The idea that anyone who has a great idea and works hard can be a success has always been a core value in our country but the entrepreneurial piece of the American Dream is in trouble.
According to the Kauffman Foundation, firm creation is at a 30-year low. And only a small percentage of America is getting the resources they need for their companies to grow. Women CEOs receive just eight per cent of venture funding; only one percent of venture funding goes to African-Americans; and seventy-eight percent of venture capital is distributed to just three states – California, Massachusetts and New York.
Perhaps the larger problem: the ideas that are getting resources are not that relevant to most people in America. In 2015, the website TechCrunch recognized as their “startups of the year” an app that helps you book high-end hotels on-demand for cheaper; a website that helps you get high-end mattresses for a lower cost; an app that lets college students communicate with each other more effectively; an Uber-for-marijuana-delivery. Collectively, these four startups have raised $225 million to fuel their growth. (Kim Kardashian won a fifth award, but I couldn’t find out how much had been invested in her Hollywood app.)
Today, the people backing new startups are more likely to fund a company delivering food to the relatively well-off rather than a company that helps struggling people put food on the table.
Why is this happening? Venture funds are under extreme pressure to deliver quick profits to investors, and in a desire to capture value quickly, the people with the resources to back world-changing ideas are too often taking short cuts that are leaving most great entrepreneurs off the playing field.
Many venture investors rely on a concept called “pattern recognition”: “I’ve seen this idea work before,” or “This founder reminds me of another founder that was successful.” If you’re an investor with limited time it’s only human nature: you look for the type of company that has been a star before. Paul Graham, founder of the very successful investment firm Y-Combinator, once half-jokingly said about the problem of pattern recognition, “I can get tricked by anyone who looks like Mark Zuckerberg.” But when over 90 percent of startup funding goes to white guys, the joke might be true.
It’s an open secret in the funding world: people who have capital put money into people who look like them, live near them, and either come from their social circles, went to their schools, or generally have similar lived experience. Chris Sacca, an investor on the TV show “Shark Tank,” where entrepreneurs across America pitch their ideas to funders says on his website, “we are going to focus exclusively on deals that come to us through our trusted network of friends and colleagues.” (Sacca was an early investor in Facebook and Twitter).
The outcome: people who are closest to the problems that our society faces might have great ideas, but often aren’t close to the resources to turn those ideas into a reality. Take Jerry Nemorin, the founder of LendStreet. Jerry is an African-American founder who started his business in Charlottesville, Va, working in a sector that well-off people don’t have much experience in. Lendstreet consolidates debt, whether it’s from student loans or credit cards. They work out a fair buy-out from the lenders, and refinance the debt at a fair interest rate. Fifty percent of Americans do not have enough cash to pay off all their debts—and Lendstreet offers an innovative private sector solution.
When Jerry started raising money, he wasn’t successful. In his words, “When it comes to pattern recognition, as a black guy, in central Virginia, solving a problem for poor people, I was 0 for 3!”
The good news: by focusing on leveling the playing field for founders, we can create different results. I run a firm, Village Capital, who trains and invests in startups solving real-world problems. We have backed 60 companies over the past 7 years: 80 percent from outside the “big 3” states; 40 percent women founders; 20 percent people of color. Our founders are building private-sector solutions to the country’s biggest problems: from global inequalities in education and health toenvironmental concerns such as food, energy, and water.
Jerry graduated our program in 2014, where he gained the network he needed to succeed. He got a boost from two of our partners: Silicon Valley firm Kapor Capital, which intentionally invests in under-represented founders, and the Financial Solutions Lab, which supports startups addressing problems facing low-income Americans in financial services. LendStreet now has a $37 million line of credit and they are helping hundreds of Americans break free of debt—reinventing what their future might be.
Jerry’s story should not be an outlier. Entrepreneurs across America are building businesses reduce the cost of food production, improving health outcomes, and more. Many of these founders have a deep but mostly untapped understanding of consumer needs—for example, African-Americans or Latinos building education startups in a country where 60 percent of students in public schools are people of color, or people from Kentucky or Indiana, instead of New York or Silicon Valley, providing the next great innovation in agriculture. Founders closer to the problem better understand the solution; investing in founders who have deeper insights will deliver better long-term returns.
To truly change the world, investors need to prioritize long-term value creation over short- term value capture. This might take more perseverance than the startup community is used to. AOL co-founder Steve Case writes in his new book, “The Third Wave,” the sectors that truly matter to society—such as energy, agriculture, education and health—haven’t been disrupted yet precisely because they take so much patience. Entrepreneurs and investors who are willing to think inter-generationally will build the next billion-dollar companies—and generate greater rewards for society.
We need to rethink short-termism in venture capital – and start by rethinking the shortcuts we take in backing new ideas.
Ross Baird is the co-founder and CEO of Village Capital, a venture firm investing in entrepreneurs solving problems critical to the future of society. Village Capital has served over 500 companies worldwide through programming and backed 60 ventures through a unique peer due diligence model since its founding in 2009. Ross was on the founding team of four startups prior, and has a masters from the University of Oxford, where he was a Marshall and Truman Scholar, and a BA from the University of Virginia, where he currently teaches courses on entrepreneurship and impact investing.