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Building Blocks for a new kind of Venture Capital

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A new kind of venture capital for purposeful ventures is something I’ve been exploring for a number of years and was recently reenergized by some conversations at the OpenEverything retreat in September. I’m writing this now as I head to SoCap08 and looking forward to testing some of these ideas against other emerging models (e.g. Enterpreneur Commons) and amongst the worlds leaders in social venture investment. I’ll follow-up this post with any big insights that emerge and in the meantime I’m interested in any comments about what I’ve started framing below. Feel free to contribute in the comments or email me directly. And of course if you are buliding another model – feel free to take anything you gain from this and use or remix freely – just ping me and let me know what you are working on and share alike.

The context of venturing is changing and this next generation of ventures requires new models of investment that are more compatible with the new context.  There are two main influences which shape the building blocks for a new kind of venture capital.

Influences on Venturing

  1. Increasing rate and depth of systems shifts
    Markets and industries are coming unhinged (e.g.  financial, music, automotive, airline, etc.) and game-changing ventures seem to ‘come out of nowhere’ (e.g. Craigslist and Google). It means that any venture is subject to drastic, unanticipated changes in their operating context making conventional planning less effective or reliable. Two major drivers of these shifts are changes in the energy and financial markets along with the pervasive adoption of communication technologies and an emergent culture of people comfortably communicating and collaborating with greater numbers of people independent of geography or in-person relationship. These shifts affect everyone, often in unexpected ways and at unexpected times.
  2. A new mode of organization
    A by-product of the underlying shifts above is a new mode of organization that has been exemplified in open source software, creative commons, and activism. This mode of organization features increased permeability in the production of the organization, more rapid iteration, and evolution through intentional emergence vs. long-term planning and resource ownership. It also draws more strongly from social and human capital than it does financial and proprietary intellectual capital.

Building Blocks for a new kind of Venture Capital

  1. Focus on outcomes vs. sectors
    The frontiers of these changes are at the edges and intersections of sectors – in places where technologies and trends challenge or circumvent current systems. These frontiers are thriving on the the Increasing complexity in our society and blurring conventional silos and sectors. Focusing directly on desired outcomes opens the seeker to the range of frontiers that influence the possible pathways to achieving the desired outcome versus being constrained to traditionally defined silo.  Focusing on specific outcomes also favors smaller, more fluid pools of capital able to evolve along with the frontiers.
  2. Surf and surface the frontiers
    As opposed to ‘pulling’ deal-flow through conventional channels, the new kind of venture capital needs to be immersed in the frontiers to uncover potentially game changing patterns. Practically this can be accomplished in part by participating in and stimulating public dialogue on these patterns – such as by blogging and commenting on other blogs relevant to the frontiers. This serves to engage a broader range of participants and fosters the identification, emergence, and advancement of innovative solutions targeting the desired outcome.
  3. Employ comprehensive capital (financial + social)
    With the increasing importance of social and human capital relative to financial and proprietary intellectual capital, the new kind of venture capital must apply the same attention to the management and leverage of social capital as they have conventionally applied to financial capital. The value of social capital lies in facilitating connections and trust among the collective social capital networks of those involved – linking several degrees of connection among all nodes of the collective network. Social capital has long been employed in venture capital by ‘bringing the rolodex’. It is still however largely untapped and represents a high ROI investment opportunity entirely compatible with financial capital and the needs of the new mode of organization.
  4. Invest in intentional emergence (systems + engagement)
    This is about building a system from which the most effective actions will emerge vs.  building a company to execute a pre-determined plan. This accomplished by designing a ‘viable venture system’ and the building the capacity to continually engage the right resources at the right time to produce the venture. Together these things fuel emergence and enable a venture to rapidly iterate the best solution for an evolving context. For that emergence to be intentional, however, the venture must be firmly grounded in a deep understanding of its purpose, values, theory of change, and have a clearly articulated goal.
  5. Serve as a conduit for capital
    Focusing on outcomes vs. sectors means a shift away from larger investment funds toward highly targeted ‘expeditions’. It also presents and opportunity for investors to assemble portfolios of target outcomes vs. a portfolio of funds. Actively employing comprehensive capital (financial and social) also means porftolios could reflect social and financial capital invested in individual outcomes and deals while returns would include quantitative metrics and qualitative stories. The viable venture system for this new kind of venture capital must cost-effectively facilitate the engagement of a broad number of participants in flowing financial and social capital among capital sources, targetted outcome explorations, and specific ventures.

One possbile model for a new kind of venture capital might be a conduit for capital with the following features:

  1. Distributed investment and deal flow – “Outcome Expeditions”
    Engage individuals to conduct ‘outcome expeditions’ - . These people would be expected to blog and comment on others blogs on the frontiers related to specific outcomes.  They would also be able to make small investments in ventures (e.g <$25k/investment and >3 investments/yr.) that would meaningfully improve the venture’s system or advance key stakeholder engagement. This would be done with minimal paperwork and would help draw deal-flow and attention on the frontiers. Investees would then be listed in a ‘venture commons’ as a ‘frontier venture’.
  2. Personal venture and outcome portfolios
    Enable investors to invest social and financial capital directly in either frontier ventures (as deals arise) and ‘outcome expeditions’. Their portfolio would track social and financial capital invested as well as quantitative and qualitative returns generated. Furthermore, the portfolios also become a gateway to the frontiers of interest for them, feeding the blog posts, comments and other information generated in the outcome expeditions and investee ventures. Investors would have to commit a minimum amount of social and financial capital on an annual basis to participate in the platform but would be free to allocate those funds as they saw fit over the year.
  3. Active employment of social capital
    Tracking social capital involves tracking contributions and connections made for expeditions and ventures either directly or indirectly. Ventures and expedition leaders are expected to report on returns realized from specific social capital investments where value was generated. These will be captured as best as possible in quantitative and qualitative measures. While likely best implemented initially on a voluntary basis, this could evolve to contractual over time including pre-determined participation in financial returns generated from social capital investments.

Walking the Talk

Investing on the frontiers and encouraging a new mode of organization means that the new kind of venture capital should itself operate in that new mode. This means being increasingly permeable in the production of the organization, iterating rapidly, and being intentionally emergent.  More specifically this means challenging some conventional barriers such as sharing of information working from a starting premise that all should be shared vs. all is proprietary. It also encourages distributed descision making and designing a system for investment to happen vs. buildng a fund to invest. The use of wikis, blogging, participating in public discourse and the information commons is a simple cornerstone of this type of organization as evidenced in the opensource and activism communities. Additionally, skills of community building and management including the effective employment of advanced communication and collaboration tools are necessary core competencies.

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This entry was posted on Monday, October 13th, 2008 at 3:07 pm and is filed under Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

  • Stacy Caldwell
    I've read this post 4 times now. I'm thrilled to read the thoughtful analysis of how these converging sectors, technology and organizing efforts are mobilizing capital in new ways.

    I am working with an 8 year old social venture partnership in Dallas that has developed a (social investment) portfolio of nonprofit agencies that address issues in the realm of children and education. They have always selected a broad range of agencies within that focus area and yet never tied specific outcomes to the portfolio (other than their own relevance to the agencies). However, they have both funded and engaged with these agencies to build capacity and help their missions work more effectively.

    I am interested in exploring how we take this portfolio to the community and present as an offering tied to outcomes that are associated with children and civil engagement in our region. I believe there would be individuals and companies that would be willing to buy into the Social ROI that this portfolio offers (if we can measure and articulate effectively).

    I share this with you because I feel like I am seeing one facet of what you are talking about here and hope very much to better understand the multi-dimensional approach you have when referring to venture capital tied to new venture frontiers.
  • Stacy, thanks for the comment and keeping this conversation in the
    public domain.

    Sounds like you have been doing great work. Are you looking for ways
    to attract capital into your portfolio?

    What I'm focusing on is being able to seed ideas on the frontiers of
    specific outcomes/issues. In other words, applying small pots of
    money to finding the best/novel/emerging ways to achieve specific
    outcomes. One pot one outcome. These have to be specific to focus the
    thinking and the 'expedition' and really get past the conventional
    approaches. In your case this might be about raising new pool(s) of
    capital around very specific issue(s)/outcome(s) that you have
    identified as root causes.

    On the side of attracting capital - when I wrote this post - I wasn't
    yet aware of the Calvert Giving Funds latest flexibility which is
    worth a look. This flexibility for investors to be able to create
    custom porftolios will become increasingly important over the coming
    years I believe - particularly for HNW investors which is the target
    funding market for breakthrough innovations.
  • I like the idea of outcome expeditions as a way to scout opportunities from system shifts, it is true that this would be a very good way to get to the good deals. One great tool you may want to look at if you want to do this is eCairn (www.ecairn.com) which offers a way to do this collaboratively.

    The next big challenge is to figure out how to engineer the investments once you have identified opportunities. And as soon as you get out of the "profit maximizing" mode you get into uncharted territories. Socap 2008 was a great opportunity to bring the conversation one level up, but there is still confusion when it comes to measuring intangibles around a given deal, and the concept of blended capital has not been clearly defined yet.

    Your idea of highly targeted expedition is a very interesting one, as it fits the profile of social investors, who seem at this early stage to all have a very specific mission that they have decided to focus on. I would be interested in seeing this implemented.

    The Entrepreneur Commons is at the opposite end of the spectrum, trying to keep the scope as wide as possible to make sure the statistical base of the investments is not biased. So we are looking as many deals as possible areas as long as they fit within the overall goal of bringing positive change one way or another. It is designed for a more "mainstream investor" willing to invest in social businesses without having to go too much into the details. The idea therefore is to offer a return rate that can be benchmarked against the market, and the general goal of bringing positive change. The issue of measurement is resolved by using debt, success is when the business is sustainable and can pay off the debt.

    The success of highly targeted expeditions would be a good way to raise awareness on what is possible and open the door for a wider more generic approach for mainstream investors. We should talk :-)

  • Marc, thanks. I'll take a look at ecairn. I think the deal structure
    for the expeditions can be quite simple. Generally the transaction
    costs relate to reducing risk, which I think can be handled by using
    open communication principles and making the process and commitments
    tranparent and public.

    Another way that this was described at SoCap that it is in fact pre-
    angel... indicating the nature of the expeditions really being out on
    the edges finding innovations.

    I also very much like where you are going with the commons. The
    'forum' style groups are a proven and essential component for venture
    success. And the mutual guarantees is also a proven and effective
    mechanism to reduce financial risk and build mutual interest. I'm
    wondering if they need to be placed together and also if the elements
    of what we are each exploring can be remixed in many more ways than
    we've currently envisioned.

    Looking forward to developing these building blocks in parallel,
    collaboratively, and seeing what others do with them as well.
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