Capital-as-a-Service: A New Operating System for Early Stage Investing
At Social Capital, we’re most excited about entrepreneurs that challenge assumptions, that take a non-consensus view of the world, and then validate that view with experiments and data. It’s only natural that we’d apply that same lens to our own discipline. In that process it’s become clear that some of the assumptions upon which early-stage venture investing was founded don’t hold to be true. With this insight, we’ve been working on something with the potential to disrupt the status-quo and accelerate our mission: capital-as-a-service, a new operating system for early-stage investing.
Before I talk too much about the solution, let me offer some background on how I first came to understand the problem. I’ve only been a professional investor for two years, but I started picking startups long before I added “investor” to my LinkedIn profile. I’ve spent most of my career in product management, building B2B SaaS products such as SurveyMonkey, Optimizely, and DocuSign. In the making of these unicorns I was part of several traditional venture fundraising rounds. As an operator, I found the process deeply frustrating, inefficient, opaque, arbitrary, and most bewildering of all: distracting! Energy that should have been focused on moving the business forward was spent instead on pretty PowerPoints and superficial pitch meetings.
Two-and-a-half years ago, as I was looking for the next opportunity to get excited about, I joined Social Capital as an Entrepreneur-in-Residence still saying I would NEVER become an investor. But, as I met the team and found a set of compatriots ready to question the same assumptions that I had questioned and lean into the same non-consensus views that I had been forming, I realized that becoming an investor didn’t have to mean I was part of the problem. In fact, it could be an opportunity to be part of the solution. Since joining Social Capital I’ve immersed myself in the world of venture investing and have realized that the consensus view of the industry today is flawed.
It is not true that there are too many dollars in venture.
Today it seems fashionable to say that there’s too much money in venture. You can look left and right and see companies solving one-percenter problems raising new rounds of funding when they should be failing fast and cheap. Or companies incinerating heaps of venture dollars in spectacular fashion that would have been better served by less funding and more focus. But, it’s not because there’s too much money, it’s because that money is chasing too few opportunities.
At the same time, the world abounds with big, weighty, unsolved problems and among the 7.5 billion people on the planet there is no shortage of talented people who aspire to solve them. So, it’s not that there are too many dollars in venture, we’d argue in fact that there are too few. This was the belief that Social Capital was founded on, and we’ve sought out the most challenging problems from the start. However, across the industry at large, the allocation of dollars is highly inefficient. While this dynamic persists, we all lose: founders, employees, investors, and most of all the society that stands to benefit from novel solutions to the world’s hardest problems.
It is not true that great ideas come only from Silicon Valley.
Many of the world’s hardest problems are felt unevenly across the globe, and often the entrepreneurs with the most context, the most authenticity, the most expertise, and the most drive to solve them sit closest to the problems themselves. From connectivity to labor market efficiency to healthcare access, many of these problems aren’t acutely experienced in the small number of financial hubs around the world. And, the entrepreneurs best positioned to solve these problems don’t always look or sound a certain way, don’t always mingle with the right people, don’t always know the secret handshake. So, many of these ideas, many of these entrepreneurs, many of these teams struggle to raise meaningful amounts of capital. I’ve met with founders and teams on six continents, and I can tell you from personal experience that they don’t struggle to raise capital for lack of talent or drive or ingenuity, they struggle because they don’t match the traditional mental model of a Silicon Valley VC deal.
It is not true that data can’t be applied to venture.
The reason that too many dollars are chasing too few opportunities is because the anatomy of traditional venture capital hasn’t changed in the past 30 years. Face-to-face interactions and human judgement, followed by (at best) a few thin Excel models and relationship-driven diligence creates a high propensity for bias and a low propensity for scale. This is a classic example of a sector ripe for disruption. Today, every industry is being revolutionized by the application of data: from healthcare to logistics to media and beyond. If the operative question is whether early-stage investment decisions can be better made with data than intuition, using virtually every other discipline as a guide the answer is almost certainly yes.
This is not a new idea for Social Capital. Data has been in our DNA from the start. Our Partners have previously been operators, applying data to build both unicorn startups and multi-hundred-billion dollar public tech companies. We’ve built Social Capital on the belief that this data-oriented approach would yield not only the best investment decisions, but also offer the most actionable insights to the entrepreneurs we partner with to make their companies best-in-class. And we’ve proven the model time and again, many of our most storied investments were not based on intuition or gut or affinity or bias, but on data, benchmarks, and empirical evidence. To date, the application of this data-based discipline within our decision making framework has been fairly manual. We’ve shared our methodology for assessing product-market fit, and each time our Venture and Platform teams collaborate to apply it by hand we learn something new about what makes a successful business model, but to truly achieve global scale we must augment this solution with software. That’s why we started experimenting with an approach we call “capital-as-a-service”, a new operating system for early stage investing, built on the principles of data-based decisions and architected for global reach and scale.
What we’re working on…
We will continue to grow our investment practice focused on the core sectors and geographies we already address, and continue to apply and refine our data-driven methodologies in a high-touch model. Capital-as-a-service will run over-the-top and allow us to scale to new geographies and sectors. We’ve modeled our approach to capital-as-a-service much the same as the startups we admire. Six months ago we kicked off a stealth experiment to develop an MVP, both assembling the underpinnings of an infrastructure platform and developing the basic customer experience for the entrepreneur. In our pilot, we evaluated nearly 3,000 companies and committed to funding several dozen of those, across 12 countries and many sectors, without a single traditional venture pitch. In fact, in most cases the data-driven approach allowed us to reach conviction around an investment opportunity before we ever even spoke to the founders. Worth noting that when we recently looked at CEO demographics, we found that 42% were female and the majority nonwhite.
The true measure of this experiment, however, isn’t in volume, but in the positive feedback from entrepreneurs. It has been, in a word, overwhelming. The scale limits and scope of our platform is being seriously tested by the level of demand we’re seeing, and the qualitative feedback has been overwhelmingly positive with entrepreneurs appreciating the speed, ease, and transparency of the process. No hoops, no $7 artisanal coffee chats, no designer pitch decks, no bias, no politics, no bullshit. Just the best teams with the best ideas, the best execution, and the best metrics funded on the merits of their achievements, not the status characteristics of their founders or the exclusivity of their professional networks.
We’re now dedicated to taking this from MVP to a scale where it can truly democratize access to capital. We’ve assembled a team of technical talent to build the platform, a coalition of like-minded global investors to help identify the best opportunities wherever they sit around the world, and we continue to seek out entrepreneurs aiming to solve the world’s hardest problems. If any of these sound like you, please drop us a line here. If you’re just intrigued by this idea, watch this space - there’s much more on the way…