I’ve been having a serious discussion with two colleagues of mine about closing the gap that exists between two groups:
- People of my generation (40 and older) who have capital they want to invest in innovation but only know the VC for-profit-only value model and don’t have any true view into or understanding of social entrepreneurship business models;
- People coming out of college today (27 and younger) who are actually creating untold value for the world without taking on investors because they don’t (a) know how to attract them, and (b) have heard too many horror stories
Jay and I fall into category 1 and Michael falls into category 2. All three of us agree that the gap above exists — due in part to rapidly declining startup costs — and represents a very real (and lucrative) investment opportunity if it can be closed properly. This opportunity is partly what the so-called “black swan fund” is tapping into as well, but I’m talking here of a distinct effort, which we want your feedback and participation on.
Creating a Workable Micro-Investment Model
Michael, Jay and I represent the three basic classes of people in this entrepreneurial ecology. Michael is an entrepreneur, I am a micro-investor, and Jay is person who sees and creates deal flow. We are trying to come up with a model that works, especially for Michael and myself — if it works for the two of us, Jay’s life becomes much easier and he makes more money. To these ends, I’ve outlined here the important elements of a micro-investment from my perspective (that of the investor). Hopefully Michael and others will chime in and say what’s important from the entrepreneur’s perspective (and what they need to motivate people on their team).
- I’d like to invest $1K to $5K in a number of different nascent “projects”.
- Monetary ROI potential is a necessary pre-condition for this activity, but it’s not my main motivation.
- The main “return” on investment for me is a combination of:
- catalyzing social good (40%)
- being “in the mix” on a social/business level (30%)
- feeling personally useful and productive in my life (20%)
- getting external ego validation (10%)
- The thing I want to invest in is a tribe in the Seth Godin sense. Tribes by definition coalesce around a leader (aka, the entrepreneur).
- I specifically don’t care about the legal structure or legal standing of the tribe. It can be a whole company, a project within a company, a de-facto, fluid, amorphous partnership of individuals, or a crowdsource. If successful, it will evolve into the correct formal/legal structure and I will trust the entrepreneur to honor the spirit of my investment in compensating me (see “moral integrity” bit below).
- I have to like and trust the entrepreneur first and foremost (and then I take it on faith that the tribe is reflective of that person’s values and energy).
- I will only invest in projects whose leaders I like personally and who have high moral integrity.
- I know I will be disappointed on the moral integrity front at some point by someone, and that’s okay. There will be zero tolerance for moral lapses: no more investment for such people, and they will be ostracized from my circle of influence.
- I am looking to get about 10% of the equity of the project for my initial investment of $1K to $5K.
- I expect the first look for follow-on funding if the project gets traction, and I understand the price will go up since the risk is lower.
- I expect the tribe to know if the project gets traction within about 3 months, if not it needs to be ruthlessly abandoned.
- I will not shed any tears and will praise the entrepreneur/tribe for making that tough decision rather than dinging them for “failure”. True failure — tragedy in fact — results from missing the real opportunities due to wasting time and money clinging to a bad or mediocre one.
- Since the cost for me to get in is about a tenth of the typical angel investment, I feel no qualms about doing little to no diligence or business model validation — in fact I feel liberated.
- Some entrepreneurs will ask for my strategic help (connections and advice) more than others. I will (mostly) give it on an as requested basis and not worry if a leader is not making the most of the relationship.
- Those that do leverage my strategic help are definitely more likely to get funded by me in the future, unless of course they make me a ton of money without it :-)
Here are some paradoxical-seeming truths that I have come to believe through my past experiences, and which the above model of investing relies upon and leverages:
#1 I am more happy and motivated to strategically help projects that I put only a small amount of money into (or no money!) than ones I put a big amount into. With the latter, the leader needed to convince me they have a brilliant, solid business plan and know exactly how they are going to go from concept stage to being wildly successful over the course of 3 to 5 years. This, of course, is utter bullshit: no success story follows the original business plan. But having that CEO come back to me (after convincing me to plunk down $100K) and admit they have no idea how they will eventually be successful, that does not inspire confidence. With a micro-investment, I’m happy to throw it on the wall and see if it sticks. If not, let’s all move on — and let’s keep the kitchen open to make more pasta while we still have some dough, the water is boiling and the staff is happy.
#2 Making money has little to do with why I want to invest like this, but if the project does not have making profits as it’s #1 goal, I’m not interested. Why? Because I don’t think it will be successful in achieving the non-monetary goals either in that case. When I evaluate a project for potential investment, I will concentrate most of my decision on the money-making potential. But I will need to convince myself that the project is set up so that non-monetary goals are structurally assured if the money flows.
#3 By “overly” and “naively” trusting the entrepreneur with my money, I know that I will be paid back manifold financially in the long run. Because by giving this trust so freely (once I am convinced of moral integrity) I am invoking powerful social influence factors that will make the entrepreneur feel like treating me more than fairly whenever they have any discretion in making decisions that affect me. And by not boxing them in with rigid contractual obligations and manufactured incentive schemes, I am increasing the number of discretionary decision points the entrepreneur has.
If you are interested…
If you have actual experience as an entrepreneur or angel investor, I want to hear from you most of all. Please comment below on what parts of the above resonate with you and what parts do not.
If you have put serious thought into becoming an entrepreneur or making an angel investment but have never done so, I want to hear from you as well, especially the reasons why you haven’t (there are no wrong reasons).
If you don’t fit any of these categories, please don’t respond, your opinion is not relevant. I will update everyone on what ultimately transpires.