Transitioning from VC to Alternative Funding
With Juho Makkonen of Sharetribe
Transitioning from VC to Alternative Funding
With Juho Makkonen of Sharetribe
Juho Makkonen founded Sharetribe, which builds software that helps founders build online marketplaces - specifically those focused on the "sharing economy". Examples of Sharetribe projects include an Australian trailer rental service and a UK-based "ebay" of kids' clothes and items.
The soul of Sharetribe is fueled by their drive to democratise platform ownership by making it possible for anybody in the world to build and launch a successful marketplace business.
“You Either Die A Hero, Or You Live Long Enough To See Yourself Become The Villain”
- Harvey Dent in The Dark Knight (2008)
Juho and the Sharetribe team are keenly aware that “the world is…dominated by a couple of giant VC funded Silicon Valley Death Stars, which obviously have created some great innovations. But at the same time, they are also causing a myriad social, societal problems”.
They’re more interested in a world with 000s & 000s of local, sustainably funded, or government platforms thriving - this is what Sharetribe is all about.
As Sharetribe grows, Juho asks, "What's stopping us from becoming one of them?”
Tell us about your transition from traditional VC to stewardship.
We were structured as a regular schmegular start-up in the early days. We took some early-stage VC funding, but the prospect of becoming a huge unicorn and the potential consequences of that always stayed in the back of our minds. The VC route incentivises us to become another extractive, neoliberal villain, creating more harm than good in society while maximising profits.
While struggling with this conundrum, we discovered this concept called steward ownership: an old way of structuring companies, but repackaged by a German group called Purpose
There are 2 main principles of steward ownership:
1.) Companies should be purpose oriented - profit should only be a means of achieving that purpose.
2.) Companies should be SELF-GOVERNED - not owned and governed by outside shareholders, but by people close to or working for the company. With the control of the company held in a trust, it can no longer be bought or sold.
Implementing this structure posed some interesting challenges regarding fundraising: how do you raise funding for a company that cannot be sold or taken public, where all returns due to shareholders are kept, dividends cannot be distributed, or returns are capped etc.? These things are challenging, but they are implemented to ensure Sharetribe remains independent and mission-driven.
Our solution came in the form of redeemable shares.
- Redeemable Equity is an investment instrument that allows founders to repurchase shares they have sold to investors - it gives them more optionality than traditional equity.
- Shares = €120 each
- Sharetribe uses 40% of its annual profits to BUY BACK those shares.
- No voting rights
- If the company is successfully making a profit, you’ll make a solid return of 5x
When we transitioned to this model in May 2018, we raised a crowdfunding round of more than 400 people from 42 countries and over 1 million euros. We ended up buying out the shares of our earlier VC investors because they weren't super happy with us. They still hoped we would become a unicorn and make a 1000x exit. Thankfully, we're now independent!
The actual transition paperwork was completed within a week - because we realised we needed to launch the campaign quite soon. The change wasn't massive, but we ended up paying €10,000 for a lawyer.
This process is always getting easier - we have som resources linked below for other founders to use and adopt in different countries:
- How to build companies that are a force for good in society: why they decided to change their company structure
- Steward-ownership is capitalism 2.0: how their new structure works in practice
- On what matters: more about Sharetribe's mission and the positive impact they want to make in the world
How did you find the “right” investors?
One of the challenging things in fundraising was coming to terms with the fact that even nice impact funds with lovely people are still structured to have VC exit expectations. Their model still assumes that 90% of their companies will fail and just 10% of their bets will provide all the returns for their fund. That meant the size of our return needed to be nearly 30x+ of their initial investment - which was unreasonable for us.
We quickly realised that our unique structure required a particular fundraising strategy that aligned our funding with our purpose. This worked well in leading us to the right investors. If you can get the incentives right, then you can be sure that the people investing will be value aligned because they have the right incentives.
We safeguarded Sharetribe by giving out NON-VOTING shares - if one day there were personal differences between investors, drama or hostile takeover attempts, our business would be safe.
In the end, at least 400+ people believed in our model for various reasons.
One angel investor pointed out: “5x returns in 10 years translates to 17.5% annual return - which is already way better than returns on the stock market. It’s also way better than the average angel investor return. When you look at it that way, it’s a great deal!”
Generally, investors lack the imagination to envision more than one model or more than one way to get returns. In our case, we were already very close to profitability. The beauty of this model is we don't need to become a huge unicorn. We grow a bit bigger, make a bit more profit, and provide the returns we promise without excessive growth pressures.
Due to our specific structure and mission, quite a few people only wanted to invest in purpose-over-profit businesses. So even though we lost out on some impact funds or traditional VCs we still caught the right flies with the right honey. You win some, you lose some.
When is the right time?
On the one hand, it was more challenging for us when we were more mature because we had already taken some investors. So we needed to negotiate a lot with them by buying some of them out. On the other hand, it was way easier for us to raise this funding when we had traction.
How would it have worked if we raised pre-revenue, pre-production or tried to raise money with the same model? It might have been more difficult.
Sometimes it can be easier to get some investor who thinks that " this is very risky, but maybe I'll get like 1,000x return". Sometimes those conversations are naturally easier.
We probably would have had to find a way to bootstrap a way longer before raising money in that scenario.
Initially, we didn't even KNOW that something like steward ownership existed. We thought the traditional start-up structure was the only thing that existed, and we just needed to say we were a social enterprise, there was nothing wrong with unicorns, etc. It wasn't until later that we realised "this isn't at all what we want." By that point, we had already raised some money. If I were to do it again, I wouldn't have gone down the traditional route at all; it would be more challenging - luckily, bootstrapping as a business is becoming easier and cheaper.
There are no-code tools to build your tech, various ways to fake it til you make it, and do behind-the-scenes work to get that initial traction. My advice would be to keep the control 100% to yourself, and get yourself to a state of “ramen profitability” - the smallest amount of money that can keep you alive.
After that, it's much easier to go into those conversations, no matter WHAT your model is. It's also easier for you as a founder because you already have something going on here that can be sustainable and justify future investment.
Have you become a B-Corp?
Our structural change was far more profound than certification. The problem with B-Corp is you can adopt it and throw it away whenever it no longer works for you. Look at Etsy - they took it but then realised it no longer works for them. It's not a permanent thing. Whereas our restructuring is a permanent commitment - you cannot sell out once you've adopted our structure.
That naturally incentivises us to explore other things later down the line. B-Corp is more about reporting, and with that comes overhead costs; perhaps we might invest in that in the future. It's useful for many different companies to be viewed through a standardised lens around how they do their reporting, transparency, etc., but at this point, it doesn't add much value for us. But we can add those layers on top when the time is right.
On the fuzziness between for-profit and non-profit:
It's interesting for us because if we succeed financially, we will have bought out all the shares of our investors. At that point, 100% of our profits will somehow be used to advance our mission. So none of the money goes back into the pockets of our shareholders: does that make us a non-profit?
Technically, we could also still raise more capital through equity - and what do we do with that capital? We may decide to invest in another steward-owned company because thats best to advance our mission. Non-profits might not have the ability to do that.
So there's plenty of flexibility between the for-profit and non-profit; it's important to pinpoint what different parties mean when invoking these terms.
Watch the video above for more details about Juho's funding journey.
- Good intentions must come with good practice: if you don’t want to live long enough to see yourself become the villain, that needs to be reflected in your company structure. Using the same models and incentives your opposition uses doesn't make sense.
- Steward Ownership has 2 fundamental principles: profit must be used to further a purpose, and ownership cannot be in the hands of shareholders; they must belong to those close to or working for the company.
- Redeemable shares can be a good solution for founders looking to retain control of their company and providing reasonable returns to their investors).
- Transitioning from traditional structures and VC funding to an alternative is challenging and expensive - LAWYERS are EXPENSIVE. You may have to buy out your VC investors eventually.
- However, using alternative models from the beginning has its challenges - you will likely need to bootstrap to prove traction and build internal resilience.
- Sometimes, convincing investors is all about how you frame risk vs reward: “reasonable” returns from Sharetribe’s model are much better than the stock market or average angel investment returns.
- Lots of "impact" funds still have the same unreasonable return expectations of VCs
- Bootstrapping gets easier every day with the advent of no-code and how to guides guides. Bootstrap with the tiniest possible margins and costs to get evidence of traction, and sustainability - this will give you power in future conversations with investors.
- Permanent structural change is far more profound than certification. B-Corp is disposable, requires overhead to do reporting and might not add as much value as structural change.
- Terms like for-profit and non-profit can get a little fuzzy when you dig deep into the activities or returns of a company - it's not always necessary to pigeonhole yourself down to one thing. Allow for flexibility - and when speaking to others, get a sense of what these terms mean to THEM before using them as labels or identifiers.
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