IGNITER

Working with the building blocks for a new kind of venture capital I’ve been shaping a couple of core components – micro funds, and the social venture commons.

Micro-funds: making small, flexible, intuitive, low-cost, high-leverage investments. Features:

• Short life: fully invested within 3 years or less
• Small, high-leverage investments: invest financial (e.g. $25-50k) and social capital in high-leverage ways – core capacity, incremental engagement, financial seeding
• Low or no fee: offset with performance based incentives for financial and impact returns appropriate to the fund
• Light-weight and dynamic operations: led by individuals or organizations that have a unique position or perspective on the ‘frontiers’ – run as a ‘side-car’ to existing occupation
• Commons interdependent: fund and individual investments must spark and support a conversation and generally contribute to and engage community to mitigate risk, improve success, and demonstrate returns

Image via Wikipedia

Social venture commons: convening and catalyzing capital, community, conversation. Features:

• co-created infrastructre: enable self-service deal support, reporting, and portfolio tracking for micro-funds and their investees
• nurture conversations: technical and financial support for stimulating micro-fund and investee conversations
• harness social capital: help develop, weave, and harness social capital among funds and investees
• strengthen community: seed and support unique, focused community gatherings and capacity supports including ‘forum’ style monthly entrepreneur groups

The key in this lies in the interdependence between the micro-funds and the commons. The commons nutures and convenes community. Funds add some fuel and spark by investing and catlyzing conversations. The ventures serve themselves through supporting each other and participating in the commons.

I’m continuing to refine this as I move toward a working example and will continue to think out loud as I go. And if you haven’t checked it out – take a look at the Entrepreneur Commons being led by Marc Dangeard. He’s farther along and is tackling similar issues as he goes. The similarities and even more so, the differences, are interesting and good fodder for conversation.

Image via Wikipedia

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.

Reflections at Hollyhock

It’s been almost a week since the OpenEverything retreat and the reverberations continue. Heading into it, not having any roots in the open-source community, I was technically the biggest noob on the convening team. At the same time, what drew me into the meme and the event was a sense that something bigger was going on and that that something was rooted in a set of ideals and a drive for the practical that resonated with my core and my life experiences.

On the other side of the event I’m more clear than ever that ‘open’ is not something new but rather is reflective of a powerful shift in our culture, driven by technology and circumstance, that is fundamentally restructuring the systems of our society. A shift that is also at play in the social change and ecological sustainability movements as much as it is in the Open movement.

David Eaves talks about ‘open’ as a social movement which it certainly is. What excites me is that at it’s core it’s also part of the movement of our society toward a more just a sustainable state – a movement that’s based on a common set of ideals that transcends meme, sector, or method. A movement that works the tensions between ideals and practical. A movement of people that recognize themselves as interdependent parts of everything from their project to their community to humanity etc.

This is what has me so interested and where I hope people rally – around the thing that is unifying – the thing that represents the change in course our society so desparately needs. For me, this is coming out through contributions to the wiki – Open Organizations and Investing and Open – and a continuation of my work ‘venturing on the frontiers’ (which I’ll be sharing more on this site in the weeks to come.

And what about you? Do you feel this shift underway? How’s it showing up? How’s it changing you? What does it mean for you, for us, for humanity?

Rhizoming the plane of emergence 2.0 . .
Originally uploaded by jεƒ saƒı

It’s been in the works for awhile and I now think we’re really starting to make a connection between web tech (2.0+), venture investing, social innovation. That connection is going to unleash some tremendous innovations and a surge in the activity directly working on the challenges facing our civilization. It feels like the emergence of a new domain that will take some very different approaches to change and influencing the course of civilization. It seems inspired by open source, technology innovation, financial risk taking, a venturing culture, and now a deepening and deeply felt realization that there are more important tasks to tend to.

I’ve been digging deeply into this for a while (Venturing on the Frontiers, Open Everything <site>, and The Great Remix) and these two posts (Umair Haque and Fred Wilson) have me feeling that something just shifted. What I love is that this isn’t just the same old folks getting into this AND that they are coming at it from an understanding of how systems emerge. Umair uses the language of DNA and Fred is living it through his investment approach in web tech companies.

Maybe what it is, is that all the different groups I’ve been working/having the conversations with (MaRS, SiG, CSI, Renewal Partners, Communicopia, Causeway, Tides Canada, and Good Capital) are using different language to talk about the same things.

I’m not sure. What do you think? Is this just a personal moment are others sensing that some thing has shifted too?

Venturing on the Frontiers – A simple guide.
Originally uploaded by Michael Lewkowitz

There seem to be two types of bets that investors make when doing a deal. A bet on the team. A bet on the plan. The closer to the frontiers (early stages and deep change) the greater the emphasis is on the team. And rightly so. We all know that plans don’t last on the frontiers.

So how can we get better at investing on the frontiers? Surely betting on the team alone isn’t a sound investment strategy.

From my conversations the current practices seem to be either focused on ‘rolling up the sleeves’ and getting involved directly (few, high-cost investments) or being a hands-off patron (many small investments). Either that or back off from the frontiers and use conditional investment to achieve specific results (e.g. disadvantaged employment or other enviro-social activities). The limitations in each of those should be fairly self-evident.

So what else could we make bets on? Well if venturing is a process, we could bet on the process they are following. If we know plans are not static, what is the venture doing to continue the process of framing, planning, and connecting?

And what other practices could we employ? Well if one of the biggest chips an investor brings to the game is their social capital, well then how can that capital be better employed in the task of connecting? Going back to the image above, we can see that at minimum it requires a venture to have articulated simple and accessible spaces. I wonder – how many entrepreneurs and their investors would truly describe the primary spaces of their venture in the same way? How about in your venture or your portfolio? My bet is that’s strongly correlated to the difference between friction and luck.

Summing up, that leaves us with making bets on:

• a team;
• their venturing process; and
• their spaces (accessible and simply articulated).

And it means bringing our social chips into the game to make the connections the venture truly needs (more in a future post).

Now that’s an investment space I’d bet on.