Mitch Kapor legendary software pioneer and prolific Silicon Valley angel investor, recently described his belief in impact investing in very simple terms:
There are orders of magnitude more startups being founded today than ever before.
The opportunity to invest in businesses which make the world better and return capital is greater because the pool is that much greater. He is completely right.
There are more startups, and thus more mission-driven startups which are poised to change culture for the better.
Our thesis at Collaborative Fund is predicated upon this same belief. We invest in creative entrepreneurs who want to change the world for the better using technology, and believe we will be an industry-leading firm as a result of it. A deep belief in the catalyzing power of a networked, peer-powered economy drives this thesis. I will describe some of the characteristics here.
A ubiquitous internet has resulted in global distribution channels available to entrepreneurs all and sundry, limited only by their imaginations and internet connectivity.
Moore's Law has borne out. Amazon Web Services and other hosting of its kind has become a permanent fixture. The explosion of online resources in business strategy, legal, and prototyping in mobile and have meant that entrepreneurs can do much more with much fewer resources than ever before.
The social web has matured, and created networks of developers, designers, entrepreneurs, and investors around the world. As Andreessen Horowitz General Partner Balaji Srinivasan points out, these networks are not limited to physical geography.
As a result, beyond the cost of entrepreneurship dramatically falling, the top ranks of innovators have unionized. Some work in formal guilds like YCombinator, 500 Startups, and Haxlr8r, and use these guilds to lead the market, create protections around deal terms, and force transparency across the industry. Others do so informally, and the industry becomes more democratic and accessible as a result.
As entrepreneurship becomes more accessible, so does angel investing. In the United States, there has been increased public market exposure to technology post 2008, and the M&A ecosystem is as active as it's ever been. As a result, scores of entrepreneurs and investors are entering the ecosystem every season. AngelList has been a catalyst to this trend, and will likely be a permanent fixture in creating a community for startups to be discovered, and for amateur investors to professionalize.
What does this mean for a venture investor? In short: it is more crowded, competitive, and flat than it has ever been. The best investors will have to be bold about inventing and reinventing themselves, and finding deal flow in the previously unlikely corners of the globe. It is inspiring to see younger funds creating new sources of free, highly relevant content for founders to attract opportunities.
AngelList is iterating like a startup, finding more and more amazing ways of transparently connecting capital with companies. Paul Graham at YCombinator created the most powerful brand in the early stage ecosystem by inventing the MBA for startups. 500 Startups and Draper Fisher Jurvetson are reaching their arms across the world discovering and creating startup networks. The list goes on.
At Collaborative Fund, we have done our part to push the envelope in as many of these categories as possible, supporting crowdfunding, leading our content efforts with founders first in Fast Company and our video series, and microsites for the community.
There is another reason why venture capital is wise to innovate as quickly and as experimentally as it can: the management fee.
Richard Arnold of Crowdflower estimated that management fees (including carried interest), account for up to 500 basis points of economic activity around the world. That is trillions of dollars every year going to money managers. And for what? Their value is predicated upon information asymmetry. As an institution or individual, I let someone else manage my money because I believe they have access to better information than I do, and that their experience and network make them more capable of profitable investments than me. The former is surely no longer true.
AngelList, Pitchbook, Mattermark, Crunchbase, Twitter, etc. have demonstrated that information asymptotes to perfect. So then it must be that a money manager’s experience and network make them more capable.
I recently heard from the managing director of a foundation that they are interested in “getting closer to the network” and that their analysts often read the same reports as the venture associates these days. In a mature social web, networks matter more, but any individual network matters less.
When Marc Andreessen famously wrote about "Why Software Eating The World", I have to imagine he realized private equity, and more broadly money management, was not going to be immune to this trend. If venture capitalists want to justify their 1.5-3% fees and 15-25% carry moving forward, they will all have to look more like these innovative firms, market leaders, or else they will get squeezed, leapfrogged, and ultimately die.
For an entrepreneur across the continent of Africa today, the venture investor is more
relevant than it has ever been. The key to the successful among these networks, and the bottom-up trends that accompany them, is that the best ones are not insular. Forbes contributor Michael Simmons describes University of Chicago Booth School of Business theory on network science.
According to Professor Ron Burt, networks share “clustering” characteristics, whereby there is a lot of mutual friendship within the network, and as a result, ideas flow quickly within the network but very slowly outside the network. This approach creates blind spots. Those networks which show the greatest success are those which are cross-pollinated. They prominently feature “brokers”, who translate network information from one cluster to the next. For a young entrepreneur in Africa, they are natural brokers.
Most of the domestic markets on the continent are small, and so successful growth strategy is necessarily international, and often multilingual and multicultural.
Venture capital tends to be concentrated outside the continent, though that is changing quickly as the entrepreneurship community continues to globalize and democratize, but it means that entrepreneurs must speak to the cultural landscapes of their users and of their investors.
Meanwhile, the networks grow stronger day by day. Access to best practices about startups is free on the web, and networks the likes of i-Hub, Silicon Cape, Startup Hub, and Apps 4 Africa serve as rich sources fo venture investors to discover talented entrepreneurs building for large markets.
Finally, investors are taking notice.
As Kapor pointed out, driving a meaningful financial return in today’s landscape is available to more investors than ever: there are so many more startups.
But the market is competitive, and the business is changing in favor of peer networks, crowd-based funding solutions, and creative deal sourcing. As a result, the capital flows will be more distributed and diverse, and new ecosystems of startup activity will flourish as the Silicon Valley does, and likely outshine it, too.
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