Why venture capital can be a trap for entrepreneurs

Venture capitalists do not invest in female and minority entrepreneurs in any significant way. Nathalie Molina Niño explains several viable fundraising alternatives that won't require founders to give up control of their companies.

Nathalie Molina Nino: So women entrepreneurs currently are getting about 2.5 percent of all venture capital. It’s not the only source of funding, but it’s a really great indicator on how we fare in the space. And that’s a fairly commonly understood statistic.

But the statistic that I like to feature—which is the one that nobody ever talks about—is what percentage of funding is actually going to Women of color, and that’s a much more dismal number. That’s actually—depending on what city you look at it’s between 0.1 percent or 0.2 percent, which is to say that women of color and companies founded by women of color aren’t really even statistically relevant as well.

The fact that women of color and companies founded by women of color don’t really even play in the space is particularly jarring if you think about the fact that most companies in this country are actually founded by women of color. So it’s bad that we’re not getting funding, but it’s particularly bad given that we seem to be the source of innovation and probably the most entrepreneurial community of all.

So venture capital is I often call it like the house flipping version of investments, right. Like house flipping shows, it has become the most popular and the most visible and the most sort of prolific version of investing that’s out there, or even of capital sources. But there’s way more to the world of investing and securing capital than just venture capital, right?

There’s long view investments, there’s debt, there’s crowdfunding. There are many different options when it comes to getting funding, but the one that dominates the headlines is venture capital. You get to be on the cover of things when you’ve secured a big series A. You don’t really get a whole lot of press when you secure a line of credit or a loan; it’s just not perceived as sexy.

And yet companies need debt in order to be successful. Companies that are women-led tend to be more successful at getting crowdfunding dollars than they are at getting venture capital dollars.

So in these areas, funding that don’t get a lot of publicity are actually really critical because they are doing a better job of servicing women who own businesses.

And so the thing that I always tell founders is that VC might be for you, it might not be. But let’s not romanticize what it is and how it works. Please do not take venture capital from any investor, no matter what terms they’re giving you, unless you’re willing to be fired from your own company—which is what happens to a lot of people who end up taking venture capital.

The bottom line for me is that there are many different sources of capital. It’s not a one size fits all regime, and we get fed one single product.

And the reality is is a smart founder has to look around to see what their other options are. And I would say that this is not just a “nice to have,” this is a critical, critical thing.

And part of the reason that I worry about that, there’s a hack in my book that comes from an amazing investor called Don Rayvon, and he talks in the book about how he knows “how this movie is going to end,” which is this idea that we don’t have enough women and people of color getting debt, for example. And what I’m worried about, and what he’s worried about, is that in ten years we’re going to look back at the statistics and we’re going to see that we had too many women and people of color accepting—blindly—horrible terms and horrible venture capital packages. And in ten years when we look back what’s that going to produce? It’s going to produce a whole series and maybe even a whole generation of entrepreneurs that were disproportionately more likely to fail.

And I worry that in ten years when we look back at a statistic like that, people aren’t going to blame an unbalanced capital stack. They’re not going to blame the fact that people should have taken debt and they didn’t.

They’re going to look at stats that simply say that women and people of color fail at a greater rate than anyone else. And I want that not to be the end of our movie.

Some of my favorite alternatives in terms of getting funding are things like loans, are things like lines of credit. But there are some that are even less [negatively] impactful to your business.

They’re a little more work, but the country is now speckled—all the country, I can’t think of a state that doesn’t have competitions, that doesn’t have pitch events where you can go spend a little bit of time and energy and get money for your company—especially in those early days—because you tell a good story, because you have a great idea and especially money that doesn’t actually have to require that you give away equity in your company.

Another one of my favorite sources of funding is crowdfunding. And there are a couple of different kinds, right?

There’s crowdfunding where you give people T-shirts or you presell whatever product you’re trying to manufacture. In that case you’re not giving up any equity. You’re giving people good will, you’re giving people product, you’re giving people a sneak preview into what you’re working on, and in exchange you’re getting meaningful capital.

Women tend to be disproportionately more successful at crowdfunding campaigns. There are different studies that say why that might be, and I suspect that it’s because their social networks are strong, and I also suspect it’s because we’re shut out of other forms of capital.

But there’s also equity crowdfunding where you are actually giving a piece of your company away much like you’re doing with venture capital. But in the equity crowdfunding space the terms tend to be better, so you’re not giving away as much and you’re not giving away nearly as much control.

Venture capitalism is glamorous. But is it smart? Securing a huge series A investment round can get founders on the covers of magazines, but VC can take as much as it gives. CEO of Brava Investments Nathalie Molina Niño offers a straightforward piece of advice to all entrepreneurs: "Do not take venture capital from any investor, no matter what terms they’re giving you, unless you’re willing to be fired from your own company," she says. For female and minority entrepreneurs, this advice is even more important—yet so much harder to follow once you know the stats. Female-founded companies currently get just 2.5% of all venture capital. For women of color, that number drops down to 0.2%. If this underfunded (and potentially desperate) group accepts poor venture capital packages with horrible terms, it can only end in disaster, Molina Niño warns. "It’s going to produce a whole series and maybe even a whole generation of entrepreneurs that were disproportionately more likely to fail... They’re going to look at stats that simply say that women and people of color fail at a greater rate than anyone else." While venture capital is the most romanticized type of investment, Molina Niño outlines several fundraising alternatives that let founders stay in control of their companies. This is the advice every entrepreneur, regardless of demographics, needs to hear. Nathalie Molina Niño is the author of Leapfrog: The New Revolution for Women Entrepreneurs

Are we really addicted to technology?

Fear that new technologies are addictive isn't a modern phenomenon.

Credit: Rodion Kutsaev via Unsplash
Technology & Innovation

This article was originally published on our sister site, Freethink, which has partnered with the Build for Tomorrow podcast to go inside new episodes each month. Subscribe here to learn more about the crazy, curious things from history that shaped us, and how we can shape the future.

In many ways, technology has made our lives better. Through smartphones, apps, and social media platforms we can now work more efficiently and connect in ways that would have been unimaginable just decades ago.

But as we've grown to rely on technology for a lot of our professional and personal needs, most of us are asking tough questions about the role technology plays in our own lives. Are we becoming too dependent on technology to the point that it's actually harming us?

In the latest episode of Build for Tomorrow, host and Entrepreneur Editor-in-Chief Jason Feifer takes on the thorny question: is technology addictive?

Popularizing medical language

What makes something addictive rather than just engaging? It's a meaningful distinction because if technology is addictive, the next question could be: are the creators of popular digital technologies, like smartphones and social media apps, intentionally creating things that are addictive? If so, should they be held responsible?

To answer those questions, we've first got to agree on a definition of "addiction." As it turns out, that's not quite as easy as it sounds.

If we don't have a good definition of what we're talking about, then we can't properly help people.

LIAM SATCHELL UNIVERSITY OF WINCHESTER

"Over the past few decades, a lot of effort has gone into destigmatizing conversations about mental health, which of course is a very good thing," Feifer explains. It also means that medical language has entered into our vernacular —we're now more comfortable using clinical words outside of a specific diagnosis.

"We've all got that one friend who says, 'Oh, I'm a little bit OCD' or that friend who says, 'Oh, this is my big PTSD moment,'" Liam Satchell, a lecturer in psychology at the University of Winchester and guest on the podcast, says. He's concerned about how the word "addiction" gets tossed around by people with no background in mental health. An increased concern surrounding "tech addiction" isn't actually being driven by concern among psychiatric professionals, he says.

"These sorts of concerns about things like internet use or social media use haven't come from the psychiatric community as much," Satchell says. "They've come from people who are interested in technology first."

The casual use of medical language can lead to confusion about what is actually a mental health concern. We need a reliable standard for recognizing, discussing, and ultimately treating psychological conditions.

"If we don't have a good definition of what we're talking about, then we can't properly help people," Satchell says. That's why, according to Satchell, the psychiatric definition of addiction being based around experiencing distress or significant family, social, or occupational disruption needs to be included in any definition of addiction we may use.

Too much reading causes... heat rashes?

But as Feifer points out in his podcast, both popularizing medical language and the fear that new technologies are addictive aren't totally modern phenomena.

Take, for instance, the concept of "reading mania."

In the 18th Century, an author named J. G. Heinzmann claimed that people who read too many novels could experience something called "reading mania." This condition, Heinzmann explained, could cause many symptoms, including: "weakening of the eyes, heat rashes, gout, arthritis, hemorrhoids, asthma, apoplexy, pulmonary disease, indigestion, blocking of the bowels, nervous disorder, migraines, epilepsy, hypochondria, and melancholy."

"That is all very specific! But really, even the term 'reading mania' is medical," Feifer says.

"Manic episodes are not a joke, folks. But this didn't stop people a century later from applying the same term to wristwatches."

Indeed, an 1889 piece in the Newcastle Weekly Courant declared: "The watch mania, as it is called, is certainly excessive; indeed it becomes rabid."

Similar concerns have echoed throughout history about the radio, telephone, TV, and video games.

"It may sound comical in our modern context, but back then, when those new technologies were the latest distraction, they were probably really engaging. People spent too much time doing them," Feifer says. "And what can we say about that now, having seen it play out over and over and over again? We can say it's common. It's a common behavior. Doesn't mean it's the healthiest one. It's just not a medical problem."

Few today would argue that novels are in-and-of-themselves addictive — regardless of how voraciously you may have consumed your last favorite novel. So, what happened? Were these things ever addictive — and if not, what was happening in these moments of concern?

People are complicated, our relationship with new technology is complicated, and addiction is complicated — and our efforts to simplify very complex things, and make generalizations across broad portions of the population, can lead to real harm.

JASON FEIFER HOST OF BUILD FOR TOMORROW

There's a risk of pathologizing normal behavior, says Joel Billieux, professor of clinical psychology and psychological assessment at the University of Lausanne in Switzerland, and guest on the podcast. He's on a mission to understand how we can suss out what is truly addictive behavior versus what is normal behavior that we're calling addictive.

For Billieux and other professionals, this isn't just a rhetorical game. He uses the example of gaming addiction, which has come under increased scrutiny over the past half-decade. The language used around the subject of gaming addiction will determine how behaviors of potential patients are analyzed — and ultimately what treatment is recommended.

"For a lot of people you can realize that the gaming is actually a coping (mechanism for) social anxiety or trauma or depression," says Billieux.

"Those cases, of course, you will not necessarily target gaming per se. You will target what caused depression. And then as a result, If you succeed, gaming will diminish."

In some instances, a person might legitimately be addicted to gaming or technology, and require the corresponding treatment — but that treatment might be the wrong answer for another person.

"None of this is to discount that for some people, technology is a factor in a mental health problem," says Feifer.

"I am also not discounting that individual people can use technology such as smartphones or social media to a degree where it has a genuine negative impact on their lives. But the point here to understand is that people are complicated, our relationship with new technology is complicated, and addiction is complicated — and our efforts to simplify very complex things, and make generalizations across broad portions of the population, can lead to real harm."

Behavioral addiction is a notoriously complex thing for professionals to diagnose — even more so since the latest edition of the Diagnostic and Statistical Manual of Mental Disorders (DSM-5), the book professionals use to classify mental disorders, introduced a new idea about addiction in 2013.

"The DSM-5 grouped substance addiction with gambling addiction — this is the first time that substance addiction was directly categorized with any kind of behavioral addiction," Feifer says.

"And then, the DSM-5 went a tiny bit further — and proposed that other potentially addictive behaviors require further study."

This might not sound like that big of a deal to laypeople, but its effect was massive in medicine.

"Researchers started launching studies — not to see if a behavior like social media use can be addictive, but rather, to start with the assumption that social media use is addictive, and then to see how many people have the addiction," says Feifer.

Learned helplessness

The assumption that a lot of us are addicted to technology may itself be harming us by undermining our autonomy and belief that we have agency to create change in our own lives. That's what Nir Eyal, author of the books Hooked and Indistractable, calls 'learned helplessness.'

"The price of living in a world with so many good things in it is that sometimes we have to learn these new skills, these new behaviors to moderate our use," Eyal says. "One surefire way to not do anything is to believe you are powerless. That's what learned helplessness is all about."

So if it's not an addiction that most of us are experiencing when we check our phones 90 times a day or are wondering about what our followers are saying on Twitter — then what is it?

"A choice, a willful choice, and perhaps some people would not agree or would criticize your choices. But I think we cannot consider that as something that is pathological in the clinical sense," says Billieux.

Of course, for some people technology can be addictive.

"If something is genuinely interfering with your social or occupational life, and you have no ability to control it, then please seek help," says Feifer.

But for the vast majority of people, thinking about our use of technology as a choice — albeit not always a healthy one — can be the first step to overcoming unwanted habits.

For more, be sure to check out the Build for Tomorrow episode here.

Why the U.S. and Belgium are culture buddies

The Inglehart-Welzel World Cultural map replaces geographic accuracy with closeness in terms of values.

Credit: World Values Survey, public domain.
Strange Maps
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Evolution proves to be just about as ingenious as Nikola Tesla

Credit: Gerald Schömbs / Unsplash
Surprising Science
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A study finds that baby mammals dream about the world they are about to experience to prepare their senses.

Michael C. Crair et al, Science, 2021.
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