Building Ties, and Value, Among Social Entrepreneurs

Dollars aren't the only thing entrepreneurs look for when they go to a venture capitalist. Advice, connections and ideas are key assets that likewise come along with having an investor. By contrast, one underutilized asset are other peers that have also received investment. But now, First Round Capital has created an entrepreneur exchange fund that could change that.

On the one hand, the basic idea of the exchange fund is to help distribute an entrepreneur's risk. On the other, the fund's goal is to give entrepreneurs a deeper investment in their peers. The fund is formed by entrepreneurs putting a small part of the personal equity they have in their companies into a common pool. In exchange, they receive a small piece of a larger, combined fund made up of other companies. The idea is that the fund, and its entrepreneurs, can still be successful -- even if individual companies fail.

If this sort of fund's immediate benefits have to do with the potential for financial gain, it also has the potential to create a powerful form of social capital shared among First Round's portfolio companies, as they each have a strong stake in each others' success.

There are other ways to use the principles behind this scheme. In particular, foundations could do a much better job creating links between their grantees. While there isn't a clear nonprofit equivalent to equity -- and thus no direct corollary to an entrepreneur exchange fund -- in some ways, nonprofits are even better suited to promote mutual gain through cooperation than many for-profits.

So far, I believe a failure to do so reflects a broader lack of imagination on the part of foundations, who fail to understand their assets in holistic terms. Although the conversation about mission-related investing -- or using the foundation endowment itself, rather than just the money allocated for grants -- has grown, it hasn't yet entered the mainstream. What's more, few large foundations have any programs that try to leverage the dense social capital of their supporters, board members and grantees.

In addition to First Round Capital, I love the experimentation that some newer social enterprise investors are playing with, like Gray Ghost's Village Capital funds. Still, though, it's crazy that within the social entrepreneurship sector -- one in which social capital is at least as important as financial capital -- more funders haven't yet caught onto these trends.

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