Patient Capital — The Investment Strategy for 2021
If there had to be one word that defined 2020, it would be ‘uncertainty.’ Entrepreneurs and startups heading into the new year are doing so with a renewed focus on long-term stability and success. And as many early-stage companies begin to reevaluate their processes, funding strategies are on the top of their lists.
Enter the startup funding method designed for resiliency — patient capital. Patient, or long-term, capital is defined by the investor’s willingness to forgo immediate returns with the expectation of more substantial returns in the future. When compared with traditional funding methods that prioritize instant profit and market share, a patient capital approach is uniquely attuned to startup needs in the new year.
Pitfalls of ‘Rushed Capital’
When considering some of the drawbacks of a ‘rushed capital’ approach, there is perhaps no better 2020 example than that of the rapid rise and fall of Quibi.
With a near $2 billion raised in funding in under six weeks, Quibi quickly caught the attention of investors and consumers alike. With this impressive amount of capital came significant expectations to quickly turn a profit; and so began Quibi’s rapid rollout to an unpredictable market. But with the company’s notable funding and growing of A-list talent how could this platform fail? Pretty easily, in fact. It is without question that this rush capital put the company in a tricky position, preventing it from adjusting to changes in the streaming market as the pandemic unfolded. As the world began to quarantine, the platform designed for mobile devices found itself with a suddenly immobile consumer base, competing against established OTT heavy hitters like Netflix and HBO.
Despite these struggles, their lineup of impressive investors seemed largely vacant when it came to contributing insights into strategy and decision making. In contrast, patient capital looks to create a collaborative environment between entrepreneurs and their investors, prioritizing stakeholders over shareholders, and offering companies meaningful advice and resources to set them up for long-term success. As Quibi proved, in a rather dramatic fashion, capital can only take you so far.
Startups Are Taking Notice
It’s no surprise that startups have begun to catch on to the overwhelming risks posed by venture capital funding. We’ve seen the market react accordingly, with many startups turning down billions of dollars of venture capital funding in favor of finding “the right investor.”
Startups are finding alternative ways to raise funds, and even the SEC is following suit, by easing Reg A regulations. But even further, startups are prioritizing the resources investors can offer besides mere capital. Especially heading into the new year, startups recognize the previously neglected the strategic advice and collaboration dedicated investors can offer. Some investors are even going beyond that, allowing their portfolio companies to tap their vast network for everything from funding to marketing to general mentorship opportunities. For some early-growth stage companies, having the ability to expand and hire how and when they want to is reason enough to turn down traditional venture capital funding.
Where Do We Go from Here?
As part of the investment community, we at Seismic Capital understand the need to support our startups and have a seat at the table for the decision making process. Investors need to provide a collaborative environment to offer real guidance, idea exchange, and mentorship in face of adversity to ensure their investments are well planned and supported. Beyond capital, startups should look to investors that can also offer the non-material support they need to maintain their business. Capital will only take you so far, and true partners to your company will offer the insights on your market but take it a step further to ensure your finances, employee engagements, and technology support are working for you.
About the author: Alice P. Neuhauser is Seismic Capital Company’s Chief Financial Officer and Treasurer. Since May 2017, Neuhauser has served as President of Gramarye Media, Inc., helping to develop the business model and business plan for the start-up IP incubator. From 2002 to 2018, she served as the Responsible Officer and Manager of The Kushner-Locke Company and was responsible for all financial and operational functions for the company through its bankruptcy and post-restructuring. Alice Neuhauser studied at Harvard University and UCLA Anderson School of Management.