups. There had been a surge in the funding of Black ventures during the so-called racial reckoning following the May 2020 police killing of George Floyd, but this funding has dropped off. Venture capitalists have all but ditched Black startups. Only 100 startups with a Black founder have received funding, with $100 million invested in seed rounds so far in 2022, $591 million in early-stage rounds, and approximately $876 million in later-stage rounds, according to Crunchbase. Startups with at least one Black founder received 1.2 percent of overall venture dollars invested in the U.S. in 2022.

“A company that isn’t venture backable, is still financially backable We’ve created two flaws 1) Young companies are now all called ‘startups’, implying they are tech focused when most aren’t 2) We pushed all young companies towards VC, when most shouldn’t raise venture,” tweeted Harlem Capital’s Henri Pierre-Jacques.

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Pierre-Jacques is the managing partner of Harlem Capital, where he focuses on fund strategy, partnerships, value-add opportunities, and financial analysis. Before co-founding Harlem Capital, Pierre-Jacques was a private equity Investment Professional at ICV Partners, where he evaluated and conducted due diligence on mid-market buy-out opportunities. The Harvard Business School graduate has also been an Investment Banker in the Real Estate, Gaming & Lodging Group at Bank of America Merrill Lynch, where he completed mergers & acquisitions, debt refinances, and various strategic alternatives according to his company’s website.

Founded in 2015, New York-based venture capital firm Harlem Capital is an early-stage, diversity-focused venture capital firm. It makes initial investments of $750,000 to $1.5 million. While it focuses on minority and women founders, it is shifting focus to early seed stage investments in companies that are post-product.

“There aren’t enough ways for young companies that aren’t startups to get growth capital so they have been largely forced to become ‘startups’ to target VC We have to create more financing for our early stage companies to continue innovation outside of just tech industry,” continued Pierre-Jacques’ tweet thread.

When it comes to funding, he noted, it is limited.

“I’ve personally only seen the following options – SMB loans, often small – non-dilutive funding from govt or pitch competitions – revenue based financing, which only matters post launch.”

He also added, “My view is that there needs to be an aggregation of individual capital that can provide $100k-$1M checks to non-technical companies targeting 5-10% returns These returns are too low for traditional funds given the risk so it has to be individual or public capital imo”

Not every startup should be venture-backed, stressed venture capitalist Sarah Guo, a partner in Greylock Partners, in a blog for Medium. Greylock Partners is a leading venture capital firm based in Silicon Valley

According to Guo, before seeking VC funding, companies should do a question checklist. The list is as follows:

• Can you do it without venture money? If so, and you’d be happy with the trajectory that option offers you, why raise money?
• Are you willing to trade ownership in your company (and some control) for a partner in your corner who will hold you accountable for their capital? Do you like and trust that partner and their organization?
• Are you personally ambitious to build a huge commercial business that will have an impact on many people? Is that a driving priority for you?
• Do you understand how companies like yours are valued?
• Are you focused on getting big, fast?

VC’s “are often somewhat disappointed when they find out their smart, driven, dynamic friends are working on businesses that shouldn’t be venture-backed,” said Guo.

Photo: Harlem Capital Partners co-founder Henri Pierre-Jacques, https://harlem.capital/team/henri-pierre-jacques