Editor’s Note – Week of October, 24, 2016
Innovation in Investing
Entrepreneurship consists of identifying unexploited opportunities and exploiting them. The immense value that startups can and do create relies on this "going against the grain." In many ways, new funds are startups, too. Not only do they typically have to raise money from investors (high net worth individuals, family offices, limited partners, etc.), but they also need to identify and invest in promising opportunities, i.e. startups. But too often, investors get lazy (or at least un-creative) and default to looking for the same tried-and-true formulas, sometimes more positively described as "pattern recognition," when it comes to picking investments. This can be limiting both for innovation and for the long-term success of these investors.
Bryce Roberts, Managing Director of Seed Stage Investor OATV, recently described the path of his firm in remarkably honest terms. He explains how OATV was one of the first institutional seed funds, started over a decade ago, and that the reason for seeking smaller funds for seed was not "because we couldn’t raise more capital, [but] because it aligned with the optionality we were trying to preserve for founders and ourselves." But fast-forwarding to today, he admits that "the business of seed investing has changed as has it’s business model. We’re rapidly moving away from a business model of optionality to one of arbitrage. The implicit A rounds and the siren song of Unicorn culture have proven too compelling to resist. Despite our best efforts to change the game, we’ve simply become another player on the field. Fundraising has become our business model." In light of the fact that there has been an explosion in the number of new seed funds in recent years (470 first-time or spin-off venture capital funds in market according to a recent Prequin Report), Bryce urges investor newcomers to think critically about how they go about investing, i.e. "to think beyond the conventional wisdom and pattern recognition baked into the business of building billion dollar businesses. A business model that depends on the business model of upstream capital will significantly limit the profile of founders one can fund and the outcomes they can achieve. [...] With fresh sets of eyes and full bank accounts, there is more to be done than simply running a VCs playbook on a smaller scale."
Of course, it's never so clear-cut whether a potential seed investment is a truly new and game-changing idea or one that will benefit from "implicit A rounds" insured by later-round investors. But at the end of the day, it's worth keeping in mind the idea that if you're still figuring out your investment thesis, there's something to be said for truly seeking out promising founders and companies that are mission-driven and have the potential to build something truly new and valuable, albeit different. A few MIT startups that have crossed my radar lately that may fit this thesis include Solstice (community shared solar), Rendever (VR-powered elderly care), and Ricult (lower interest rates for farmers in developing countries).
-Teddy Lee, Editor