faster returns, which will amplify our successes, and those returns will get reinvested back into the startup community and provide support for new startups.
(ii) Social Capital’s “Capital-as-a-Service” (CaaS) approach, on the other hand, is likely to return fair—but not huge—outcomes because it will tend to result in a spray-and-pray portfolio strategy, with lots of bets in many companies. As Monte Carlo simulations of portfolio design show, the more venture bets you make, the more likely you are to return a good outcome with less risk, but also less upside.
At the same time, those founders and operators raising money from CaaS-esque vehicles will look for additional funding from smart firms who mentor, guide, and support them and their company. As a founder, having access to capital was huge, but access to individuals who taught me how to build a successful business (in addition to providing capital) was far more valuable.
In an era of algorithmic funding, where computers are making the investment decisions based on any available data, those companies that also raise money from the best investors with a history of supporting successful entrepreneurs will be the winners.
For Detroit, that means that we continue to need smart, seed-stage money in the market. This need doesn’t change in the world of algorithmic investing, but machine-driven investing does probably help our companies succeed by providing additional capital with less bias towards location. It’s worth noting that one of Social Capital’s stated benefits of CaaS is a reduction in all sorts of bias, from location to education to race, and an increase in overall diversity.
(iii) Lastly, initial coin offerings, in which companies raise money by selling units of cryptocurrency, are causing venture investors everywhere to pause and reflect. While I think it’s too early to make a true judgment on where and how token sales will have an impact on venture as an industry, I do think we can make some predictions.
ICOs will absolutely eat into some venture opportunities. But they’ll be few and far between, and will hurt growth-stage investors far more than early-stage investors. ICOs will act more like revenue boosts for later-stage companies than fundraising for early-stage companies. As we sort through the regulatory environment of cryptocurrency sales and the hype burns off, we’ll see them being used more by companies with real traction to kickstart revenue at a later stage, not by seed-stage firms with an idea and a team.
For Detroit, this means that token sales will have little impact on our startup ecosystem. We have few growth-stage companies ready to use tokens as a meaningful revenue kickstarter, and the region’s capacity to invest remains limited at the seed stage.
Net-net
While there’s plenty of change, disruption, and innovation happening in venture, the impact to early-stage investing in nascent startup communities like Detroit is minimal. We have plenty of our own challenges, but these disruptions are not part of them. I don’t believe seed- and early-stage investing is a science, and I don’t believe we’ve figured it out; there’s plenty of innovating left to do. But the current hot innovations in venture are not targeted at early-stage companies and are not impactful for secondary or tertiary markets like Detroit.
Remain focused, invest more, give first, and let a thousand flowers bloom.
(Note: This is an edited version of an article first posted on my blog, Made in Detroit).
