Consequences of Ignoring Scaling Solutions
In April 2017, The Ewing Marion Kauffman Foundation convened a diverse group of 50 professionals over two days in Kansas City in order to discuss one fundamental question: What would we do with a trillion-dollar collective investment in entrepreneurs across the United States? The convening in Kansas City brought together bankers, venture capitalists, community development finance executives, entrepreneurs, representatives from government entities, faith community leaders, and aligned foundations. They provided space for those in the room to discuss existing, effective solutions while collaborating to design new, promising opportunities. The group generated hundreds of ideas that could help to bring about a substantial sea-change in our system for investing in entrepreneurs. But ideas are one thing, practicality is another.
As is the case with any major moonshot, there are already many people and organizations working on the problems we face in American entrepreneurship, with demonstrable success – and yet, these same organizations struggle to maintain the attention of funders. It is important we continue to provide catalytic resources and solutions to support new and innovative ideas – but, just like in the 1960s with the original moonshot, there have always been things working that warrant scale.
Ideas are one thing, practicality is another.
As an investor, and as a community funder striving to build more robust ecosystems, the question of how to balance supporting what’s new versus scaling existing solutions is one that I find myself wrestling with at times. In order to realize the moonshot for entrepreneurs across America, we need to support ideas and companies that have yet to be discovered; but we also need to do the work of scaling existing solutions and organizations.
Here are two ways we neglect to provide appropriate scale to proven, existing solutions:
People Prefer a Shiny New Penny
It’s human nature. We all like the next, best thing. We all assume foundational programs and organizations will persist, so we prefer to be credited with discovering that shiny new penny. I imagine, in my mind’s eye, that as we discuss new and exciting ways to support entrepreneurs, there are numerous organizations standing in the corner, waving their arms back-and-forth in a desperate effort to remind us that they are in the arena every day and are able to provide even more and better solutions, if only we got behind them financially to provide adequate funding. It’s important and at times necessary to consider new approaches and organizations, but not at the expense of existing solutions that have proven themselves worthy of support.
People Apply a Program Mindset Over an Investment Mindset
I have found that as it pertains to economic development, we apply a program mindset instead of an investment mindset. A program mindset is one that requires a detailed plan and budget, and then an expectation from funders to follow that plan exactly as defined. An investment mindset recognizes that variables change and the path may be different than anticipated, but the outcome itself is what matters. An investor views budgets and plans as instruments deployed to achieve an objective, often working in close partnership with organizational leadership to navigate the inevitable twists and turns involved in growing an organization. Program officers, conversely, often view the plan as the objective, requiring, above all, detailed reports on how the plan was executed. If we are to support entrepreneurs in an ever-changing environment, the solutions themselves must be flexible. We need to identify people and organizations that are working faithfully toward a supported goal and support them without strings and without requiring strict adherence to rigid plans which often become outdated and outmatched. There is a mantra among investors that venture capitalists invest in people, and then trust those people to do the job. Non-profits should be given similar flexibility and trust when it comes to spending money!
The Unintended Consequence of Neglecting to Support Organizations at Scale
We like organizations that have a proven track record and that are surpassing our expectations in every way. However, by neglecting to scale what works, we rob these very organizations of the resources they need to attract and retain the talent required to deliver those results quarter over quarter. Appealing to a person’s altruism for employment only works for so long. Organizations eventually have to support their employees competitively or risk losing the very talent that makes the organization distinctive and worth scaling.
In the final report to Kauffman on the $1Trillion Moonshot, we highlighted some of the organizations worth scaling. For the purposes of this short article, I am featuring two that I have worked with over the years, seeing firsthand both the amazing successes they have achieved and the unbelievable difficulty they face in overcoming the hurdles listed above:
Village Capital finds, trains, and invests in entrepreneurs solving real-world problems (e.g. health, education, energy, agriculture, financial services) in overlooked markets. Village Capital has trained more than 500 entrepreneurs through 50+ programs, and its 80 investments boast an impressive 91% survival rate and have created more than 10,000 jobs . Village Capital’s method of peer-selection and venture development reliably identifies promising ventures that are solving significant global challenges, providing an efficient and inclusive alternative to conventional due diligence; 38% of Village Capital portfolio companies are led by women, 19% by minorities, and, in the US, 86% are from outside of New York, Massachusetts or California, the three states that receive more than three-quarters of all venture capital investment.
However, despite these amazing statistics, they struggle to raise balance sheet capital to support their work. They are routine, as their tagline suggests, democratizing entrepreneurship and producing materials for the broader entrepreneur support community (see VIRAL and the VilCap Communities effort). Yet when entrepreneurs seek funding, they find it difficult to find the capital it takes to run their core investment readiness programs that have produced these inspiring results. Village Capital is forced to take on side projects that provide the critical capital needed to pay their personnel, but that distract them from the core function of their organization. Recruiting and retaining top talent is often a challenge, as a lack of balance sheet capital means Village Capital is often unable to offer competitive salaries. Instead of investing with the mindset that they will produce, we fund them programmatically and require cumbersome reporting, creating inflexibility in an organization that is seeking to keep up with the pace of entrepreneurs.
Kiva US helps any founder building a business secure a loan. Kiva has lent over $1 billion worldwide, and its U.S. program has funded over $20 million in loans, unlocking capital within the U.S. and bringing in new capital through loans sourced abroad. Kiva’s borrowers include a high proportion of women (58% female) and minority business owners (27% African American and 30% Hispanic), helping to fill the gap in access to funding for emerging entrepreneurs within these demographics.
At Access Ventures, we have had the pleasure of working closely with the entire Kiva team in multiple markets, and have been impressed with their ability to move the needle on a seemingly tight budget. Jonny Price, Founder and Director of Kiva U.S., has built an impressive program across the United States with (at times) a team of 3-4 full-time individuals. Kiva is delivering vital and transformative capital to disconnected entrepreneurs everywhere. Nevertheless, they struggle to maintain a team of dedicated developers to keep up with the ever-changing online platform.
In both of these cases (and in so many others across the country), there are amazing organizations and leaders doing the hard work of sustaining and improving our entrepreneurial economy. We owe it to these amazing individuals and organizations, and to the people they serve, to put aside our bias for the next big thing and to put on the mindset of an investor as we partner with them to scale what already works.
Written by Bryce Butler @brycebutler