How much time, money, and effort is expended trying to determine which innovations are “worthwhile”? And how many truly disruptive ideas fail as a result of hierarchical due diligence processes?
What if the entire innovation process was streamlined and innovators had the power to invest in each other’s ideas? Village Capital’s peer selection model makes this possible by leveraging collaborative peer review and injecting democracy into the entrepreneurial process.
Rather than asking analysts, judging panels, and prize committees to deem which innovations are worthwhile, our model empowers the innovators themselves to decide which ideas go forward and receive funding. After successfully completing 15 programs around the world and investing in 30 companies, I can say with confidence that democratizing the entrepreneurial process leads to stronger results – at a fraction of the cost of traditional investment models.
The Organization Behind the Peer Selection Model
Village Capital is a nonprofit that operates business accelerator programs for game-changing entrepreneurs worldwide. Village Capital also operates an affiliated investment fund that invests capital using a unique peer selection model where the entrepreneurs themselves choose who will receive catalytic funding in their cohort.
How Village Capital’s Model Works
Village Capital’s model is simple: we recruit entrepreneurs focused on innovation in a particular geographic area (e.g. Brazil, New Orleans, East Africa) or a specific sector (e.g. mobile, energy, education). A select group of approximately 15 entrepreneurs goes through a 12-week program focused on building their businesses. The curriculum covers: (1) customer discovery/development, (2) team-building, (3) product refinement, (4) financials, and (5) scaling and impact, and (6) exit strategy. At the end of the program, the entrepreneurs vote on the top ventures to receive Village Capital’s pre-committed capital.
Atlanta cohort entrepreneurs gather:
Nairobi cohort entrepreneurs brainstorming in a breakout session:
Shelley Saxena, founder of Sevamob, presenting his innovation for feedback:
Wider Application of the Peer Selection Model
Organizations are made of people, and where there are people, there are ideas. Often, the people who are closest to the problems come up with the most relevant solutions.
While Village Capital uses the peer selection process specifically to source, develop, and invest in seed-stage enterprises addressing social and environmental issues, the peer selection process is highly adaptable to any organization seeking to jumpstart innovation.
For example, in its day-to-day operations, a company might identify a lag in processing time or a breakdown in organizational efficiency. In all likelihood, there are several intra-company ideas on how to solve this, but they may not come to fruition for a variety of reasons: it’s easier to accept some slack as a natural condition, employees don’t feel they’ll be heard if they make a proposal, or external expertise and opinion is required to get buy-in to allocate funds for a solution.
If an organization instead chose to believe that the people all around the bottleneck likely have the best ideas for innovating around it, and empowered them by dedicating budgetary resources to the best peer-selected proposal, the time lag between identifying and solving the problem would likely shrink significantly. The key component here is for the organization to pre-commit to the top employee-ranked ideas. While many corporate cultures might think they have effective feedback loops in place, putting decision-making power in the hands of those closest to the problem and stepping up with resources changes the stakes. Being willing to test high-risk innovations and accept a chance of failure is likely to lead to a much greater diversity of solutions.
Here is an illustrative example of Village Capital's peer selection model applied to organizations more broadly:
The peer selection model has enabled Village Capital to support early-stage innovations at significant scale. Village Capital has launched 15 programs, supporting over 250 ventures and leading to capital investments in over 30 ventures picked by their peers. Participating ventures have created over 4,000 jobs, served over 1 million customers, and raised over $30 million in follow-on capital. In addition to being scalable, the model is also cost-effective: Village Capital has built a portfolio of investments at 20% the transaction cost of a control-group fund, and these investments are tracking at similar returns. If deployed within existing organizations, the cost savings associated with the peer-selection and investment process could have a significant impact on a company’s bottom line.
While sitting within a competitive landscape of top-down corporate and investment models, Village Capital’s peer-selection democratizes the entrepreneurial process, empowering solutions and allocating capital from the bottom up. Village Capital compares to the following existing models:
- Venture capital firms, who invest in early-stage innovations; the high overhead cost of sourcing, diligence, and vetting (a 2012 study by the Kauffmann Foundation illustrated that venture capital firms rarely delivered returns that compensated for expensive management fees) means that firms rarely invest in unproven solutions. To make traditional fund economics work, higher degrees of certainty, even at an early-stage, are required. This inhibits some of the most innovative (and riskier) ideas from ever getting a chance. In an analysis of 300 funds operating in similar sectors to Village Capital, only four made active investments at less than $250K per investment; Village Capital’s model enables investment at the $50K-$100K level. This type of smaller, risk-tolerant seed-stage investment is absolutely crucial for testing and scaling new innovations.
- Corporate innovation departments develop in-house ideas, yet entrepreneurs rarely feel ownership of the innovation: ideas are created to satisfy management – not the customer. One former head of innovation at a Fortune 100 Company said “Our innovation department was far more focused on great storytelling than actually improving our supply chain or employee productivity.” Village Capital’s peer selection model is more likely to produce disruptive innovation because entrepreneurs are pitching to a crowd of peers (and thus need customer validation to be successful) rather than an investor or a boss.
- Angel investor groups invest in early stage ideas, but a “veto player” mentality means one person can kill an unusual, but promising deal. Innovations selected through Village Capital’s peer selection model come from entrepreneurs that would not necessarily win if pitching investors on a stage, but have true staying power with customers.
- “Accelerator” and “incubator” programs for entrepreneurs are typically too costly to justify the scale of the investment, and rely on heavy subsidies to operate. In a 2012 study by the Aspen Network of Development Entrepreneurs, 90% of accelerators/incubators worldwide could not cover their operations alone, and relied on philanthropic or government subsidies. Village Capital’s peer-driven model operates under a cost structure at 20% of industry comparables due to lower overhead; at scale, this model could be viable for all seed-stage investments.
Gaining Traction and Support
Our early results are gaining attention. Village Capital’s work has been featured in Forbes and the Huffington Post, and the team has spoken at a range of industry events, including NetImpact, Social Capital Markets, ANDE Metrics conferences, and USAID/CARE working groups to share our approach for encouraging innovation. In Fall 2011, the MIT Press Journal featured the Village Capital model in its publication, Innovations, and our model was the winner of the NextBillion Case Competition in April 2011. Private foundations (The Rockefeller Foundation), governmental organizations, (InvestAtlanta), and private investment firms (RSF Social Finance) have all endorsed the Village Capital concept by funding our nonprofit programs and investing in peer-selected companies.
A Model Built by Entrepreneurs, for Entrepreneurs
Before becoming the Executive Director of Village Capital, I had founded three entrepreneurial ventures. In 2009, I was working for Bob Pattillo, another successful entrepreneur, at First Light Ventures, an impact investment firm. Our mandate was to make seed-stage investments in potentially disruptive innovations that could both reach commercial scale and achieve an impact objective beyond financial returns (e.g. health, education, energy). We had an investment team of four, and we were reading through literally thousands of business plans a year, with the capacity to invest in and manage only a handful.
We realized three major disconnects in the culture around innovation worldwide, which I had personally experienced when launching my own ventures in the past:
- The supply of entrepreneurial ventures at the early-stage dramatically outnumbered the available risk capital to get them started;
- The cost of deploying capital at the early stage was the largest barrier to giving new ideas a shot (the combination of the cost of an investment team in our venture firm, plus the pressure to produce financial returns meant that many ventures were too small for us to consider);
- Most importantly, a counter-productive power dynamic shaped which innovations got a chance: the people with ideas were very rarely the people with capital, so people were building ventures that investors liked, rather than building ventures that customers liked.
When Microfinance and Angel Investing Have a Baby
Bob and I were having a beer in a dive bar in Atlanta, GA, and we started thinking outside the box. The idea: what if entrepreneurs could invest in each other? Bob talked about his extensive experience with microfinance, where peer groups of women in developing countries would enable $100 handshake loans through the “village banking” peer review model--surely, he thought, we could take that to the venture level? Seemed like it was worth a shot!
We started pitching the idea: we would recruit groups of entrepreneurs, run a program for them to build rapport and experience, and, in the end, entrepreneurs would decide who would get funding. One prominent venture investor called the idea “bonkers.” Another said that it would be a “shark tank”--ventures would rip each other apart. A third would say that there was no way “non-experts” had the expertise to know how to pick a good entrepreneur. But we weren’t deterred…
2009: First Round Pilots
I worked with Bob to develop a plan in which Village Capital would be an investment strategy of First Light. To test the experiment, we launched pilots in San Francisco (an entrepreneurial hotbed); Mumbai (an emerging market); Boulder (in partnership with the Unreasonable Institute, an international incubator); and New Orleans (an under-served domestic market). We recruited 1,000 ventures to apply, and ran these first four programs similar to traditional “incubator/accelerator” programs, focusing on improving business models, developing products, and pitching investors; at the end, we encouraged entrepreneurs to create a process to select which ones would receive investment. Early on, we experienced bumps in the road, and the process didn’t always work perfectly. One cohort had only six entrepreneurs, and we found that in small groups, politics could trump transparency—the peer review was far more competitive than cooperative, driving us to develop larger cohorts. Another cohort did not have a transparent process/rules-of-the-road, meaning that entrepreneurs spent far too much time on decision-making process and not enough time on actual peer review—a lesson any organization could learn from!
Despite these lessons learned the hard way, we saw enough proof points to think that the core innovation of entrepreneur-driven investment was working.
2010: Second Round Pilots & External Validation
In 2010, after four successful pilots, we launched four more (San Francisco, New Orleans, India, and London), to explore whether other investors would buy into our peer-selected concept. And we found a few early adopters. In San Francisco, a co-working space/seed fund (Hub Ventures) co-operated the program with us, and co-invested in the peer-selected enterprises; in India, we worked with a major family foundation (KL Felicitas) to pre-commit capital to peer-selected enterprises. Application numbers grew, and the peer-selection was proving to actually increase our recruiting ability. Changing the power dynamics, and putting the entrepreneurs in control, enabled us to recruit the kinds of entrepreneurs that found traditional “planned programs” unattractive or distracting.
It is also important to reiterate here that the Village Capital experiment was being conducted alongside a portfolio of direct investments made by First Light’s investment team. Today, this peer-selected portfolio is performing comparably to the “expert-selected” portfolio, and was built at 20% of the overhead cost. These early results are creating potentially revolutionary implications for the future of developing more innovative ventures – more quickly and cost-effectively.
2011-2012: Launching and Growing an Independent Organization
Based on the success of the first and second round of pilots, in 2011, I decided to launch Village Capital as an independent organization with an affiliated fund. I felt that the ultimate test of the peer selection model would be if Village Capital could stand on its own as an independent organization.
To date, the model has continued to be proven true. Since its inception, we have worked with over 250 entrepreneurs and invested in 30 peer-selected ventures. Some of the innovators we have invested in using the peer selection model include:
- Mike Macharg, co-founder of Simpa Networks, enables families in India to afford home solar energy systems through a "mobile meter". Simpa has sold 1000 systems in pilot with SELCO, and after Village Capital, raised a $2 million follow-on round. Simpa’s “pay as you go” methodology is making clean energy affordable in emerging markets.
- Rajesh Shah’s venture, SABRAS, has innovated the supply-chain for salt farmers living in poverty in India, increasing their incomes 400%. SABRAS’ customers, salt farmers making 50 cents/day, now earn living incomes.
- Jen Medbery, founder of KickBoard, has created an education technology that has surged to the forefront of U.S. education reform. Kickboard now has contracts in 14 states with prominent organizations such as KIPP and Teach for America; they’ve raised almost $2 million in follow-on capital.
- Kyle Azevedo, founder of ViaCycle, has created a bike-sharing enterprise that is enabling more sustainable cities in the US. They’ve acquired major corporate and university clients, have raised almost $500,000 to scale their venture, and graduated from the prestigious Y-Combinator.
The innovators we serve have always been – and always will be – our greatest asset. They are the linchpin of the peer selection process. They are our clients, investees, and most avid advocates. One even asserted that, “without Village Capital, our venture would not have been possible.” In the end, paving the road to success for world-changing innovations that might not have made it, or at least not as quickly, is the reason why we do what we do and want to continue sharing the peer selection process.
Village Capital has faced and grown from a number of challenges throughout the course of running our 15 programs to date.
Challenge #1: Not Enough Structure – Establishing a Process
Our first two pilots, located in New Orleans and Boulder, allowed entrepreneurs to personally design and run the ranking process. This was a mistake. With a $100,000 investment at stake, entrepreneurs naturally had a vested interest in designing to their advantage. It was difficult to reach a consensus among them quickly and fairly; 90% of their time was spent on outlining the ranking process, and only 10% was spent on actual peer review of business plans, which is the bedrock of our program. After this initial experience, we established clear, standardized rules for the peer ranking process of all future programs. This decision has made our programs more efficient and effective; entrepreneurs now spend roughly 99% of their time on peer review and 1% on ranking one other.
Challenge #2: Still Not Enough Structure - Introducing Objective Ranking Criteria
In subsequent programs in San Francisco and Mumbai, we ran into the problem of the ranking process being subjective. As a result, we found that the investment was likely to go to entrepreneurs who were most liked or most in need of the support, rather than those with the strongest innovations and most promising businesses. We replaced our simple (and extremely relative) ranking scale of 1 through 15 with a ranking system using six investment criteria, such as customer validation and exit strategy, in order to ensure that ventures ranked each other based on the underlying fundamentals of the businesses, instead of personal favorites. These standardized ranking criteria have dramatically improved voters’ focus and objectivity, resulting in more consistent and dependable results that favor businesses with stronger fundamentals. In the spirit of keeping the ranking process fair and objective, we also decided to drop the highest and lowest score of each venture to reduce the odds of one outlier venture giving disproportionate punishment or support to a peer based on personal feelings and sabotaging the process.
Challenge #3: Establishing Trust & Accountability
In our earliest accelerator programs, our entrepreneurs voiced concern about the lack of transparency in the peer ranking process, which made them skeptical and suspicious of the process. As a result, we now publish every venture’s scores of each other and encourage specific, direct feedback alongside the rankings. Many entrepreneurs said that they would have appreciated receiving feedback earlier so that they could do something about it. In response, we now do trial ranks throughout the program so that entrepreneurs have a sense of where they stand in the overall lineup and can adapt to feedback throughout the program. As a result, we have found that the entrepreneurs trust and get more out of the peer review process, which makes the final investment decision go much more smoothly. It also allows all the entrepreneurs in the cohort to feel like they have gained something from the process, even if they are not selected for investment.
How the Peer Selection Process Works Today
Addressing initial mistakes like the three outlined above has made the peer selection process more and more systematized. While the general ‘feel’ of the earlier programs was more competitive because ranking was more subjective, the experience is now much more collaborative and constructive: 70% of our participants describe the process as more “cooperative” than “competitive”. Frequently asked questions include:
Doesn’t everyone just vote for themselves?
Participants are not allowed to vote for or rank themselves; also, ranking is not “absolute” (‘yes’ or ‘no’), but relative (enterprises are scored on a scale of 1-30, providing comparable data comparing one innovation to another).
How do we keep the “players” from gaming the system?
What one of our partners calls “militant transparency.” All trial ranks and the final are public, available online for each cohort to review. If one cohort member torpedoes another one, they face total public accountability from their peers: since making rankings transparent, we have (perhaps counter-intuitively) found the sessions to be more cooperative than competitive.
How do we stay focused on review, rather than pure ranking?
We emphasize peer review more than ranking by incorporating cohort-feedback into every content session: content deliverers operate a session, then assign an exercise for peer review immediately following. (For example: budgeting sessions walk each participant through projected revenues and costs of a particular innovation, building a “funding gap” that then is reviewed and revised by their peers.) We limit the amount of time dedicated to the actual trial or final ranking activities, and maximize the in-cohort interaction. Participants are given the option to review the ranking results in more detail online, but they must do so during their own time between program sessions.
How do we account for different ranking philosophies between individual participants?
We have adjusted our methodology to account for disparities in ranking: some entrepreneurs give high scores to all ventures, while others are consistently harsher: we are now piloting a process to re-weight scores around a common average, to adjust for a discrepancy between bullishness / bearishness of participants. We also have begun dropping the highest and lowest scores of each cohort member.
As we continue to learn, we will also continue to iterate on the process.
One of the most valuable aspects of Village Capital’s model is its ability to position entrepreneurs for significant follow-on investment after program completion. For instance, John Burns’ Jack and Jake’s enterprise, which enables hospitals, schools, and businesses in New Orleans to buy healthy local food wholesale, recently raised $500K in equity to scale its business. Naveen Sikka’s TerViva BioEnergy developed a strain of biofuel feedstock that creates ethanol at 10% the cost of soy/corn and its plantings across the U.S. have raised over $3 million. Anand Kulkarni’s MobileWorks enables low-income individuals in India to earn extra cash performing "micro" tasks; they have raised $1.7 million while profitably creating jobs for low-income women in New York City and single mothers in villages in India. Anoj Viswanathan’s Milaap enables anyone to support a small business entrepreneur in India through an online crowd-funding platform. To date, Milaap has enabled over $1 million in loans with 100% repayment to date, and has achieved follow-on investments from established venture investors such as Unitus.
Other Village Capital entrepreneurs have validated the benefits of the model with these testimonies. Kevin Casey, an early Village Capital program participant from San Francisco said, “I learned more in three months of Village Capital than I did in two years receiving my MBA.” Entrepreneur Fernando Fernándes from Brazil explained that, “I was able to take my venture to the next level through three months with my strongest supporters and toughest critics—my peers.” After completing the program, Rajesh Shah from India stated that, “the change I see in myself far outweighs the investment dollars.”
Village Capital alumnus Naveen Sikka, of Terviva Bioenergy, describes the Village Capital experience in this video, saying "this process has changed the way we think about our business."
Village Capital alumna Jen Schnidman Medbery, of Kickboard, describes Village Capital in this video, describing the peer selection process as exhilirating: "People that voted were, by and large, people competing against me...it really just helped me to hone the message."
Growing Organizational Capacity
Village Capital’s organizational capacity has continued to grow since its inception in 2009; every year we offer more programs, vet more enterprises, serve more entrepreneurs, fund more ventures, and expand our network of partner organizations:
# of programs
Model Application Outside of the VC World
Perhaps the greatest validation of the peer selection model is its growing influence outside of the world of venture capital and early-stage entrepreneurship. Two high schools (one in the United States and one in Europe) have contracted with Village Capital to develop a peer-driven entrepreneurial curriculum; a third is working with Village Capital on using teacher peer review to develop new courses. An immigrant community east of Atlanta is working with Village Capital to develop peer-review support for immigrant-run small businesses, and a church worked with Village Capital to develop a new method to allocate its mission budget. Village Capital’s peer review model has implications far beyond the initial application to early-stage impactful entrepreneurs.
Village Capital’s peer investment model is a proven concept shaped by trial and error. We hope the lessons we’ve learned so far can help all organizations in their efforts to encourage the success of new innovative ideas.
1) Changing the process changes the results.
In the case of Village Capital’s peer investment model, the most qualified ventures only consistently ranked at the top of the list and won investment after we took the peer review process design into our own hands and tweaked it to make the ranking less biased and the investment criteria more objective.
When management wants innovation, but is frustrated with the lack of quality ideas, rather than seeking “better ideas”, perhaps they could focus on changing the process by which internal ideas become reality. A directive that employees spend a percentage of their time on non-core functions (e.g. Google’s “20% time rule”), an open process for suggestions from any level of the company, and organizational culture adjustment (e.g. “no meeting lasts longer than 30 minutes”) are several process adjustments we have seen lead to innovation that are not focused on “finding the next great idea.”
We know from experience that changing the process can change the results in unexpected ways too. In our case, while our intention of tweaking the peer review process was to make the ranking process fairer, we saw an unexpected result of women becoming 300% more likely to receive funding; one female entrepreneur found that the traditional model of proposing entrepreneurial ideas, which focuses on style over substance, substantially favored men; in the peer review model, she felt she got a much fairer shot.
Another example of “changing the process changes the results” relates to our experience with “demo days.” Investor pitch events (or “demo days”) are a significant focus of entrepreneurial programs; after conducting a number of these for our entrepreneurs, we discovered that our greatest value was introducing entrepreneurs to customers, not investors. As a result, we have changed our showcase events, or “demo days” to help our entrepreneurs focus on customers first.
2) Spend your resources developing actual innovations, rather than perfecting the innovation selection process.
Every organization faces the challenge of limited resources. Leverage what you have available to further actual innovations people have put on the table - rather than debating how to choose which one to pursue. As we learned from our programs in Boulder and New Orleans, it is easy to fall into the trap of devoting time to agreeing on selection criteria rather than working on improving ventures. Before any innovations come to the table, determine a reasonable selection process - even if it is not completely flawless. In other words, “do not let perfect be the enemy of good.” As we have found in traditional venture investing circles, the amount of time and money spent on diligence/vetting of ideas that are early and unproven means many promising innovations never get a shot. The Village Capital model has identified a way to reduce the friction in the selection process, enabling our team to focus more time on sourcing/developing new innovations (recruiting entrepreneurs) and driving/pursuing innovation (supporting our portfolio enterprises).
3) Pre-commit to trying new ideas validated by those closest to the customer.
Why? We all know that there is almost always a “veto player” at the executive table who does not like any new ideas--and always finds a way to say no. As a result, the bold ideas die, and kill the team’s creative spirit or risk tolerance along with them. Typically, when pursuing new initiatives, the lowest-common-denominator ideas win; truly innovative ideas proposed by lower level employees (who are almost always closest to customers, and able to see new directions) are drowned out.
To avoid this pitfall, organizations should pre-commit to pursuing at least one idea supported by employees on the ground. In the case of Village Capital, we pre-commit capital to the top two peer-selected ventures, which are determined by the entrepreneurs at the culmination of our program. In the venture capital world, decisions are typically made by investors (who are much further from the customers than entrepreneurs); by flipping the power dynamic, we are enabling the individuals closest to customers to decide which ideas get a shot. As a result, we are always investing in innovations supported by entrepreneurs – regardless of the money’s opinion.
For example, we could imagine a Village Capital model implemented in a consumer packaged goods company seeking a desired improved objective—for example, lower cost of supply chain. In this model, management would issue a call for innovations from company employees (and potentially external entrepreneurs), with rough desired outcomes: e.g. software innovations to improve supply chain, or lower-cost and/or more recyclable packaging. The Village Capital program would provide approximately 15 innovations with a laboratory for idea development and peer review, and at the end of the program, management would pre-commit a budget of $100,000 to peer-selected innovations to trial an idea. All participants would be motivated to find the better solution for the company, and the pre-committing of capital would (a) reduce internal bottlenecks to project approval, and (b) motivate employees to truly innovate.
4) Be transparent in everything you do.
People are more likely to buy into a new idea or innovation if they know exactly how it is designed to work. In the case of Village Capital, entrepreneurs did not trust the peer selection process when all they received was their rank at the very end of the program. Their distrust of the process prevented them from fully engaging. However, once we made all ventures’ scores of each other public and specifically identified the reason/s for their rank throughout the program, entrepreneurs understood more about their own ventures’ shortcomings and became more motivated to improve them. Make all activities transparent; it is the key to creating a trusting and collaborative environment conducive to innovation.
The peer investment model was a collaborative effort, and credit for its development goes to five main groups:
- The ‘concept creators’ - Ross Baird and Bob Pattillo developed the idea; the early team at First Light developed the concept to the point where it could be tested; the Village Capital board (including Joy Anderson, Sean Foote, Miguel Granier, Tracey Turner, Jeff Woodward, and Kelly Michel) helped scale the innovation.
- Funders - Foundations (including the Rockefeller Foundation, Potencia Ventures, and RSF Social Finance) as well as a number of generous individuals took a risk supporting the development of Village Capital and co-investing in the ventures our entrepreneurs selected;
- Program partners - Organizations such as Idea Village, the Hub, Artemisia, ECSEL, Points of Light, the Unreasonable Institute, NCIIA, and GrowthAfrica made it possible for us to run business programs for entrepreneurs and hone our unique peer investment model;
- Village Capital team – Each team member believes in the promise of the peer selection process, and dedicates each day to scaling the model, improving the process, and supporting the entrepreneurs who go through it;
- Our entrepreneurs – We are only as good as the entrepreneurs in our programs, and are grateful to the 274 of them who have been astoundingly collegial and provided feedback on ways to hone our innovative model for future programs.
Huffington Post blog post on Village Capital:
MIT Innovations Journal article (attached)
Forbes article on the Civic Accelerator, a joint venture between Points of Light and Village Capital:
[Video]: Village Capital alumnus Naveen Sikka, of Terviva Bioenergy, describes Village Capital: "This process has changed the way we think about our business."
[Video]: Village Capital alumna Jen Schnidman Medbery, of Kickboard, describes Village Capital, "It was exhilirating: people that voted were, by and large, people competing against me...it really just helped me to hone the message."