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Campaigning for Capital

What can the entrepreneur learn from the politician?

Every day we are observing our political system at work.  Whether it is an election season or time for legislative battles, we see our elected representatives and follow their work on our behalf.  But is there something that entrepreneurs can learn from the workings of our political system?

On the surface, it’s difficult to find two professions more radically different than politicians and entrepreneurs. Politicians juggle a variety of issues at once, while entrepreneurs typically pour their attention toward one project at a time. Politicians are part of a large and bureaucratic public sector, while entrepreneurs stay lean and independent. At a philosophical level, politicians alter frameworks with policies and regulations, while entrepreneurs try to invent entire new frameworks.

But for all their differences, there is one important aspect in which they are very similar, or at least have to go through a similar process: campaigning for support. Just as politicians must win the hearts and minds of voters, entrepreneurs must win the hearts and minds of investors.

Let’s flesh out this comparison a bit — it’s not a perfect fit, but I think it works in a simplified form. An investment of capital is essentially a vote: it’s a vote (with dollars) that a particular business or industry is going to be successful. It then follows that investors are voters, choosing how they want to use their vote/capital. This means that entrepreneurs seeking capital are functioning as campaigning politicians seeking votes.

The issue with this metaphor — and I believe the biggest problem facing the industry right now — is that the investing space currently functions less like a democracy and more like an oligopoly, where just a few parties control the vast majority of the access. Right now, most investments are channeled through small confines, namely Venture Capital or Private Equity firms. VCs (and private equity firms) are the ones making the decisions with investors’ money, meaning that a vast majority of accredited investors are shut out from the system, and, on the other side, entrepreneurs don’t have an effective or efficient way to make their case directly to those investors (no offense, Shark Tank).

When we talk about opening up this system, most people use the phrase “democratizing access to investment.” This is shorthand for, “Why do we have to bother selling to accredited investors? We want to sell to everybody.” This is a recipe for fraud — these are unsophisticated investors who are easily swayed and may not be able to withstand risks. And even if they are investing thoughtfully and strategically, they will not have as much capital to invest, meaning that entrepreneurs will need to find many more investors.

Instead of trying to expand the base of investors, we should focus on accessing the available pool of accredited investors directly — without having to go through VC. Rather than democratizing access to investment, I call this democratizing access to capital. Of course, you can and should still invest with VCs if you like and trust them, and they provide hard-to-find value. But you should have other options, as well.

My work at iownit.us has been all about the pursuit of a more inclusive, transparent ecosystem. We’ve built our platform to provide investors and companies the ability to transact directly. We provide investors the tools to directly source and vet potential investments and we give companies tools to act responsibly toward investors. By cutting out middlemen when they aren’t necessary, the investing process becomes more efficient. And, yes, more democratic as well, as more investors directly vote with their own capital.

The benefits of this process are many. Greater access between companies and investors will promote greater accountability. Just as a state senator shouldn’t break campaign promises if she or he hopes to be re-elected by the same populace, companies must put their capital to good use if they answer directly to their investors. It brings a layer of transparency to the system and keeps people communicative.

For investors, it also helps line up incentives. For example, if you have a venture firm or investment advisor invest on your behalf, they will naturally have biases based on experiences and their compensation structure. Maybe everyone is aligned on the idea of, “Let’s find a unicorn and make as much money as possible,” but whereas you might consider 2x or 3x in a few years to be success, they would consider that a loss. That bias will have a large effect on how your money is invested.

Finally, becoming more democratic will mean becoming more diverse. In politics — and most other spheres — we’ve seen positive changes in the way various groups are represented, such as female and minority representation. Of course, there is still much to be done on that front as well, but giving all people a say gives all people a chance for representation. This is an area where the investing industry has lagged behind, but opening up to more investors means that those investors can provide capital to a greater variety of companies or projects that resonate with them.

Voting isn’t mandatory in this country, and neither is investing. But if you do vote, you want to know that your vote matters, that elections are transparent, and that the candidates will be responsible and accountable for what they do with your vote. Let’s make it the same for investing.

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