“Negative Expertise” in Impact Investing: How to Learn from What Isn’t Working

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The following blog post was written by Ross Baird, Executive Director of Village Capital.

Nicholas Nassim Taleb, of “Black Swan” fame, once wrote an essay on “Iatrogenic Science,” essentially meaning illness caused by a doctor (rather than created). The idea of “negative knowledge,” or learning what doesn’t work, isn’t spread the way “positive knowledge is.” I once heard from a professor at his third university who cited, upon arrival at his third post of duty, finding out a scientific experiment that had been tried–unsuccessfully–in the exact same manner in the first two, and outlined the resources and time that had been spent learning three times over that this particular experiment didn’t work.

“Negative expertise” is knowing, scientifically, which hypotheses have been falsified. (You can never prove a hypothesis, only know that it’s not true). Science suffers, argues Taleb and the aforementioned professor, from lack of publicized negative expertise, and we do the same thing in the impact investing world. Perhaps motivated by competition over scarce funds, we talk about how we are doing our thing and what we’re learning, but rarely point out the flops. We’re seeing the rise of “Failure Fairs” and other Ted-like conversations focused on failures–which are helpful, but often are great anecdotes of personal learning rather than diagnosed systems failures.

At Village Capital, we’re trying to be more thoughtful about what we know doesn’t work, and we’d love to continue the conversation with the rest of the field. Three bits of “negative expertise” we’ve picked up along the way (and what we’re trying to do about it):

Other impact investors (and, by extension, conferences with impact investing as the focus) are not the best source for companies. Our initial methods to find and recruit entrepreneurs focused on “pipeline partners”–both incubator programs and next-stage investors who might have companies that were fits for our particular programs. Yet we find, too often, the impact investing space’s view of impact entrepreneurs out there is pretty narrow, and any referrals are limited to that universe. Many great entrepreneurs are heads-down and don’t even know who the investors are–or where to find them. We just had 67 applications to our Nairobi program, selecting 16 strong companies–almost none of whom we or other impact investors had heard of pre-program launch. And the sources of how the final 16 found out about the program are a hodgepodge–an ad we put in the newspaper, an email that the government’s ICT board sent out to entrepreneurs, a personal relationship of one of our program staff in a different geography, and an open house that our partners at GrowthAfrica held. Sourcing is hard work that requires a tremendous volume of conversations, and getting outside the impact investing community to be successful.

Venture equity is not always the right tool. I wrote about this in a previous post, but as some of our initial companies are reaching maturity, we’re finding that the standard convertible note, which we borrowed from the consumer technology world, isn’t the best fit for every company’s growth plans. We’re working on a couple of new term sheet options that better fit the growth trajectories and time horizon of the impact investing world in response.

For any fund–or accelerator–“build it, and they will come” just isn’t true. When we first launched Village Capital programs, we thought “hey, we’ve got this cool peer-selected thing, and we’ve got money on the table, and of course entrepreneurs will want to show up!” Some of our programs did get quite a good turnout–but others, even with the work we put into marketing, got disappointing applications. We found, essentially, that we had to recruit, rather than market, to entrepreneurs, as busy entrepreneurs who have limited time aren’t necessarily convinced of the value proposition of a group plus the chance for money. Now, we have over a hundred conversations with potential applicants before we even launch a program, verifying that the strength of the cohort that we want would show up before day 1. The money isn’t everything. (Funds looking to invest, with capital to deploy, often find the same.)

We’re excited to share our learnings–and I’m sure there’s a lot of positive learnings that I’ve just said above that we’ll probably add to our category of “negative knowledge” six months from now. But we want to hear from our partners in the sector: what “negative knowledge” have you picked up?

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