I grew up about 40 miles from J.D. Vance, the New York Times bestselling author of Hillbilly Elegy: A Memoir of a Family and Culture in Crisis, which personifies the many hardships facing rural America today. A story that took the pundit class by storm, turning J.D. into an overnight celebrity, was to me a well-articulated reminder of where I came from, and the struggles that many still face there. It also revealed how segregated America has become—in both thought and circumstance.
The election of Donald Trump, which was decided by this same region, is emblematic of our insular culture—revealing a major blind spot among urban elites who didn't see it coming, just as they hadn't anticipated the re-election of George W. Bush twelve years earlier. I recall my University of Chicago classmates, staring awestruck at a televised electoral map of Ohio in the wee hours of that 2004 night, barking at me relentlessly: "who are these people???"
They were blinded.
And now, Ross Baird, a social entrepreneur and venture capitalist, is talking about a different kind of blind spot—one that affects how, whether, and to what extent we support the ideas of tomorrow.
The Innovation Blind Spot
In The Innovation Blind Spot: Why We Back the Wrong Ideas and What to Do About It, released just last week, Baird describes how mental shortcuts, biases, and funding models prevent us from tackling our most pressing social and economic challenges, instead opting to solve problems that are familiar, and where investment returns are more predictable.
Baird is concerned about three blind spots. The first deals with how we pick new ideas to invest in. According to Baird, the venture capital industry subscribes to a "one size fits all" approach, which ensures that solutions to some of our most important problems don't get funded. The incentive for quick, exponential returns, combined with the necessity to make funding decisions rapidly, often forces venture capitalists to rely on rules of thumb and pattern recognition too heavily, and to deploy funds to particular types of companies that feel safe and familiar. "Flipping companies", as Baird refers to it, isn't the surest way to meaningful innovation.
“I’ll argue that most great innovations don’t see the light of day, for reasons entirely of our own making. The idea that entrepreneurship is a meritocracy is a myth. In the real world, money flows to the ideas that are the most convenient to find or the most familiar, not necessarily those that are the best. Simply put, the blind spots in the way we innovate—the way we nurture, support, and invest in new ideas—make all our other problems even harder to solve.”
The second blind spot refers to where we invest in new ideas. It is no secret that venture capital is highly concentration in a few cities—both in the U.S. and globally. Because startups and venture capitalist are so reliant on networks to build companies and find investment opportunities, getting plugged-in can be life or death for young startups. But, what if you don't live in one of these places or don't otherwise have a network that enables introductions to leading investors? Baird says this leads investors to ignore investment opportunities outside of a small number of regions.
Further, he says this insularity also makes them unable to grasp the potential of many broad-reaching, high-impact innovations, because the problems they solve are unfamiliar to them or are otherwise not pressing issues in wealthy knowledge hub—lifestyle and convenience apps for well-heeled professionals in San Francisco are more likely to get funded (familiar) than would a startup that wants to provide debt solutions for people without a lot of money (unfamiliar).
“I’ve probably seen, in my career, over five thousand examples of “Famous Startup X for Industry Y”—think “Uber for tennis coaches” or “Kickstarter for nonprofits.” If you’ve ever played the game Mad Libs, you can generate a hundred ideas in an hour.”
The third blind spot is concerned with why we invest in new ideas. Corporations and investors too often take what Baird calls a "two-pocket" approach to business—with a profit motive on one side, and giving back (through corporate philanthropy or other social activities) on the other. Typically, the first is the clear priority of the business, with the latter only done minimally. More importantly, these two strategies are seen as being mutually exclusive, and are tackled by separate parts of the company. In the book, Baird quotes Pierre Omidyar, a founder of eBay: "Giving back implies, at one point, that you were taking. We’re dissociating what we do from what we value, and it’s becoming very difficult to improve the world as a result."
Like Omidyar, Baird thinks it's possible to take a "one-pocket" approach—aligning broader social goals with profit motive—and still earn healthy returns to investment.
“Two-pocket thinking is seductive, but wrong. Just like corporate CEOs who argue that one-pocket thinking would break their fiduciary duty to shareholders, or foundations that argue they cannot risk their endowment, venture capitalists often argue that investing with purpose goes against their basic job. This argument contains a faulty assumption: that if I integrate “what’s good for society” into my business decisions, I’ll lose money.”
These three blind spots—the structure and incentives of the venture capital model that reduce the types of companies "worth" investing in, the geographic and socio-economic concentration of the investor community that leads to an insular worldview, and the belief that investors can't do well by doing good—ensure that entrepreneurs who are looking to solve some of our most important social and economic problems will likely face challenges to getting those ideas funded.
In short, Baird is concerned that we have a myopic view of innovation, and that the incentives of getting rich quickly have directed many entrepreneurs (and investors) to pursue efforts that don't come anywhere near the top of our economic and social to-do list.
Much of the rest of the book offers solutions to these problems, and describes how the firm Baird founded—Village Capital—has fared in handling them, sharing many valuable insights and lessons along the way. And for those of you who don't know about it, Village Capital is worth checking out-—they are taking a novel approach to ensure that many overlooked companies tackling major challenges in agriculture, education, financial inclusion, health, and other areas critical to human well-being, have a fairer shot at getting critical early-stage funding. Their ingenuity even garnered them a HBR/McKinsey M-Prize for Management Innovation.
A Lot to Like
For me, there is a lot to like about this book. First is Baird himself. This is obviously a person of deep intellect, ambition, and an authentic desire to help our society and the people living in it. He sees the bigger picture. And, this isn't something to take lightly—we are short on smart young people who are both committed to making a positive impact, and who are capable of executing on it. Many moons ago, I worked in international economic development, and was persuaded by the bottom-up, market-based approach to private sector development, vis-a-vis the top-down, institutional method. This is a book that advocates for that.
To me, this read like an economic policy book more so than a management one, particularly with regard to thinking about the impact that entrepreneurship has on the economy, the workforce, cities and regions, and society overall. He begins the book by describing in detail how the American dream—self-made entrepreneurialism and upward mobility—is dead. This is a startling surprise to most people. I should know—it is an area that I have spent publishing on. Many books on startups and venture gloss over the impact of entrepreneurship—more of everything!—but Baird's book unpacks in detail the stakes for getting it right, and demonstrates the fact that entrepreneurs are essential to our sustained economic prosperity.
Some Feedback
There isn't anything I disliked in this book, though that doesn't mean I agree with everything either. Baird's frustrations about the implications of a network-based approach to securing startup funding are understandable, and to a certain extent, it is true that the current venture model does leave many impactful innovators on the outside looking in—something that is personal to me. I have half a lifetime of watching my father, a brilliant inventor, struggle to gain traction with investors and get his breakthrough ideas in transportation and logistics off the ground because his ideas were too far ahead of his time (he received that feedback often).
I'll infer that Baird thinks venture capital—or a repositioned version of it—is the solution to tackling many of these problems. I wonder about that. I don't see a venture capital industry that wants or needs to change its funding approach, per se—despite some well-advertised shortcomings of industry performance overall, and the adulation of some ridiculous rich-people apps, many firms are doing well by funding critical technological breakthroughs in computing, life sciences, and other areas. What's going on in Silicon Valley goes much deeper than social media and on-demand services—we just happen to be more familiar with those applications because we interface with them in a personal way. Underlying all of that is a lot of hard technology that someone took a chance on developing.
Instead, what I heard, was the need for something different—a funding model or asset class separate from traditional venture capital (impact funding), that contains certain elements of equity funding, but may also include other instruments (grants, loans, etc.) shaped around a "one-pocket" objective. That also repositions this as an issue to be addressed by deployers of capital (professional investors), and more an issue of appealing to sources of capital (limited partners).
One example is The Engine, a venture fund spun out of MIT with a three-pronged mandate—fund long-term, challenging, "deep science" problems that often get overlooked; focus on companies in and around the Cambridge, Massachusetts area (many of them spun out of MIT); and earn a healthy return. But for this to get off the ground, it took a group of motivated limited partners who cared about these issues and wanted to invest in the community (I hope I'm not mistaken, but I believe all of them are local to the area). You might say, the are motivated by "one pocket" thinking.
Secondly, I don't see how you get around the network issue. It seems that Baird is confounding the network-based approach to sourcing deals, with exclusivity. In reality that's how it probably works in many cases. But, I know for a fact that some of the most successful venture firms (in fact, two of them were mentioned in the book), don't do business this way. Brad Feld, an investor at Foundry Group (one of these firms), talks about the need to be inclusive in Startup Communities—Brad himself is renowned for his willingness to engage with just about anyone and has been a catalyst for an openness in his community of Boulder.
So, it may not be that networks are the problem per se, it may instead be the nature of some networks that are—networks that are exclusive or have leaders who don't embrace diversity will perpetuate the challenges of many non-traditional entrepreneurs from having their ideas seriously considered.
Some Ideas
Two things that Baird discussed I'd like to make some suggestions about for consideration. First, he proposed job bonds as a means of investing in companies that create good jobs in local communities. I like that. One thing I'd add to that, is to consider not just any jobs or any firms, but ones that are more likely to have a bigger impact to the broader local economy—where the "spillovers" and job "multipliers" are largest. From a cost-efficiency perspective, it's important to consider not just the direct jobs created, but also the indirect jobs and economic activity that is spurred by these firms.
Practically speaking, that means prioritizing companies that are high-value, and are able to sell goods and services outside of the region (companies in the "tradable" sector). Enrico Moretti, a professor at the University of California, Berkeley, discusses the increasing necessity for these types of companies to ensure local economic growth, in his book The New Geography of Jobs.
Secondly, Baird discusses ways that governments can either hinder or help startups. He points to the efforts of then New York City Mayor Michael Bloomberg, who concluded that making regulations easier for new companies would be too complicated and expensive to setup, and instead opting for a program that helps walk nascent entrepreneurs through the process of starting a business. I'd like to challenge that notion, and steal an idea from John Dearie, the founder and president of the newly formed Center for American Entrepreneurship (disclaimer: I am an advisor to the organization).
In his book Where the Jobs Are: Entrepreneurship and the Soul of the American Economy Dearie argues for an outright holiday for all non-essential regulations (and taxes) for early stage companies (I encourage anyone to check out his book, and in particular the appendix which is an agenda for sensible public policy that can help stimulate entrepreneurship).
Final Thoughts
This is an important and timely book from a person with the expertise and track record of pushing new ideas forward. It is forcing me to think hard about things, which is the mark of a great book. Even as I sit here about to post this, I acknowledge that I know very little about the type of impact investing Baird discusses, and therefore I feel that I have little to offer in constructive feedback. I'm still unsure about some of the comments I've written above. But, I'll just get them out there and see how they hold up.
Regardless, this is a great read, and I recommend it to anyone who is interested in entrepreneurship, investing in early-stage, high-impact companies, local economic development, and in government and public policy. Thanks Ross for a meaningful contribution to the discussion on how we innovate moving ahead. I wish you and the team at Village Capital continued success, and I look forward to following the firm as it grows.