Investing In Overlooked Startups Could Bring Social And Economic Equilibrium
Ross Baird is the CEO and founder of Village Capital; author of “The Innovation Blind Spot.” Photo: Nina Roberts
Published in Forbes on September 18, 2017
A group of diverse investors, consultants and entrepreneurs gathered last week in New York City to celebrate the publication of Ross Baird’s new book The Innovation Blind Spot. The outgoing and talkative Baird began by underscoring a known fact to this crowd, “Capital has not been equally distributed.” He continued that venture capital has been funneled to startups typically founded by white males from similar socioeconomic backgrounds, located in areas like Silicon Valley, New York City or Boston.
Baird believes this concentration of immense capital among specific, small groups has contributed to today’s radical income inequality and all its repercussions. “The social fabric of the U.S.—” says Baird, “capitalism and democracy—we are seeing a fraying of both.”
Baird is the 32-year-old founder and CEO of Village Capital, a Washington D.C. venture capital fund, which invests in startups often overlooked by mainstream capital funds.
Mexican snacks like chips with guacamole and spicy corn chowder were consumed by the crowd; Baird eventually sat down with investor Jeremy Mindich at the SOCAP/Impact Republic office to discuss his book and the larger question of impact investing. “It’s not fair,” Baird joked to the crowd, “Jeremy used to be a journalist, he’s going to have better questions!”
Sprinkling in the term “blind spot” into the discussion with Mindech fairly often, Baird brings up Jerry Nemorin, a Haitian immigrant who founded LendStreet, a debt consolidation startup that helps poor families in deep debt. Village Capital invested in LendStreet; a prime example of a mission-driven business that typically doesn’t get funded by mainstream venture capital funds. Village Capital has invested in other startups founded by immigrants, Fin Gourmet Foods and Mpower Financing, which specializes in education loans for immigrants who don’t have credit history.
Baird makes the analogy that today’s small group of “weird” impact investors are akin to those once “weird” hedge fund investors 25 years ago. Mindich, now a managing partner at Scopia Capital Management and co-founder of Propel Capital, gently reminds Baird that hedge funds are largely profitable. “These are not super high returns,” notes Mindich of the startups Baird champions.
Does investing in a startup with a social mission equal modest to no financial returns? Baird doesn’t think so; the outdated venture capital model needs to be overhauled for a new era.
Baird believes that the two pocket system of making as much money as possible in one pocket and giving it away to non-profits and causes in another pocket needs to be merged into one pocket. Why not invest in startups located in small cities? Those startups launched by immigrants, and/or people of color, and/or women?
Earlier in the day Baird answered questions about why he launched Village Capital and why he wrote The Innovation Blind Spot, Why We Back The Wrong Ideas and What To Do About It.
Nina Roberts: First, why did you start Village Capital?
Ross Baird: I came to investing and backing startups from the perspective of an entrepreneur. I never had an interest in finance.
I started an education company when I was in college. I cold called Bob Pattillo, I didn’t know much about him other than he was a guy with money who lived in Atlanta, where I grew up. I pitched him on my idea; he took a chance on me.
Later, he wanted to start doing direct startup investing. He said, “I’d rather have an entrepreneur than an investment banker, I think entrepreneurs understand what entrepreneurs need.”
Roberts: Who invests in Village Capital?
Baird: All of our investors are entrepreneurs themselves. Steve Case, the founder of AOL, is a large investor. Mitch Kapor, the founder of Lotus, acquired by IBM, and his wife Freada are investors.
Roberts: Do you think coming from a non-financial background makes one less interested in pure monetary gain?
Baird: I think a lot of people go into finance to make as much money as possible, and as quickly as possible.
If you try and do what you can to maximize and capture value in the short term, it really prevents you from creating truly valuable in the long term. I think it’s true in the stock market, with startups and venture capital.
I started Village Capital to solve a problem: how to invest in entrepreneurs that can build great companies that are undervalued for a number of different reasons.
Roberts: Is it a misconception that if you invest in a company that has a social mission, the return will be meager?
Baird: Yes! Historically, people that wanted to do something mission driven thought non-profit was the only career path. Now they are building really great businesses. Warby Parker is a billion dollar eyeglasses business, co-founded by Neil Blumenthal, who was the director of the non-profit VisionSpring.
I think people used to feel like they had to choose: either make as much money as possible—and then feel really guilty about it—or, do something mission-driven but feel like you can never realize success in your career. That’s left us with inequality at a 100-year high and a business world that is wildly out of touch with the problems that we have.
When we invest in immigrant founders like Jerry [Nemorin, founder of LendStreet] or Mike [Davis] and Manu [Smadja, co-founders of Mpower Financing], we’re investing in people who have experience with problems that most people at Stanford Business School or most Silicon Valley venture capitalists haven’t experienced.
Roberts: Do you ever get the, “Oh, that’s so ‘good’ of you” about investing in overlooked founders from the more traditional venture capital people?
Baird: Totally. It’s almost like when I talk about the mission of our company, we’re put at the kids' table. Yup, the people who care about society are put at the kids' table; the people who care about business are at the grown-ups’ table.
But then the amazing thing is, the 2016 election… almost every venture capitalist supported Hillary Clinton; 90% of venture capital went to states where Clinton won. Venture capitalists didn’t support Trump. But the kind of thinking that pervades venture capital sure put Donald Trump in office.
I remember last October I had dinner with a venture capitalist in San Francisco before I took a red eye to Cincinnati for work. He said, “You mean, there are actually companies in Cincinnati worth investing in? How can that be possible?”
Roberts: Has it been financially rewarding to invest in those companies?
Baird: They are very early. It takes a long time to build a company. I started Village Capital seven years ago, we’ve invested in 70 companies. For the typical company, 50% survive five years in; we’re seeing about 90% of the companies survive.
Roberts: Is Village Capital more of a slow and steady approach to investing?
Baird: I think the framework of venture capital is, “We are happy if we create one billionaire and 99 failures.” But, we’re in a world where eight men own half the world’s worth. If our entire financial system is designed to create one billionaire and 99 failures, we get the political and social unrest we deserve.
The conventional wisdom of today's venture capital and startup funding—people aren’t thinking through the social consequences.
The portfolio we’re trying to create is where a lot more people are really successful rather than boom or bust. We’re seeing nine out of ten companies making a reasonably good, profitable shot at success.
Roberts: I’m sure you’ve heard of the new startup Bodega.
Baird: That’s a prime example of blind spots!
Roberts: Why did you write the book, The Innovation Blind Spot?
Baird: I think of Jerry Nemorin—a black guy in central Virginia solving poor peoples' problems. He has a very, very small chance to build his company, why is that the case? Digging into and solving that problem is why I wrote the book. It gave me a chance to step back from my day job and try to understand how money is moving into new ideas.
This Q&A has been edited and condensed for clarity.