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Want to change the world? Solve the biggest problems facing society in education, health care, food, energy and resource use? Silicon Valley certainly claims it wants to. And yet. There’s something a bit off about where the Valley sends its money, notices venture capitalist Ross Baird.
“Seventy-eight percent of startup investment goes to three U.S. states,” the 31-year-old tells me, citing 2015 figures from the National Venture Capital Association. It’s his favorite statistic and sums up his mission: to bring Valley-style innovation and entrepreneurship to places like Louisville, Kentucky, New Orleans and Richmond, Virginia. Silicon Valley may well be the hotbed for consumer tech, but Baird isn’t after the next Tinder or GrubHub. Instead, he’s eyeing companies that can solve what he identifies as more important problems, including the water, energy and education spaces. His backers hope that these companies are billion-dollar opportunities in the waiting: The strategy “will result in some real breakthrough companies, [as well as] a more evenly dispersed innovation economy so we don’t have all our eggs in a few baskets,” says Steve Case, co-founder of AOL and lead investor in Baird’s fund.
Baird’s Washington, D.C.-based company, Village Capital, is “first and foremost an investing strategy, not a social impact strategy,” says Lenny Mendonca, director emeritus at McKinsey & Company and lecturer on economic inequality at Stanford Graduate School of Business. Rather than career VCs, it’s entrepreneurs themselves who make investment decisions for Baird’s fund. Every month or so, Village Capital assembles a community of entrepreneurs focused around a shared problem or geographic area, for instance fintech in Mexico or Central Appalachia–based startups; at the end of their three-month training and mentorship program, they rank each other’s companies to decide who should receive funding. (You can’t vote for your own idea.) This novel approach to investing is turning some important heads, among them billionaires–turned–social-impact gurus Case, Jim Sorenson and Mitch Kapor.
The Atlanta-born investor came up with this peer selection idea while working in microfinance in Indian villages for a year in 2008-09 — hence the firm’s name. “The basic thesis of microfinance was that women who know and understand each other as peers are better forecasters of who’s likely to succeed than a loan officer,” says Baird, who founded the firm in 2009. Today, the roughly $18 million fund has nearly 70 companies in its portfolio. Several hundred companies have taken part in Village Capital programs and missed out on the prize.
— Village Capital (@villagecapital) October 7, 2016
Village Capital’s target sectors — including agriculture, fintech, energy, education and health care — tackle Baird’s two hot topics: income inequality and resource sustainability. Take Village Capital portfolio company Upsie, which helps consumers shop for affordable warranties to avoid getting ripped off. Upsie’s Minneapolis-based founder, Clarence Bethea, is African-American and targets low-income consumers, which puts him “0 for 3 in the pattern recognition” of traditional VCs, Baird tells me — not white, not in the Valley and not addressing the aches and pains of wealthy Californians. “People invest in who and what they know and understand,” says Baird, so “you need to change who the decision makers are.” Forty percent of entrepreneurs who get peer-selected in Village Capital programs are women (substantially more than the industry-wide average), while 20 percent are people of color.
Don’t think Baird and company bet on mere tokenism: Village Capital identified Minneapolis as an important global city of retail (Best Buy and Target are headquartered there), and fellow entrepreneurs in the summer 2016 U.S. fintech program believed Upsie was solving an obvious problem, and that Bethea had “direct experience with his target customer base,” says Baird. Upsie received $75,000 of peer-selected funding from Village Capital and now holds almost $2 million in capital investment. Other Village Capital portfolio companies include MPOWER Financing, which provides higher-education loans to students shut out by traditional financing systems, and Future Pump, a Kenyan company that produces solar-powered water pumps for irrigation.
A Southerner to the bone, Baird is charming even while squeezing media interviews between bus tours to promote regional investment. He was an academic highflier before entering the world of entrepreneurship and investment, studying as a Truman Scholar and Jefferson Scholar at the University of Virginia and as a Marshall Scholar at Oxford. He sometimes describes his mission in terms of lofty academic ideals, critiquing assumptions of modern capitalism — chasing short-term profit alone, he spiels, may not necessarily lead to the best long-term investment strategy.
Baird, who continues to think of himself as an entrepreneur, founded an education startup in college to promote civic engagement for students. An investor in that first company eventually helped him climb the investment ranks and launch Village Capital. Though he’s farther from the frontlines, you can see the archetypal entrepreneur shining through. There’s his salesmanship (inherited from his insurance salesman father) and his creativity (from his mother, who worked at an art museum).
Experts say the peer-selection model at the heart of Baird’s approach may not be the silver bullet. “I’m not convinced,” says Jeffrey Carr, professor at NYU Stern Business School. “Simply because someone started a successful company in a certain industry does not mean that they can replicate that, or that they can identify it in somebody else.” Career investors, he says, are exposed to hundreds or thousands of business plans, giving them a perspective beyond that of entrepreneurs — and good VCs have records of double-digit returns. Plus, critiques of capitalism aside, the Village Capital model of supporting medium-size, impact-based companies is far from the tried-and-tested moneymaking Valley model of making dozens of risky investments in the hope that one becomes a Dropbox or Snapchat.
But Baird’s more concerned about writing a new venture capital cartography than the dough. That map? He’s going everywhere, he hopes — except for New York or Silicon Valley.
This editorial article was originally created by OZY Media and published on OZY.com prior to, and independently of its inclusion in this JP Morgan Chase & Co. sponsored series. OZY Media claims the full rights and responsibilities of this article.