Conservation with Shruti Shah, Founder, By Design Capital, a Step Fund
Creating an Alternative Funding Source
July 29, 2020
- What problem is your business solving?
I am creating a new asset class, called a STEP Fund, that is an alternative to venture capital. The idea behind the STEP fund is to provide an alternative form of funding for entrepreneurs who don’t want to take venture capital but who do need financing to fuel the growth of their businesses.
Venture capital is a very specific type of financing that encourages growth at all costs. In doing so, there are a lot of casualties. There are a lot of good businesses that can’t grow on the timeline that venture funds need them to. The incentives for the entrepreneur and investor aren’t always aligned.
My hope is that with an alternative structure, we can realign the incentives of entrepreneurs and investors toward sustainable and responsible revenue growth.
The second reason we designed STEP is that access to capital is really hard. It is especially hard if you are a woman or a person of color or you don’t live in New York or L.A. or San Francisco. Statistically, we know these businesses are better investments as there has been research that shows businesses founded by women and people of color return more capital than those founded by white men. In addition, research suggests that companies with diverse founding teams actually outperform those with homogenous teams.
I see a huge opportunity to create a viable alternative and rethink who has access to this capital.
This is how the fund works:
With our solution, we make an equity investment in a company we diligence. The company slowly pays back the investment over a 10-year period, by allotting a percentage of revenue to the fund investors. It’s kind of like a stock buyback or receiving a loan based on collateral or future earnings. The big difference is that our incentives are aligned because the goal for both the investor and the company is to grow revenue sustainably.
- What is your background?
I started my career as a public school teacher, then became co-founder and COO of Move Loot, which was an online marketplace for used furniture. I helped grow that business, and we raised about $22 million in venture capital.
The business grew quickly and exposed me to some of the challenges that come with venture capital. The business isn’t around anymore, and I think the demands that venture placed on dramatic growth are a big reason. We were first-time entrepreneurs trying to weigh the desires of our investors and their need for us to grow quickly with the actual needs of our business.
Then, I became an entrepreneur-in-residence at Silicon Valley Bank, where I worked as a consultant and advisor to many entrepreneurs. It was great to understand other founders’ experiences with growth. I started asking myself, was my experience what others also experienced? Do they have issues accessing capital or growing their business at the pace required by venture?
I started to believe that the high failure rate of venture-backed companies wasn’t due to bad business ideas. Instead, I think that perhaps not every company is meant to be a billion-dollar business in three years. I decided to fill the need for a different type of financing to support those businesses.
I have also spent a lot of time in ecosystems that aren’t big city hubs like Los Angeles or San Francisco or New York. There are so many incredible companies being built all over the United States. Access to capital is hard, especially when you aren’t in these big cities or if you don’t fit the profile of a “typical founder.” Having this additional capital helps businesses hire more people, beef up marketing, spend on inventory, or operating costs. There are so many reasons people need an infusion of capital. Finding capital can be a real challenge, particularly if you don’t have access to a network of investors.
- What obstacles have you faced in your business/endeavor?
This has been an incredibly slow process, and we’re still very much in the process of raising money. But we’ve been through many drafts of what the model will look like and have spent a lot of time getting feedback in hopes of landing on the right structure. It’s been a challenge to figure out what is right, but at some point, we just have to put a model out there and tweak it as we go.
We are also working to make it really clear who our offering is for. We won’t be a one-size-fits-all approach for anyone who doesn’t want venture capital. We have clear parameters; for example, every company needs to have revenue. There is also thought that goes into the growth rate and margins. We aren’t for anyone who has ever had an idea, but for those who have some traction.
One of the big things about entrepreneurship is that there is a lot you can do and some things that are hard to learn on-the-fly.
- What are the metrics that are important for STEP Fund in deciding who to invest in?
The big thing for us is the company’s team, is it diverse? What are their backgrounds? Where are they located? We also want to back founders who are thoughtful about the growth of their business and want to be intentional about building a diverse team.
- How have external advice and partnerships impacted your business decisions?
A big part of this has been talking to founders to gain their insights and advice into what they wished existed. We’ve also talked to venture capitalists who see so many good companies that just aren’t a fit for the venture model because they aren’t meant to be billion-dollar companies in a short time. I’ve had many conversations with people on both sides of the aisle who agreed that something else should exist.
- What tools have you used to grow professionally? Are there any communication or technological innovations that helped your company?
On the tax side, there are some benefits to investors in terms of tax benefit to holding stock in small businesses. But at the end of the day, we are still structured like a venture fund because we are an equity investment.
- What are your biggest sources of inspiration?
The biggest sources of inspiration for me are people who push the envelope–women and people of color who have the courage to think outside of the box and do things differently. They may be criticised, but they do it anyway. They aren’t necessarily famous, but when I meet people who are doing hard things, it’s incredibly inspiring.
- What’s the biggest piece of advice you would give yourself ten years ago, knowing what you know now?
Be open to not having a plan. Early in my career, I always felt like I needed a plan. But nothing in my life has gone according to any sort of plan.
If you told me when I was a senior in college that I would start a company and now a fund, I probably would have laughed. I thought I would go to law school, work in policy, become a lawyer, and maybe run a non-profit. Running a for-profit business seems so far from anything I would have imagined, but I’m grateful for the many varied experiences I’ve had.
- What are you hoping for in your business in the next five years?
I hope that we can deploy $50-$100 million dollars to amazing companies to grow while simultaneously helping people rethink what it means to grow a successful company.
- Do you have any personal goals for the next five years?
I think amidst all of the uncertainty in the world right now, I really just want to continue to grow and learn and be open to all sorts of opportunities.
Date of Conversation: April 3, 2020