Village Capital’s Peer Selection Model: Empowering Entrepreneurs and Investors to Create Value Together

Innovation can be anywhere. While most people in the entrepreneurial world define innovation as the products and services that entrepreneurs are selling, Village Capital’s core innovation—peer-allocated capital—transforms the way that investment capital builds companies. Ultimately, our peer-selection model changes the power dynamic between entrepreneurs and capital providers in a way that leverages the comparative advantage of each actor, and enables them to create more value together.

Since 2010, Village Capital has launched 22 programs in seven countries and made over 30 peer-selected investments. Through these programs, we have served over 350 ventures worldwide, building disruptive innovations in energy, environmental sustainability, agriculture, health, and education. Enterprises started by program graduates have raised more than $40 million in follow-on funding to date, creating 5,000 jobs and serving five million customers worldwide. While the entrepreneurs and programming have changed significantly over time, one question has always been at the core of Village Capital: What if entrepreneurs could invest in each other?

In this case I describe how we developed the Village Capital peer-selection model as a disruptive approach to building and developing ventures: the model’s origin, evolution, results to date, and implications for funding innovations worldwide more efficiently

Why Peer Selection?

The Problem: Entrepreneurs are building enterprises that funders, not customers, want.

Entrepreneurs need cash—in the form of either revenue or investment—to fuel the growth of their businesses. Historically, when teams launch a business, they are working hard on one side to discover customers, while simultaneously meeting with angel investors, foundations, venture capital firms, and banks. At their best, these processes work together, but all too often the two kinds of activities create wildly different messages for the entrepreneur.

The primary reason a firm should raise money is that the current revenue (and underlying demand) from customers is not strong enough—yet—to support the expenses of the company, constraining its operations and growth. Entrepreneurs often need time to find the right product and the right market—and in these early stages, investors typically fund the cost of this discovery. This process can take years. For example, Amazon.com, founded in 1994, did not turn its first profit until 2001, but two years earlier, in 1999, Jeff Bezos, its founder and CEO, was already being named Time Man of the Year.

So, on the business side, entrepreneurs are discovering exactly what products or services their customers want, but on the financial side they are looking for the cash they need to deliver those products or services. In theory, these two processes should be linked, but in practice entrepreneurs often face a harmful dissonance. While both activities are equally important, entrepreneurs often find themselves spending more time on raising capital, believing that injecting more cash will ease their operations and facilitate growth more than customer validation could on its own. Too often, “getting funded” is their primary goal, rather than finding authentic demand from real customers.

Because of this situation, investors have tremendous power to dictate which enterprises get a shot, and which don’t. This power dynamic is most detrimental to the most innovative businesses that have the potential to be revolutionary but are considered too high-risk. Why? Two reasons. First, banks have little ability, mandate, or incentive to lend to higher-risk concepts, no matter how transformative they may be. Second, because venture capital firms have become more professionalized over the past 25 years, investors are now looking for quick wins, specifically, IT-based consumer technology that can be acquired or go to an IPO in three to five years. As a result, in their early days, entrepreneurs cannot adequately finance their businesses just from customer revenue, and they have a very specific incentive to build the type of business that investors want so they can get the necessary cash from them.

Founding Village Capital

I entered the investment world not from a traditional finance background but as an entrepreneur. In 2009, I went to work for a mentor of mine, Bob Pattillo, at First Light...