What would the perfect tech for good investor look like?

We’re really just getting started with Bethnal Green Ventures. We believe that tech has the potential to massively change the world for the better, solving big problems in healthcare, education and sustainability to name a few. We believe that there’s no shortage of people out there who have the talent and desire to build the new tech startups to solve those problems and finally we believe that the capital to help them is out there, even if it’s perhaps not yet getting to the people who could do the most with it.

As we develop we want to get a lot better at what we do and we think it’s always good to aim for the stars. Hence the question in the post title — if you had a blank piece of paper, what would the perfect tech for good investor look like? What support would they provide? How would they provide it? How would they behave? Where would they be based? How would they know if they were successful?

Accountability and accelerators

Daniel Epstein of the Unreasonable Institute has a really interesting blog post up about accelerator programmes and accountability. The context is David Cohen’s guess that there’s a new accelerator programme set up every day. He might be right. The number is certainly increasing on Jed Christiansen’s Seed-DB although the number of impact accelerators (which is what I’m looking at at the moment) is much more modest. I get a similar level of emails to Daniel from people wanting to set them up.

What worries Daniel is the significance of what startups give up to accelerators, namely shares in their companies. At BGV we get a 6% stake in the startups in return for the £15,000 we invest and the support they get during the programme. Daniel thinks that programmes should have a break point half way through where the startup can decide whether or not they think they’ve got that much value and he’s putting it into practice on the upcoming Unreasonable At Sea programme. I think that’s a good idea although for us it would make more sense for it to be at the end of the programme and possibly even six months after the programme when it becomes clearer what impact we’ve had.

I think all accelerators really need to get the stats right as well and publish them openly which is why I’m a big fan of Jed’s Seed-DB. Not all the numbers are meaningful for everybody — Paul Graham has written about fundraising being a misleading statistic for example (which I agree with) but some founders find it useful. The mark to market value of the startups is another metric that is used or some programmes look at how many jobs have been created or the total revenues of startups they’ve supported. There’s no settled way of measuring things yet but I’m fairly sure it will come with time.

When you add the social impact element to all this though, things get even more complicated. When you start to consider how to measure the social or environmental impact that all your startups have had it becomes a bit like three dimensional chess. I don’t think anybody has cracked that for early stage social ventures yet.

My only addition to Daniel’s idea and what Jed is doing is that I also think we should all be publishing our costs, although I doubt this is going to happen soon because compared to other investors, the ratios don’t look good. For the last cycle of BGV for example we invested £85,000 and the programme cost £60,000 in cash terms. From what I hear that makes us pretty efficient but you also need to bare in mind all the ‘in-kind’ support we got from Google, the mentors and lots of other people. Again, it’s complicated but we do all need to work on this to get some standards in place. It’s something I’m asking all the programmes I’m meeting for the Field Guide about.

Why social investment is more than a fad

I’m no fan of buzzwords or phrases but sometimes there is something substantive behind them. Over the past few years ‘social investment’ (also known as ‘impact investment’ in some quarters, particularly the US) has been growing as an idea and, while I was a bit of a cynic early on, I’m coming round to the idea that it is more than just flavour of the month.

I got the chance to see Sir Ron Cohen give a couple of talks in London earlier this year. You might have seen him on Newsnight or similar over the past few months as he’s become more high profile as Chairman of Big Society Capital. His back-story is that he played a very significant role in the development of the venture capital and private equity industries in the UK and elsewhere, setting up Apax Partners in the 1970s. There’s a long list of interesting companies he’s either invested in early on or turned around using a more private equity like approach.

He tells the story of social investment slightly more formally in this SSIR article but about twelve years ago (apparently after a phone call from the Treasury of Gordon Brown’s era) he started thinking about how the approach he’d developed in financing businesses and delivering a return to investors could be applied to tackling social issues. The scale of the challenge was what interested him. He saw social problems getting bigger but charities and the public sector less able to innovate because all their time was spent servicing existing needs.

He set about proving that social investment could have an impact so co-founded Bridges and the Social Investment Business and played a role in the creation of social impact bonds that are now spreading to other countries. Sir Ronnie talks about social investment having a range of returns and for Big Society Capital he talks about an average return of 5–6%. Some people think that’s very ambitious in the current economic climate, but in the venture investment world that’s pretty low. VC funds that go fundraising would be predicting a 15–20% IRR.

Investors often talk about a ‘pipeline’ of investment. I’ve been watching this field develop over the last few years in the UK and one of the things I realised is that there’s a kink in the pipe right by the tap. As Seedcamp has done a fantastic job in solving that in for European tech startups over the past 5 years, the social investment world has to now focus on creating opportunities for the brightest and the best to start new ventures. BGV is our attempt to do that and I think it’s good that a few other people seem to be doing that too.

I think social investment will continue to grow and start to be an appealing source of finance for founders where they can see a match between their aims and those of their investors. It’s already becoming a bigger part of the investment world in Silicon Valley with many of the big names (such as Mitch Kapor) setting up ‘impact funds’. I’m sure there will be plenty of mistakes along the way but I’m pretty hopeful that the growth of social investment will be a good thing.

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