In over two decades of running and investing in Internet companies with global reach, a question has kept nagging at me. If as I believe, and Marc Andreessen aptly put it a few years ago, software is eating the world, why is so much venture capital so glued to so very few geographic locations? Nearly 80% of venture capital in the US, and 50% of venture capital in the world goes to just three US states.
Anyone with a smart device anywhere can have access to all human knowledge essentially for free. It’s never been easier to start a company. And, yet, the very model by which venture capital is formed and deployed is strikingly unchanged since its inception. When so many more people have opportunity, why are we still investing in so few of them?
Among my favorite people to engage in this question is Ross Baird, founder of Village Capital a leading global angel fund here in Washington, DC focused on solving some of the thorniest problems on the ground in his markets. Ross has travelled the world, seen thousands of companies and (he’ll hate me for writing this), as a Marshall Scholar at Oxford, he brings remarkable candle power to any debate. Best of all, he has brought all this experience and thinking to a wonderful new book which you should immediately pre-order here: The Innovation Blind Spot: Why We Back the Wrong Ideas and What We Can Do About it.
Ross offers a provocative tour of the history of investing in innovation. He suggests that the very structures of how we invest too often put emphasis on a portfolio finding a small number of massive winners in Silicon Valley at the expense of great ideas elsewhere. This often traps investors in both trying to replicate their (or other’s) previous successes and re-affirm their (or co-investors) existing biases. While many firms have been successful, we’re too often ignoring the best ideas that can affect millions far from San Francisco, New York, Tel Aviv, or Beijing.
Can we do better? Ross answers with a resounding “yes,” and delves into key related questions:
Why are we so tied to deploy capital out of what he calls “two pockets?” Historically, one pocket is called “investment” – a hard-nosed look at capital returns – while a separate pocket is for do-goodery or philanthropy less focused on profit. Why, he asks, don’t we think about all our investments as one pocket – looking for successful investments that also can have significant impact?
Some of the greatest tech investments of our time are having profound impact on societies around the world (Facebook, Google, Apple). And I’ve seen emerging technology innovations and companies (e.g. Souq in the Middle East, bKash in Bangladesh, M-Pesa in Africa) re-define economies from analog to digital. And I’m seeing rising capabilities in education technology, health, crime prevention, fin tech, food security and more.
These companies are great investments, and also revolutionize societies more broadly, bottom up, often by the very entrepreneurs with the greatest stake in wanting those problems solved in their back yards, countries, regions well beyond Silicon Valley.
Why do we get so easily trapped in our own narrative bias? I’ve seen many of my best board members contribute invaluable insights and pattern recognition from years of running companies. But pattern recognition also creates the risk of driving our enterprises through side or rear view mirrors. Sam Altman of YCombinator once told me that he often ignores investment counsel from entrepreneurs who ran companies in the same space. Too often, they remember only the hard parts, and all that went wrong.
He’s right: I’m skeptical of many health companies, having run one. As Ross notes, entrepreneurs are makers – often making things that were never there before -- setting their own precedent, their own patterns.
How can we possibly extend our investment reach with the increasing and overwhelming quantity of deals we see each day?
I’m an investor, and see dozens of new deals a week. It’s tempting to invest in the ideas that are closest to home, or my friends are in. I’m also seeing tremendous enterprises solving critical challenges-- say in last mile logistics or access to health – with a massive un-met need for funding in parts of the world where investors aren’t looking; in fact, I’ve decided to intentionally concentrate my time in markets that I think have billion-people, billion-dollar opportunities that the capital markets don’t value.
When I travel, I consistently see that the best enterprises look very different than the winners of the past. Too often, I see investors over-excited about the “Whatsapp” or “WeChat” of x country. I think they’re toast; WhatsApp and WeChat already won the category. At the same time, we’re overlooking enterprises solving a massive, hands-dirty problems affecting millions in an African country that could easily expand to Egypt or Indonesia. These companies have enormous markets and big, unique data sets more leveragable than ever by the latest in machine learning, and we’re ignoring them.
Ross offers a plethora of action advice for investors, entrepreneurs and policy makers with extensive data and examples. He teaches us how to check, what he calls “type one errors” – the often unintentional herd mentality that can cloud our openness to new opportunities. He similarly warns us of “type two errors” of isolating ourselves in our own communities. “It’s not who you know, but who you get to know” he notes, pushing ourselves to learn new experts and new opportunities by widening effectively who we speak with.
Finally, Ross outlines a blueprint to invest in and lift up different places outside the well-trodden tech hubs. Ross steals a great word from Governor Hickenlooper, himself an entrepreneur and Governor of Colorado – “Topophilia”—Love of Place. “When people find meaning where they live… they feel freedom to create.” The best entrepreneurs I’ve seen in emerging markets are building bridges to Silicon Valley, but their primary motivation is being near and solving problems which they’ve lived with at home.
My biggest critique of the book is that as a passionate believer in Silicon Valley, I do think Ross generalizes too gingerly in his description of what’s wrong with the Valley mindset. It has become “in” to critique every aspect of Silicon Valley these days – and some entrepreneurs and investors alike have become cable TV parodies for sure. But in my experience, they are the exception.
Ross criticizes how money is concentrated in Silicon Valley: while some of this is unconscious bias, Ross also ignores the sheer network effect of talent that leads to this concentration. The best come to the Valley, attracting more of the best to want to come there. Ross criticizes the investor reliance on a “warm introduction,” relying too heavily on the people they know. Ross could do better to highlight how the secret sauce of entrepreneurship is collaborative, win-win relationships: in a thriving ecosystem, communities value trusted filters to help assess the strength of an entrepreneur or her idea.
Ross’ view that too many entrepreneurs come up with “new” ideas that “deliver fast food to yuppies in urban areas” simply treats an exception as a rule. His over-simplification underplays the power of ed-tech, health tech, fin tech, robotics, drones and their underlying AI that is solving a wide berth of problems that will affect, even save, millions of lives around the globe. Yes, as he suggests, Theranos, should not have received the quantity of funding at the quality of valuation that it did – but it was looking to solve problems affecting billions of lives. Companies everywhere are over-valued and lose money. We’re going to have big and often embarrassing failures: this is the game we have chosen.
While I wholly agree with 80% of Ross’ book, and spiritedly disagree with 20%, 100% of it’s a great read. The debate that Ross is provoking here is critical to the future of our innovation economy, and this remarkable book is a quick, lively, wonderfully written look at issues central to global growth, greater prosperity and happier lives anywhere in our new century.
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