Micro-funds: Peer-producing Venture Capital (UPDATE 1)

Here’s my first crack at the Micro-Funds concept.  It’s related to the Social Venture Commons and Social Capital work I’ve been developing. They are all based on the new mode of organizing I see emerging.

*** I’ve also added an illustration of 3 alternative models that have emerged in recent conversations. They are all interesting in their own right and it may be more about using them in according to specific situations. All comments/suggestions/alternatives welcome. ***

Micro-fund Model Alternatives

Ping me directly if you are interested in learning more – and if you have comments on the presentation below please add them to this post.

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Micro-funds and the Social Venture Commons

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
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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.

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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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Union Square Ventures and a new kind of Venture Capital firm.

Yesterday’s, NYTimes article on Union Square Ventures (USV) entitled “A New Kind Of Venture Capital Firm” is an interesting read and I’m glad to see the media beginning to pick up on this.

I’ve been following USV for a whlie now and actually interviewed Brad Burnham in preparation for a session at the Open Everything Retreat on Investing in Open. They seem to have a knack for investing in webtech ventures like Twitter and Wesabe that have models that can be deeply disruptive to the systems they are taking on and where the question of how they are going to make money from them is far from answered. And now they’re turning more of their attention to conventionally ‘social’ issues including education and the environment.

Coming off my latest exploration of the social venture capital sector, I’m looking forward to seeing USV coming into this space – and I don’t think it’s much of a stretch. Investments like Twitter and Wesabe are not too dissimilar from making investments in social change and innovation. Both are venturing toward systems level change – and come with a high degree of complex ambiguity.

At the same time, we are beginning to see a new mode of organization taking shape that challenges how ventures are built and therefore how we invest in them. Where all of these things come together is where I’m betting we are going to find some deep innovations on the new kind of venture capital firm I think USV and others are all working their way towards.

In the meatime, if you’ve encountered – or are thinking of – any innovations in this area please pop them in the comments or over in the public wiki on ‘Investing and Open‘. I’m playing with some ideas myself and will be adding them in there and here on this blog as they develop.

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