Village Capital in 2017: Betting big on ideas in blind spots

By Allie Burns, Ross Baird and Victoria Fram

“Clarence Bethea doesn’t have the standard background for a tech entrepreneur.”

That was the first line of a recent profile on our portfolio company Upsie, and a good tagline for the types of investments we try to make at Village Capital: entrepreneurs who might otherwise be overlooked by traditional early-stage investors.

Clarence is an African-American founder, based in Minneapolis, solving a problem that may not relate to the day-to-day experience of a venture capital investor: he’s disrupting the warranty industry. Clarence is also one of the entrepreneurs featured in Ross’ recent book, The Innovation Blind Spot, which talks about the shortcuts, groupthink and biases that cause many investors to miss out on promising entrepreneurs.

The result of these blind spots: startup investment is concentrated in

  • a few places (50% of global VC investment goes to three US states)
  • a few people (less than 15% goes to women, and less than 1% goes to people of color)
  • a few types of ideas (only 15% of “unicorn” companies are solving problems in food, health, energy, agriculture, financial services, and housing).

In 2017 we’ve all started to see what it looks like when blind spots start to catch up with the tech community. We’ve all seen the stories of well-funded companies exposed for solving a problem that doesn’t actually need solving. And worse, tech’s homogeneity has contributed in several cases to abusive behavior within companies, which has led to high-profile scandals and even caused firms to fail.

Rather than get discouraged, we prefer to keep our eyes on the long game. Here’s what we’ve learned this year about the innovation blind spots — and how to get past them.

We can rethink venture capital: updating the way we back new ideas

For most people, innovation refers to what we invest in: where’s the next Apple or Amazon? But there’s been very little innovation in how we find the next big idea. Here’s what we’ve learned this year:

  • Equity investment is not the only option. We’ve all seen the startup that flew too close to the sun: raising millions in equity before burning out under pressure to scale. It doesn’t have to be that way. When our fund approaches a company for investment, we offer a number of different investment structures, including revenue share agreements and flexible debt. Read more from Victoria about why a reliance on equity causes investors to miss out on non-traditional, high-potential companies.
  • Entrepreneurs and investors need a common language. Every founder knows: it’s easy for a potential investor to say “No”, but it’s often harder for them to explain why. This year we rolled out the VIRAL Pathway, a helpful lingua franca to guide entrepreneur-investor conversations. We’re piloting it in Virginia as a way to connect the entire state’s startup community. Read more about it here.
  • To save the American Dream, we need to think bigger. Despite the media hype, fewer companies are being started in the US than at any point in the last 30 years. This spring, Ross co-led a Kauffman Foundation convening of fifty entrepreneurs, investors, and community leaders to debate a “moonshot” idea — how could we invest $1 trillion to restore the American Dream? We released a report with six practical ideas, ranging from public policy to new fund structures. Read them here.
  • Changing the power dynamics = better investments. The average VC firm reviews 1,000 startups a year and makes 10 investments. At Village Capital, we make contact with nearly 10,000 entrepreneurs a year, get to know about 150 of them through our programs, and invest in 15 to 20 using peer-selected investment. This year we used our model to invest in 18 early-stage startups in our core sectors: Clean Energy (Autonomous Tractor Corporation, Idle Smart, M-Trigen), Health (Certintell, LivWell, Huli, Metix), Education Technology (Simulanis, Kings Learning, Upswing, Qualified), Agriculture (Masienda, Arable), and Fintech (Piggybank, Olivine Technology, Loans4SME, Finix Payments, Paykii). See all of our investments on our website.

We can bring more people and places into the conversation

“It’s not what you know, it’s who you know”. It’s a common phrase in business and in life, and unfortunately all too common in tech. Here’s what we’ve learned this year about ways to change that:

  • There’s a more objective way to evaluate founding teams. We’ve found that investors evaluate founders and founding teams on a largely subjective level: “He just gets it” or “She has grit.” So we partnered with a psychometrics consultancy to survey 500 of our alumni companies on their personality traits. The result: a tool called STAR (Startup Team Aptitude and Readiness) that has already helped us identify trends in what makes a good founder. For example: spontaneity has its downsides. Read more here.
  • Looking beyond the obvious places in emerging markets — We have offices in India, sub-Saharan Africa and Latin America, but we’ve also had FOMO in these regions by only focusing on a limited set of countries. This year we decided to change that. In Africa, we expanded our pipeline beyond Kenya — to Ghana, Nigeria, Rwanda, South Africa, Tanzania, and Uganda. In Latin America, we expanded our pipeline beyond Mexico — to Colombia, Argentina and Chile. Our regional managers wrote about why.
  • Want to build your local startup ecosystem? Focus on what you already do well. Lots of communities want to build their startup ecosystem to better support local entrepreneurs. Our VilCap Communities initiative allowed us to work with 26 ecosystem leaders around the world, and we learned some lessons, like: focus on what you know. Cincinnati is a great example — they’re building on their history as a water innovation hub to support water entrepreneurs. Read more in our April report.
  • Investors in emerging markets have a lot of blind spots. We released a report with the Bill & Melinda Gates Foundation about fintech entrepreneurs in East Africa and India, and the results confirmed something that those entrepreneurs were very familiar with: investor biases. For example: in East Africa, 90 percent of disclosed investments over the past two years went to startups with a European or North American founder. Read more about common blind spots for emerging market investors.
  • Don’t underestimate the power of networks. We’ve been partnering with the Rockefeller Foundation to answer the question: how can we increase the readiness level of high potential, under-resourced founders to receive startup capital? We’re excited about our early experiment, Pathways DC.

We can move toward “one-pocket thinking”

A major theme in The Innovation Blind Spot is the need to move past two pocket thinking. Lots of investors visualize where they spend their money by imagining two “pockets” — they pull from one pocket in order to make for-profit investments, and they pull from the other pocket to give to charity. We believe in a one-pocket mindset — investing in profitable companies that solve real social and environmental problems.

This year we saw evidence that one-pocket thinking is on the rise, and our portfolio provided evidence that solving real-world problems can definitely be profitable. Here are some updates from our one-pocket portfolio:

  • Neighborly raised $25 million to help city governments get out of debt. Neighborly helps cities crowdsource their bond financing, especially important in an era of federal budget cuts. This year they more than quadrupled their investment backing with a $25 million Series A led by The Emerson Collective.
  • ePesos raised $6 million to help Mexican small businesses. ePesos, a Mexican mobile payments startup that helps small businesses raise the financing the need, raised $6 million this October, securing one of the largest-ever startup equity raises in Mexico.
  • Constant Therapy was acquired by Digital Health Corp. Constant Therapy, a speech therapy app for people recovering from stroke, traumatic brain injury, or who have speech-language disorders, was acquired this May. The app builds customized tasks and exercises to help patients recover even after they leave the hospital.
  • Kuli Kuli closed a round from Kellogg’s and others. Lisa Curtis started a company to introduce the superfood moringa to the United States — and provide a better source of income to farmers in Africa. She closed a $4.5 million round, including the first-ever investment from Kellogg’s new venture arm.

What we’re looking forward to next year

We’re excited to work with partners across the globe to address economic empowerment and resource sustainability by backing entrepreneurs. If this 2017 recap interests you, we’re eager to work with you to create better outcomes for society.

  • For investors: If you struggle to find relevant new deals or to evaluate your opportunities in a more efficient way, we have tools and networks to help leverage your time and match you to entrepreneurs that fit your thesis. From customized deal sourcing to tool licensing, we’re excited to find ways to work together.
  • For ecosystem builders: If you’re seeking to create a more inclusive ecosystem and build stronger connections within a specific community (even your own!), we have proven tools and best practices you can license and an excited team you can consult to help skip the “I don’t know how” phase and make meaningful impact sooner.
  • For foundations and corporations: If you are interested in leveraging the power of entrepreneurship to create measurable impact in issue areas you are passionate about, or if you’re interested in engaging your employees with the latest innovations in your field, we have opportunities worldwide we would be eager to discuss.

Reach out to Dustin Shay, Director of Partnerships, at dustin@vilcap.com to talk about any of the above.

Allie Burns is Managing Director of Village Capital. Ross Baird is co-founder and President of Village Capital. Victoria Fram is co-founder of Village Capital and Managing Director of VilCap Investments, LLC. Learn more on our website and read our insights on Medium.