Comparing Creative Models of Venture Funding

The world of seed funding is changing, and not just in the social entrepreneurship space, either. In particular, venture capital is undergoing some seismic shifts -- and in the process, the way young companies get funded and built is likewise evolving. But how similar are these changes, and how much can each sector learn from one another?

First, the lay of the land. The venture capital industry is experiencing a shift due to the maturation of the consumer internet, and the decreasing cost of building a new, web-based company.

Traditionally, venture capital required big "home runs" that had an "exit" (in the form of either a sale to a larger company or an initial public offering) that was big enough to justify the cost of those other company investments that would go under entirely. Back when the internet was younger, companies needed millions of dollars to start, and venture capital firms needed to find those companies that were going to make them a 10x return. Now, though, that more companies are embedded in a broader ecosystem of other companies -- Facebook applications, iPhone developers, etc. -- both their financial needs and size of their potential exits are reduced.

This trend is allowing a new generation of seed-stage funders to emerge -- a generation that's responsible for most of the innovation in seed funding currently underway.

For example, there are groups like Y Combinator and Techstars, which are focused on building communities of founders and mentors that accelerate how fast and how well companies bring their products to market. Then there are firms like RightSide Capital Management, which is taking innovation in another direction altogether. Instead of a mentorship-heavy program, they're focused on building a more efficient pipeline for seed stage funding and a more diversified portfolio for angel investors. Their fund will invest in 100-200 founders at a time, and return decisions about funding in less than two weeks.

Let's compare this to what's happening in the social entrepreneurship space. When it comes to startups, the field is even less mature than the consumer internet. It's only recently that social enterprise founders have begun to think of themselves as a distinct group with common challenges and opportunities. The state of seed-stage funding for for-profit social ventures reflects that immaturity as well.

Still, there's plenty of budding activity. Coworking spaces are becoming an important centerpiece of regional social venture ecosystems popping up in San Francisco, New York, Austin and Boulder. There are stirrings of seed stage creativity exhibit in models like Sparkseed and the Village Capital fund. Nevertheless, seed funding for social ventures continues to rely much too heavily on business plan competitions, fellowship programs and the like.

Two major challenges impede growth in seed funding for social ventures. On the one hand, there's the question of cost. Most social venture projects don't share the low infrastructure cost of the internet, making the cost for seed fund investors relatively high. Second, there's the question of exits. The social venture investor space is still figuring out what sort of financial returns it needs, as well as how to make a commitment to social good deep enough that it can't be pushed aside in the event of a sale to a larger company.

Still, I think there's a lot these two worlds can learn from each other. Much of what they share comes from new founders' expectations:

1) They love building meaningful things. Whether it's web products or new social change organizations, I think that when you give people a chance, they want to build things of worth and meaning. This doesn't mean that everyone thinks of their company as a "social enterprise," but changing the world means more to people than just building a great web application.

2) Both groups like to create meaning together. The explosion of mentorship-based, cohort-creating startup programs on both the consumer web and social enterprise side of things is no accident. Founders like connecting with other founders, and I anticipate this trend will only grow.

All in all, it's an exciting time to be in the venture space. I'm thrilled to see what the rest of 2010 brings.

Photo credit: tibchris