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4/07/08 |
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Participants : 1673 |
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Donations : $260,044 |
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Median Donation : $56 |
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Comparables
As can be seen from the diagram, a Venture Collective is fundamentally different from typical venture funds or foundations. The latter two invest the bulk of their money "amorally", driven only by the need for "return on investment". In the case of venture funds, the ROI goes to the investors, and the IRS. With foundations, it is granted out, but only 5% of the endowment's worth each year.
How does a Venture Collective differ from a typical venture fund? In numerous ways:
Two major differences
The two primary differences are our non-profit status, and our emphasis on purpose over return-on-investment (ROI).
Those two are inextricably linked. We couldn't be non-profit if we didn't have a purpose, and we couldn't make ROI anything less than primary if we weren't non-profit. Our primary motivation is social change, not manufacturing money.
Non-profit status
Non-profit status comes from the fact that we are funded by donations, with no expectation of financial return on the part of the donors. Because of that, we don't have a bunch of investors breathing down our necks to maximize their returns.
A normal venture fund, on the other hand, is funded by investors who have only ONE expectation, financial return.
Purpose and Focus
Our purpose is to provide working capital that is strategic, patient, flexible, low-cost, and most of all purposeful, in support of media enterprises that serve the public interest and compete aggressively with those that don't.
Our focus is on "disruptive" media technologies that change the game rules.
We think there is a great deal of value creation potential in that arena, but we don't seen any normal venture funds focusing on it.
Purpose as non-negotiable investment criterion
Normal venture funds really only care about one thing, how much their investment is going to grow. They typically don't care what the company does, as long as it's legal and they are convinced it will be successful.
Media Venture Collective, on the other hand, cares first and foremost about what the enterprise does. If it doesn't fit our purpose, we're not interested, regardless of how lucrative it might be.
"Commons" value creation
Venture funding is about "value creation", providing working capital for turning opportunities into real value. Fundamentally, our approach is oriented to creating value that is widely shared, and the "commons" is the best metaphor or model for that.
Just as fundamentally, traditional equity investment by venture funds is a lousy way to fund the creation of a commons, because it is predicated on early funders owning most of the value created.
Longevity
Normal venture funds last about 10 years, because the investors want their money back, plus returns.
Because MVC has no investors looking for "liquidity", we are essentially perpetual, as long as the portfolio breaks even.
Less greedy for returns
Do we care about returns? You bet. But since we don't have investors anxious about how much their investment is growing, we can invest in enterprises that don't promise huge returns, as long as they fit our purpose, and the porfolio in aggregate breaks even.
Because of our structure, we can be perfectly happy with a 3%/year average return on our portfolio (to cover transaction costs), as opposed to the >13%/year that a typical venture fund looks for. That's because we don't have to pay taxes, and we don't have investors who would be unhappy if their investment only broke even.
Significantly lower overhead
Because MVC is not an investment vehicle for those providing the funds, it is not governed by securities laws and regulations designed to protect investors. So startup and operation of the fund is greatly eased.
More freedom
Because we can be happy with breaking even, we have a great deal more freedom and flexibility to invest in enterprises that fit our purpose well, but might not have be expected to be hugely successful.
Partner, not antagonist
While there are many good venture capitalists, the bottom line is that ROI is their only motivator, and that often puts them at odds with the founders and staff of their portfolio companies. Media Venture Collective will probably be in situations where ROI is a factor in our involvement with an enterprise, but again, because we can be satisfied with a significantly lower average return, we don't have to make purpose secondary.
Mission creep
History is littered with stories of companies that start out doing one thing, and morph into something completely different, because the investors believe they'll get a better return that way.
Deal structures
The legal term used when a non-profit invests is "program-relate investments". These can be equity investments, convertible loans, low-interest loans, recoverable grants (basically a no-recourse good-faith loan), and straight grants.
Normal venture funds typically use variations on one boilerplate deal structure oriented to owning as much of the company as possible at the lowest price and being able to force liquidity (i.e. sell the company or go public) when it most suits the investor.
Media Venture Collective equity investments can be identical to what a normal venture fund would do, except that, as described above, the terms don't need to be as onerous. However, if we co-invest with traditional funds, or covert loans when others invest, we expect identical terms.
Transaction costs
Because we are less sensitive to ROI than a typical venture fund, we don't have to be as relentless on terms and legal structuring for downside-protection, so we can typically be much more efficient in the legal costs of closing deals.
Managing partner compensation
Typical venture funds allocate 20% of the ROI to the management of the fund. Because we're non-profit, we can't do that. Because of that, management has no direct stake in the ROI of the enterprise, and thus is not as motivated to maximize it. This is one disadvantage, in that it removes incentive for management to make the most of the fund. However, this can be compensated for by the equally powerful motivation of purpose, and by the contributions of domain experts in the process of identifying and vetting investments.
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"A popular Government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or perhaps both."
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- James Madison |
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