If you look at the front pages of Forbes or Fortune, you might think we’re in a golden age of entrepreneurship. But for most people in most places, the idea that entrepreneurship is a meritocracy—that the best ideas and founders rise to the top, regardless of their background—is a myth.
I often tell the story of Jerry Nemorin, an entrepreneur who participated in an early Village Capital program. Jerry grew up in South Florida, the son of refugees from war-torn Haiti. Jerry grew up watching his immigrant mom getting ripped off by payday lenders, and in 2011, after spending a few years on Wall Street, he moved to Charlottesville, Virginia to start a company called LendStreet that helps people refinance their predatory loans.
Jerry needed venture capital to grow his company, but initially, he struggled. As he later told me, “Investors often talk about ‘pattern recognition’ when they’re making funding decisions. As a black guy, living in central Virginia, solving poor people’s problems, I was 0 for 3!”
Jerry was a classic example of an entrepreneur facing the “Pioneer Gap.” He’d risked his career and bet his life savings on an idea. He’d taken the jump—but there was no one to catch him on the other side. More than anything, Jerry was struggling to find a thriving “ecosystem”, which I’ll define as a network of relationships that interact with, and are interconnected with each other.
Jerry isn’t alone in lacking an ecosystem. It's harder to find your ecosystem if you're not living in a city with highly-concentrated venture capital. Nearly 80% of startup investment in the U.S. (and 50% globally) goes to three states: Massachusetts, California, and New York.
Entrepreneurs who come from different backgrounds than most investors struggle. Less than 10% of startup investment last year went to women, and less than 1% went to African-Americans and Latinos. In a study we conducted with the Gates Foundation, we found that 71% of startup investment in Africa over the last three years has gone to just four enterprises—all run by foreign expats.
And entrepreneurs who are solving real-world problems struggle. Only fifteen per cent of “unicorns”, startups valued at a billion dollars, are in the industries that comprise the highest amount of consumer spending and have the highest real-world impact (health, education, energy, agriculture, financial services, and housing).
There are thousands of Jerries, who have ideas that will make us healthier, improve our food systems and educate the next generation—but too many investors are overlooking their ideas. To bridge the Pioneer Gap, we don’t just need to fund people like Jerry; we need to support ecosystems that empower people like Jerry, no matter who they are, where they live, or what problem they’re trying to solve.
VilCap Communities: A Pilot to Close the Pioneer Gap
Cincinnati’s leaders have a vision: for Southwest Ohio to lead the world in innovation around water. In the words of Cincinnati City Council member P.G. Sittenfeld: "Water can and should continue to put Cincinnati on the map.”
You might think that’s a weird idea, but water has always been in Cincinnati’s DNA. The Riverfront City was an early brewing town because of the quality of the Ohio River. Cincinnati is home to one of the country’s oldest water systems, and a federal research lab that researches bioremediation and pollution. Procter & Gamble, which has delivered billions of liters of clean drinking water to developing countries, has a main office that rises above the arts district downtown.
As that councilmember said, “The assets we have would be the envy of cities around the nation." And in order to capitalize on its positioning in water, the city recently launched Pipeline, an incubator focused on developing entrepreneurs that are innovating around water.
In the spring of 2016, Village Capital teamed up with the DOEN Foundation, the Kauffman Foundation, and the Sorenson Impact Foundation to launch a pilot, VilCap Communities, to help cities like Cincinnati build on their local advantages to close the Pioneer Gap. We partnered with entrepreneur support organizations in 26 cities across the world, to identify and test best practices for developing entrepreneurs.
Each community had three requirements:
1) Run a venture development program—with a specific focus: Rather than copying-and-pasting the standard Silicon Valley accelerator model, we asked each city to design a program focused on their specific sector or industry expertise - like water in Cincinnati.
2) Invest in entrepreneurs using a more democratic model: Each Community committed to invest in the top two entrepreneurs in their program, as identified by the entrepreneurs themselves. Village Capital has been using this peer-selected investment model for seven years, with inclusive results: our portfolio of 70 companies is 45% female, with a higher survival rate than mainstream VC.
3) Gather and track performance data of the companies, compared to benchmarks. In partnership with the Global Accelerator Learning Initiative, each of the participants in the VilCap Communities pilot were required to gather company data, so we can learn what works, what doesn’t, and what depends on local contextualization.
So, what did we learn?
We went into VilCap Communities with a hypothesis: that, to borrow a slogan, every American city can be the “best place in the world to change the world” if they focus on a specific sector or industry.
One year in, we believe this even more strongly. A full 92% of participating Communities ran sector-specific programs. Our Baltimore Community partnered with Johns Hopkins University on a healthcare-specific program. Kansas City, home of Pearson and the Kauffman Foundation, honed in on education. And Pomona Impact in Guatemala tapped into the region’s agricultural resources to better connect entrepreneurs to sector leads.
In post-program surveys, we heard that this focus was helpful for entrepreneurs within a cohort: shared understanding leads to more meaningful peer relationships. The data also showed that sector-specificity was a positive for Communities’ bottom lines. Village Capital facilitated introductions for twelve Communities to raise supplemental funding, largely due to connecting sector-specific contacts to the Communities. Meanwhile, two of the the three Communities that could not secure enough funding were sector-agnostic.
There's a distinct difference between 'business model development' and 'investment readiness'. Most entrepreneur support programs focus on the former, with the goal being to help companies validate their business model (think: “Lean Startup”). That’s important, but our hypothesis is that entrepreneurs really need something bigger: they need to understand what it means to be investment ready, and how they can get there.
As part of our support process for VilCap Communities, we developed a series of tools to help entrepreneurs understand the “lens of the investor.” This is centered around the peer-review process: entrepreneurs in each cohort jointly take on the traditional role of the investor, performing due diligence on each other and deciding who among their peers should receive Village Capital’s investment. Although most Communities chose to customize the tools we provided (only 23% used the full curriculum), every active Community used peer-review.
The results were positive: 85% of ventures thought that the peer rank process was helpful for their business, while 78% of current and potential Communities indicated that they would pay for all or part of the curriculum, at an average of $10,000 a year.
According to an Emory University study, entrepreneurs that participate in peer review through a Village Capital program are better prepared for investment: they grow revenue faster, raise more funding, and create more jobs than a control group.
With VilCap Communities, we sought to find out whether this would hold true for programs run in a specific city. All of Village Capital’s programs recruit from a nationwide pool of applicants; would the model work when the applicant pool was more place-based? One year, in we’ve found that 92% of participating entrepreneurs felt more prepared for the investment diligence process. Beyond that, 92% of entrepreneurs connected with a meaningful mentor, 80% connected with a potential partner, and 64% connected with a potential investor.
We also found that the strongest programs had two consistent variables: free enrollment; and a chance at receiving investment capital. Incentives still matter, even on the local level.
Many ecosystem builders are under-resourced, especially in smaller cities
There’s an old saying: “The cobbler’s son has no shoes.” The idea applies here: accelerators and incubators that are helping local businesses often have trouble with their own business models.
Even with a ready-made curriculum and the support of the VilCap Communities network, 11 of the 26 communities worldwide were unable to launch - largely because they had trouble raising the capital needed to execute the programming within the allotted twelve month timeframe. The fundraising difficulties were particularly acute for smaller cities.
Communities that did have success with raising the needed capital were able to bring together support from a wide range of stakeholders - including government, private and corporate foundations, and angel investors. For instance, Buffalo’s Community succeeded in bringing together the University of Buffalo, Launch NY, the Western New York Incubation Network, and Invest Buffalo Niagara along with support from the Small Business Administration. It's a reminder that all elements of a community play an important role in supporting the development of young companies.
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We’re looking forward to continuing our work with many of these Communities, and testing more hypotheses around three themes: discovering, developing and investing in entrepreneurs no matter their zip code. Here’s what we’re working on next:
Discovering new entrepreneurs, particularly where others aren’t looking. VilCap Communities confirmed what we already knew: there are great entrepreneurs everywhere, and investors need to do a better job at finding them.
I’m inspired here by the work of my grandfather, a legendary Duke basketball coach. My grandfather took over a struggling team in 1959 and turned it into a national powerhouse in the 1960’s by doing what other coaches wouldn’t: recruiting talent outside North Carolina, and integrating the team. These days, if there’s an exceptional player in high school at a Tier 2 school in rural Wyoming, the NCAA knows everything about them and is already trying to recruit them to a specific college.
We have a similar vision to break the normal patterns of recruitment, but with entrepreneurs. We’re building new tools to find and engage great founders, including a psychometric test to determine the raw talent of high-potential entrepreneurs; a marketplace to bring investors directly in contact with companies outside their normal social networks; and another pilot project, a roadmap of investors in Virginia that will ultimately create a lingua franca for investors and entrepreneurs in the Commonwealth.
Developing entrepreneurs and preparing them for scale. The Communities experience has empowered us to double down on our focus on investment-readiness. We’re going to continue working with communities across the country (and across the world) to license our curriculum and spread the peer-review method to more cities.
We’re also taking a hard look at our approach - if sector-specific investment readiness programs lead to better results, what about sector- and place-based approaches? We will be researching the best communities outside of San Francisco, New York, and Boston to base our sector-specific work in. We’ve already begun this in Louisville, where we have the longest-running agricultural venture development program in the nation - but where else can we anchor our sector practices in financial technology, education, energy, and health?
Investing in the top companies solving real-world problems. Finally, we’re continuing to experiment with innovative ways to invest. There is no one-size-fits-all investment model that works for every entrepreneur, and my co-founder Victoria Fram has written about our experience leveraging alternative financing models. We’re continuing to gather ideas from different sources: last week we participated in a Kauffman Foundation gathering around the moonshot idea of putting $1 trillion to work in entrepreneurs in the next 10 years.
We’d love your thoughts on what you’re seeing in your community, and how we can be helpful! I’d encourage you to share your reactions in the comments, or reach out to me at ross@vilcap.com.
