Sunday, September 11, 2011

SoCap Redux

At the last minute, I was asked to sit in on a SoCap panel on Thursday, along with Will and Arjuna from Omidyar Network and Kelly from Potencia Ventures. The ring master was John Goldstein from Imprint Capital.

The general idea was to talk about our experiences with raising money, or investing it, in social ventures in the developing world. I was asked to speak from the entrepreneur's perspective. 

One thing about not preparing for a session is that it puts you in "improvisation mode"... no time to try new material. I covered my experience in helping raise money for Envirofit International (a non-profit that sells clean energy products in emerging markets) and Inviragen (a for profit that is developing vaccines for infectious diseases in developing world). Both companies have raised over $10 million, including significant grant funding. 

John asked us to share "lessons learned," and I shared a few. First, I like the advice that entrepreneurs should think of "hiring investors." This involves thinking about organizational fit, roles, time commitment, etc. Take off the rose colored glasses and think about who you want on your team when the going gets tough. I have posted on this topic before. I think we hired good investors in both companies. We said "no" to deals that didn't feel good, and those still seem like good decisions. We also have invested significant time with our investors, and have strong, personal relationships with them. I can't emphasize enough how important it is to keep investors "in the loop"; many problems arise when this slips. 

The second, related, point was that the deal has to fit the needs of both the company and the investor, and to question "conventional wisdom" as it is embedded in the law firm templates for different instruments. An example I gave was that at Inviragen, we didn't have a min/max for our first round of convertible notes. We had one amount, $10,000. And we made darn sure that this was perceived as "not much money" by each of our investors. Several people wanted to put in quite a bit more, but we said "no." The idea was that this was high risk (others had tried and failed at making a dengue fever vaccine), and all our investors were people we knew well. We wanted to pass the "Safeway" test- if we lost their money, they'd still say "hi" to us at the grocery store. Similarly, a big reason we formed Envirofit as a non-profit was that we just couldn't come up with a plan we had confidence in that would return money to investors. Since our overall intent was to reduce pollution and improve health, we could fit under the requirements for a charity, and be transparent with our investors (what we always called our donors) about the risks of this venture. 

Part of being a panelist is knowing when to keep your lips zipped, and I had very knowledgable co-panelists. Kelly, Will and Arjuna shared some great learnings, and I will invite them to post their comments below. 

Tuesday, September 06, 2011

Duh + Duh: Start Ups as Experimental Networks

Andy Hargadon's idea that building a start up is about building a network is one of those "duh" ideas. You read it, you say "yeah that makes sense"... yet, from then on, it changes the way you think about start ups.

Similarly, Steve Blank's advice is to think of the start up as an experiment to determine whether there are customers and a business model to effectively serve them. I don't know if he knows Bill Easterly, but I know he has a similar faith in "searchers." I do know that thinking of a start up as an experiment is  advice I heed on a daily basis. 

So, two retroactively "obvious" perspectives, which, if combined, get us to think of start ups as temporary associations tasked with experimenting, prototyping and building networks. These networks are built, then reinforced as weak bonds become stronger. Trust makes these synapses fire faster and more accurately.

I think this is why people are so interested in successful, serial entrepreneurs. They de-risk a start up somewhat, because they know it is about building a network, and they know the questions to ask as they start a search.The entrepreneur that has built successful networks has a head start- if they have done it well, they have existing relationships. What customer wouldn't want to give Tony Hsieh a try if he started another company? What investor wouldn't want in to a deal with an entrepreneur that had given them a good return? What community wouldn't want to have another start up from someone who had been involved in an earlier company? What supplier or distributor wouldn't want to be part of supply chain v2.0? And the cream of former employees often show up in the founding team as well, not wanting to miss out on another fun run.

Not a serial entrepreneur? As a founder, this approach also biases you toward a posture of humility, ambiguity and curiosity. It takes you out of "sell mode" and keeps you in "design/build" mode. Think: "I am building an experimental network, to see if there is a significant market, and a business model to address it efficiently and effectively."*

Spend more time on your business search than on your business plan. And let the search drive the network which drives the business model, which are then all described in the plan.
Note: I wrote this post in July, and it mysteriously showed up when I tried the new blogger interface this morning. So I hit "publish."
*Channeling Peter Drucker's super marvelous comment: "Efficiency is doing things right. Effectiveness is doing the right things." 

Sunday, September 04, 2011

Welcome to Emergence (A Venture Gapitalist's View on #SoCap11)

This is a follow up post to my SoCap zoo post from last year. While it doesn't have anything to do with zoos (that is SO 2010...), it does have to do with Socap. Let's start with a story, shall we?

As with many start ups, it began with two friends who thought they could do something better (well, actually it started with an argument). Of course, they had to finish grad school, so they did the start up on the side. They didn't have any real industry experience. Or money. And there was a lot of competition from well entrenched competitors. But they kept at it, and over time, they gained traction and built a company. They called it "Backrub."

I was a bit shocked to see that this company became a teenager today. Yep, Google is now thirteen years old. On track for $30 billion plus in revenues, and over 28,000 employees. I think we could all agree that is pretty good performance for a start up. Even though I have had my disagreements with Larry and Sergey in the past, I think we should all congratulate them as they leave the Wonder Years and become teens. It happens to everyone, even Harry Potter.

The Social Capital Markets Conference (SoCap) turns four this week. What does this have to do with Google? Maybe not much; maybe a little. SoCap is aimed at the intersection of money and meaning,* so it is very much about impact investing. Which, after four paragraphs, gets me to the title of this post.

The term "impact investing" emerged in 2007, but it has been shaped by earlier movements... socially responsible investment, venture philanthropy and noblesse oblige.** While people are still arguing over definitions of impact investing,*** it seems to come down to the idea that people would like to invest their money in a way that makes the world a better place.# This is, I have found, much more difficult than it sounds (so sorry, Larry and Sergey, for my earlier impertinence).

Which really does get me to the title of this post. Impact investing is new. It is emerging, as SoCap puts it, at "the intersection of money and meaning." But generally speaking, things emergent are small, weak, and hard to predict.## A storm in the south Atlantic can dissipate, or turn into a hurricane. We know how to predict this, but we don't know how to prevent, or invent, hurricanes. A start up can dissipate, or turn into a Google. We don't really know how to predict this, although many try.

The impact investing industry is a start up, as are most of the funds, organizations and social enterprises promoting it. And as Steve Blank says, the right way to view a start up is as an experiment. But I don't think that this has happened with impact investing. Instead, I think many are treating it more as a baby they want to go to Harvard, rather than a cluster of hypotheses that need testing. Just look at my "zoo" post from last year... do we know which of these animals have been most successful? We may be able to measure popularity, but that has little correlation with longevity or impact. How many deals are being done? How much capital is actually being deployed to make a difference? And, is it fair to ask these questions before most aren't old enough to go to kindergarden?

One of the things I got to do this summer is work on a special edition of Innovations Journal for SoCap. It is intended as a "provocative primer" on impact investing, for investors, entrepreneurs and policy makers.### There are a number of excellent essays, cases and analyses which discuss, describe and poke at this emergent creature. Many celebrate its potential, but a few question whether it will turn out well. One of my favorite articles is from Katherine Milligan and Mirjam Schoning of the Schwab Foundation, and I think it summarizes the situation well: "... the hype is obvious. The (social capital) market is not ready to absorb commercial capital on anything close to the order of magnitude being talked about...."

SoCap is a four year old. I just googled this, and found that this means it "walks a straight line" but also "can run in circles... and delights in creating... silly language." Still very much exploring boundaries, still very emergent. If you come with an open mind, and an understanding of how much hard work is required to make something new happen, I think you will find it inspiring and useful. And if you come with an urgency to create, develop and act, you can help shape SoCap and impact investing.

We only have 9 years before SoCap becomes a teenager. By then, impact investing should be more fully formed and easier to predict. These are still the Wonder Years, full of hope and dreams, and the opportunity to shape a movement. Welcome to the awesome responsibility of raising a start up. It is an experiment, full of good intentions, but no history. And like many four year olds, it may just turn out alright despite us.
* VC John Doerr, who knows quite a bit about making money, is credited with the "make meaning" mantra. He is also on the board of Google, but perhaps that is just a coincidence. But probably not.
** I had to google that. Since its French.
*** I think there are two types of people in the world. Those that like to argue over definitions, and the rest of us.
# It is curious that this seems a novel concept. I mean, who wants to invest their money to make the world worse? It seems to be moving in this direction already, and doesn't really need additional help, does it?
## Think babies.
### I think it came out well, and you can see if you agree by picking up a hard copy at Fort Mason this Wednesday, or buying it on Amazon (available NOW). Don't worry, I don't receive a penny of your $3.99. It all supports MIT, an educational institution located in New England that needs all the money it can get. (I just used Google again).

NOTE: Greg, you are right. I should have written more about crowd sourced capital. Kevin, you are right, there is much hybrid vigor in Green 2.0, which I hope to witness this week from a safe distance.