"Writing Checks is the Easy Part"
Hopes, dreams, and downloadable spreadsheets @ Innovative.Finance
“Writing checks is the easy part.”
This was Brad Feld’s advice to us when we started the Greater Colorado Venture Fund.
We’d just won the state of Colorado’s commitment to anchor our first fund, a seed VC fund focused on rural Colorado companies only. Brad and his partner Seth, a GCVF advisor, have supported us with genuine belief in the entrepreneurs to be found in our market and the returns available by investing in them. We share this belief about Rural Colorado and overlooked startup ecosystems all over the world. We believe there is huge opportunity amongst underdog startups in underdog markets.
In reality, small communities and rural regions are still devoid of early-stage risk capital compared to their urban counterparts. In Colorado, since 2019, 30+ funds have sprung up in the front-range urban corridor. No other fund has been able to get off the ground in our rural Colorado market since GCVF’s founding in 2018. Most small towns and tier II and III cities don’t get the support we got to start GCVF.
A lot of the roadblocks to local early-stage funding lie in the numbers–or so folks think. I believe that is decreasingly true.
As GCVF raised the first fund, we had lots of questions about managing and deploying it. Meanwhile, Brad was pointing out the real job of running a fund– supporting the companies for the long haul.
For a community or region to reliably produce successful companies, it will require a community. This is largely the takeaway from Brad’s book, Startup Communities (the second edition of which GCVF helped write). The book frames the intangible things that help companies rise to success out of communities.
I particularly like the book’s separation of leaders and feeders. The first edition defines leaders unequivocally as the founders, and feeders are everyone else. In his second edition, he makes a more lenient distinction between the two and room for non-founders ecosystem leaders.
In the case of outstanding community leaders who are not founders, many (not all - a minority) truly add value to the companies they touch. I’ve seen it. They’re doing a lot of the “hard part” Brad was insinuating.
Don’t get me wrong - early-stage investing is a partnership with responsibilities and alignment above and beyond your typical “community support.” A lot of the “hard part” is true board-level work.
That said, there are real community leaders who add value on par with many VC funds’ “value add” services. They’re doing the same job.
GCVF eventually raised a fund large enough to support all three of us. We got job security to continue to do the hard work. Most community leaders don’t get this job security.
Anyone who has witnessed the rise of an ecosystem has also witnessed a startup community leader get burnt out. They’re inseparable events.
These are folks who often run local coworking spaces, lead the meetup groups, start accelerators, secure grants, place interns, the list goes on. Maybe they used to run a company themselves. Maybe they just know how to counsel a founder trying to navigate the idea maze, build a team, raise a family, or raise a round. They provide value and lack a straightforward way to monetize it. And then they burn out.
I’ve been in countless conversations, on both sides of the table, where the conversation is, “how will we keep this person engaged?” Thus far, the most humane advice is for them to find a more stable job and give up their community-facing efforts.
If the ecosystem is lucky, a succession plan is in place. If not, the community will have to adapt without them. The community leader model is broken.
We rarely get to see what happens when these leaders, acting as a nexus of community knowledge and trust, compound their efforts over a long time horizon. That is the true tragedy.
But wait, writing checks is the easy part.
In well-developed ecosystems, countless funds get raised and deployed without any differentiation or tangible company support. They just do the “easy part” and get management fees to do so full-time. Unlike true community leaders, they’re not helping founders in the trenches. They’re networking, shmoozing, tweeting.
What if we armed our A+ community leaders with capital to invest and management fees to keep doing exactly what they’re doing already?
And I mean exactly what they’re doing. The fund is not the job, it is simply the monetization attached to the person already doing the hard work, so the ecosystem can see their efforts compound year after year. Let the fund part be the side-gig that happens to pay the bills.
To be fair, there are countless examples of the community leader to VC trajectory playing out (myself included). This isn’t a new idea.
The kicker is enabling capital formation in places where VC can’t play. Across the world, young startup ecosystems are birthing fantastic, investable companies that won’t fit the VC model. The local culture and competency may not be in a high-growth scalable sector. A $20M “micro-VC fund” is the wrong tool and far too much capital for their proximal community to absorb. Frankly, it is far too much to deploy and manage thoughtfully part-time. But that’s a solvable problem.
The future of early-stage funding is decentralized amongst a collection of local, small, flexible vehicles deployed by trusted community leaders.
These are funds of sub $10M, but often even less than $5M. A 2% fee on a $5M fund is $100,000 per year. That is a minuscule budget to the traditional VC world, but a more-than-healthy budget for a community leader to continue doing their thing.
This may smell like LPs subsidizing a full-time role, but there is a greedy investor benefit to this model too.
The person most qualified to invest in the local community is the person with the most trust and visibility in the local ecosystem (*don’t take this as glossing over the appropriate checks and balances to ensure sound decision-making*). The #1 factor for financial success in startup investing is just being there with a checkbook when the quality early rounds get raised. When true community leaders are the check-writers, they’re already “in”. LPs just need to arm them with capital and a sound decision-making structure.
However, the future isn’t just a spray-and-prey portfolio of preferred equity checks.
Many underdog companies need risk capital rounds of less than $500k, and often less than $250k. For this reason, along with the simple fact of being off the beaten VC path, these early checks will be uncontested by most existing venture investors.
The checks will also need to be structured flexibly: equity, debt, redeemable equity, revenue share - whatever is right for the company. This is the part where the ecosystem can become warped by a capital influx…or enabled by it.
Structuring deals to fit a company’s needs, not the funds, is critical to ensuring the capital remains authentic to the founders and community it calls neighbors. Yes, the “easy part” just got a bit harder.
If done right, more young companies get funded and startup ecosystems around the world finally get to see the efforts of their exceptional community leaders compound for many more years.
This is my unabashed dream for the Innovative Finance project and the fund and deal models Jonathan Bragdon and I made for it. There is one spreadsheet to model a deal across numerous investment structures, and one spreadsheet to model portfolio returns across these numerous structures.
Hopefully, getting capital deployed and community leaders compensated just got a touch easier.
If you are one of these community leaders, or an investor looking to match your capital to your community’s capital needs, feel free to reach out.