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INVESTING

The Only Incubator That Lets You Choose Who Gets Funded

Think you're smarter than a VC? Village Capital lets the entrepreneurs decide who gets funding. It's a plan so crazy, it just might work.

Ross Baird has a problem with the status quo in Silicon Valley.

"Silicon Valley is supposed to be so innovative, but people spend a ton of time making apps just so we don't have to call to make dinner reservations," he says. "It makes yuppies' lives more convenient, but it's not actually solving world problems."

It's because of this beef with business as usual that Baird launched Village Capital. It's a new type of incubator and investment fund that not only backs companies that do aim to solve world problems, but it also chooses which companies it funds in an entirely different way. That is, it doesn't actually choose the companies, at all. Entrepreneurs do.

How It Works

Since it was founded in 2009, Atlanta-based Village Capital has pioneered a unique peer investing model that puts entrepreneurs in charge. The firm has sponsored 23 programs in seven countries worldwide, where founders come together for three months to develop their business ideas, much like a traditional incubator. The difference is, at the end of those three months, it's the other entrepreneurs in the cohort who decide which business gets the final investment.

Baird conceived of this unique approach while working at the impact investment firm Gray Ghost Ventures. He was frustrated by the fact that the venture capital model, as it exists today, favors companies that can promise investors a quick exit.

"The companies people fund look more like Facebook and LinkedIn than the kinds of companies that may take a longer time to build, but would have disproportionately positive benefits for the world," he says. "The problem we think we've diagnosed is the way people support entrepreneurs today in the capital markets."

Because the other entrepreneurs in the cohort don't stand to make a return, their decisions are based less on planning a quick exit and more on the potential impact that start-up could have. Of course, that doesn't mean they overlook financial viability altogether. Three times a session, every startup in the cohort grades every other startup on 24 different metrics, ranging from potential for profitability to ability of the product or service to create change. (Companies aren't allowed to grade themselves.) The two startups ranked highest on the last assessment are the ones who get funded. 

The Results

The peer investing model has yielded some interesting data points not found in traditional venture capital investing. For instance, women-run companies are far more likely to get funding through peer investing than through traditional funds. That, Baird says, should get investors' attention, since women-run companies, recent research suggests, deliver higher returns to investors.

"The market is undervaluing a specific asset which is women co-founded businesses," Baird says. "Women, we find, tend to under-promise and over-deliver. Men tend to over-promise and under-deliver. In the entrepreneurship world when you have two minutes, over-promising helps." When women get to pitch over three months to a room of their peers instead of two minutes to a panel of investors, in other words, they get a fairer shake.

To date, 350 entrepreneurs have participated in Village Capital's international programs, and 32 have received investments. Among them are companies like MobileWorks, which works with corporate clients to outsource clerical and administrative work to low-income virtual workers. Kickboard, formerly called Drop the Chalk, is another star Village Capital alum and Inc. 30 under 30 finalist, which makes software to help teachers better track student performance. Another promising recent company, SevaMob, offers healthcare and insurance to people living in poverty in India and Africa, but its health workers also collect anonymous data on the people they treat, which SevaMob can sell to major corporations interested in developing world markets.

 Obviously, these are companies that not only have a social impact, but could have a financial one, too. After all, Village Capital isn't a wholly altruistic endeavor; it's seeking investment from both high net-worth individuals and impact investing firms that are willing to be a bit more patient about returns. Village Capital's stake in the companies is usually somewhere between 5 and 10 percent. As for just how long the firm is willing to wait for an exit, Baird says they're flexible--they'll even do a revenue-share agreement that pays the firm back slowly.

"We're trying to build different kinds of structures that make fiduciaries comfortable with backing companies that could create the world we live in," Baird says.

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