Soundbites: An Atypical Investing Strategy

Heron's Toni Johnson sits down with Ross Baird, Executive Director of Village Capital, and discusses their strategy to working with and investing in entrepreneurs. Baird highlights the difficulties women and minorities face when seeking capital and how centralised venture investing has become. 

Toni Johnson: This is Toni Johnson with www.heron.org. I’m here today with Ross Baird, Executive Director of Village Capital. Hi Ross.

Ross Baird: Hi Toni.

Thanks for joining us today. Village Capital is an interesting name. Can you talk a little bit about what it is and how it came about?

First of all, it’s so great to be here on the podcast and thanks so much for the invitation. Village Capital is looking to change what entrepreneurship means in the world by democratizing entrepreneurship, making entrepreneurship accessible to everybody, and what we do is we find entrepreneurs around the world solving major global problems like health, education, energy, sustainable agriculture. We run programs for entrepreneurs that help great founders build great teams and great businesses. We make investments in companies through a peer review model where the entrepreneurs themselves actually make investment decisions. And, so, what we’re trying to do is create an investment process that creates better results for investors and a system that builds better enterprises.

One of the things that you talk about in some of your materials is crowdsourcing investment. Can you talk about a little bit about that and what kind of benefits it yields over a more traditional model?

Yeah, so the way we as a society invest in new enterprises doesn’t actually work that well for most people. In the U.S. 75 percent of investments happen in three U.S. states: New York, California, Massachusetts. 95 percent of investments go to companies with all-male co-founders. Only 3 percent of investments go to African-American Latinos, and I think that part of the reason why this imbalance happens is we make investments through processes that have all kinds of implicit biases. So we find investments through talking to who we know, and you know, if you are a guy who went to an Ivy League school, your network tends to be other guys who went to Ivy League schools. And so, making the process a little more open and a little more meritocratic, we think, yields better results. And so our enterprises who participate in our programs are the ones who actually make the decisions on who will get investment from the fund. And so, what we found is that in an average venture fund, 5 percent of investment goes to women. About 40 percent of our investments go to women, as one example. And we think that this is better than the traditional model, taking example women entrepreneurs, the average woman-run business is outperforming the average male-run business in the U.S. about 40 perent and raising half as much money. Now, we recently did a study with Emory University where we found when a women CEO gets a first investment, like through Village Capital Fund, she still outperforms and she closes nearly the entire gender gap on fundraising. So, if we change the way that we make decisions and have a little more level playing field for every entrepreneur involved, then I think we get different, and we get better results.

You talk a little bit about how this relates to people, but I’m wondering how this also relates to where investments happen. One of the things I’ve noticed in our investing is it tends to clump around some of the more successful areas as opposed to reaching places where capital is both hard to raise and also hard to implement.

Yeah, absolutely. Like I said, 75 percent of investments in entrepreneurs in the U.S. and over 50 percent of investment entrepreneurs in the world goes to three U.S. states—New York, Massachusetts, California—that are pretty well off. And you know, those are problems that are doing better compared to most places in the world. Now, in Village Capital, 95 percent of the companies that have gotten funded through the peer review are outside those three states, and I think that one of the things we find globally is that we really want entrepreneurship to change the world. We need to live a little more evenly dispersed innovation economy, and changing the process by which companies get funded. You know, most of the money is in San Francisco, or New York and people in New York tend to invest in people in New York and people in San Francisco tend to invest in people in San Francisco. And, if you change the way capital is allocated, people from Buffalo and people from Richmond and people from Nairobi and people from Lagos, I think, have a little more even shot at the capital they need to succeed.

So do you have any good stories you’d like to tell, for our listeners? What have you guys been learning on the ground?

I think number one: investing in great people really makes a difference above all else, and people who are solving major problems in society really need to have lived experience with the problems. One of the companies we’ve invested in is a company called Student Loan Genius, you know, out of Texas. And the founder, Tony Aguilar, is a first generation college student. He went to university in Texas, got out, really wanted to start a company, and he had an incredible amount of student debt, and he didn’t have a family that could help him go through college. He had to put himself through, and so he went and he got a job at corporate, and they offered all kinds of benefits like, you know, a gym membership, a philanthropic matching and a 401k and he asked them for help with student loans and they said “That’s not really what we do.” And, so, what Tony came up with was an idea where employers could offer student loan repayment as a benefit and student debt is an all-time high. It disproportionately affects the poor in America. It keeps people from accessing more opportunity and most of the solutions we see around student debt are top down. Oh, well governments should forgive student loans, and what this great company Student Loan Genius is that its figured out a private sector and so there are companies already spending billions on recruiting and keeping the best talent, but while most benefits, like philanthropic matching or gym membership tend to be targeted at higher end people, Tony just came up with a benefit from his own lived experience of a way that a corporation could attract a disproportionate  number of people who were high achieving but maybe from less well-off backgrounds, and it’s a great market-based solution to part of a much larger problem, and it’s because a great person with personal experience solved a problem.

Another big thing we’ve learned is around place. So, New Orleans in 2005, Hurricane Katrina hit and the city is in massive trouble. And a lot of people in the country leave the city for debt. And one of the things that happens out of Katrina is, now, over the last decade, nearly every school in the metro New Orleans area has converted into a charter school. And you have huge influx of people in Teach for America and Peace Corps and AmeriCorps coming in. So you actually have this huge talent boom and one of these people coming in is a woman named Jen Medbery. And she went to Columbia, she’s a techie, a coder, and she works in this charter school in New Orleans and came up with a method for measuring school culture: discipline, how kids are behaving, how kids are performing, and ways to use data to track how students are doing, where they’re going off-track and how to approach student performance. And, she turned that software technology into a company called Kickboard, which is really the tip of a spear in a massive amount of great ideas and great innovations coming out of New Orleans that are improving the quality of education for low income people across America. So, we invested in Kickboard. She, she got her first financing from us, she’s now raised over $7 million. She’s scaled nation-wide, high-profile organizations like KIPP and Teach for America are using Kickboard in the classroom everyday, and they’re really a leader in changing the way teachers use student information to get much better results. And I would say a company like Kickboard really only could come out of a place like New Orleans, which is a place that really embraces and supports education reform. I think if Kickboard were started in Boston or San Francisco, it probably would have gone much more upmarket, already well educated kids who have access to resources.

So, when we have people with lived experiences with problems and people in places that are deeply experiencing a problem and coming up with great solutions, I think we’re finding really wonderful enterprises.

Looking forward, what do you see as important for the future of investment, and also, what are the lever points that would allow us to see more of the type of work that Village Capital is doing?

This suits me. I’m really excited to be on the Heron podcast because I think what Heron is doing is changing a conversation that is the single biggest barrier to more Tony Aguilars and Jen Medberys and more great entrepreneurs solving social problems. I think that most of society views money and views investment through a lens of two pockets. I spend most of my life making as much money as I can in one pocket, and then, when I figure I’ve got enough, I transfer some of it to my other pocket and I call it a foundation, and I give it away. Or even, within foundations, 95% of assets that foundations have go get invested in the mainstream market, into Exxon Mobil and Monsanto and, and companies that people who are doing charitable things typically don’t love, and only 5% of assets in a foundation actually go to the doing good of the foundation. Now, one of the things that you’ve done at Heron that I think is really really wonderful is you’ve dedicated 100% of your assets to the charitable mission of Heron and the investments you’re making out of the endowment mirror the grants you’re making with the 5%. You think of it as one pocket and I think every foundation should think this way. I think it’s crazy that foundations don’t. But, I think when people start to view investments through a one-pocket lens, we have this objective that we want to accomplish. Maybe investing is the best way to do it. Maybe grants are the best way to do it. All of a sudden, the resources for entrepreneurs like Student Loan Genius or Kickboard just dramatically explode. And, we’re starting to see more of this in society. The Omidyar Network has been doing this for a while. Mark Zuckerberg just raised all kinds of eyebrows when he announced he was doing a 99% of Facebook shares to an LLC, not a foundation, but I think that is actually a one-pocket way to make investments. But, when people start questioning the values behind the investments that they make out of one pocket rather than out of two pockets, then we’ll see a lot more resources for valuable companies.

So, Ross, is there anything else you’d like to share? Anything sort of top of the mind?

I think that most people look at an entrepreneur and think of all of the ways the company can fail: the market’s too crowded; the market’s too big; the sale cycles are too long, et cetera. The places and communities that people have seen the most progress look at entrepreneurs and think of how they might succeed. So, for example, downtown Durham has been revolutionized by this group called the American Underground. Albuquerque has a great industry built around water innovation. Louisville has a really wonderful food and agriculture sector, and, and I think a lot of cities are, in some ways, trying to replicate what Silicon Valley or what New York has done, and I don’t think you can. I think that people who are picking specific impact objectives or sectors to build around. Buffalo withheld certain energy, for example, or Louisville with agriculture, are really making great progress. So, I would say: one, come from a position of how to help entrepreneurs succeed, and two, don’t try to be the next Silicon Valley. Try to figure out what you, your organization, your city, your community, can be the best in the world at, and double down on that are the two biggest mindsets we see to make real good progress.

Terrific, Ross. For www.heron.org, This is Toni Johnson.

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