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Friday, 20 August 2010

Entrepreneurs As The New Asset Class


Forget about technology, market size and products. VCs should invest in the entrepreneur.

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As a reputed hacker and a serial entrepreneur, Rich Skrenta personifies the kind of person that I love to invest in. He is by most accounts a prodigy--his technical prowess showcased to the world while still in the ninth grade. Early successes in his career include NewHoo (subsequently the Netscape Open Directory) and Topix. Our paths crossed while Rich was still at Topix, and it was instantly clear that his future was infinitely bright. I jumped at the chance to invest when he started Blekko, but the reality is I'm just as excited about what tomorrow will bring.

Enter my new lens on investing: Entrepreneur equity. Specifically, equity in all the commercially productive activities of a person's career. I want to invest in the innate drive, talent and potential of a person. I want to invest in what they're working on now, what they're thinking about next, and whatever they dream up in the future. When it comes to exceptional talent, I've stopped worrying about technology, market sizes, product-market fit, etc. I just want to invest before the valuation gets frothy (seed is so 2010).

In case you're wondering, no, I'm not a feudal overlord. I'm not talking about payday loans and cement boots. In fact, what I'm talking about is not a new idea at all. The concept of making long-term investments on a person's complete body of work has analogues in many industries. Bowie Bonds (and the further music-backed securities that followed) in 1997 were an example of what can happen when you securitize the intellectual output and associated property rights that span the career of an artist (starting notably with David Bowie and much of his work).


I want a cross between Bowie Bonds and the MacArthur "Genius Award," the $500,000 grant given by the MacArthur Foundation to exceptional people to work on projects of their choosing. Perhaps a more recent analogue is the social venture Enzi, which is like Kiva for education. They're finishing up pilots at Stanford University to allow peer-to-peer investments in Stanford international students with financial need. Help pay their tuition and you get a share of their income streams for a fixed period in their future. The first batch of these students has already graduated and is now entering the productive period of the cycle.

Let's take a test case--Jim Everingham. He was the technical cofounder of LiveOps, and most recently the founder of image monetization platform Pixazza. Both are portfolio companies and repeat bets on people, notably ex-Netscape veterans, Everingham and his team (including hacker-ninja Lloyd Tabb). To date, my firm has had to make multiple discrete investments in both entities, but the reality is those investments were just a proxy for following the career of a prolific talent. If there had been a mechanism to invest directly in Jim (and others in the nexus), I'd be the first to do it and posit that it would be a more accurate reflection of our actual investing behavior.

Venture capitalists, today more than ever, need to be talent scouts. In "Why Entrepreneurs Don't Need VCs," I outlined the reasons why the current landscape has fundamentally altered the role of venture capital, and as embryonic investors we have to think in terms of people, not companies. It's well established that most start-ups pivot multiple times, and the idea we invest in is rarely what the company ultimately does.

More recently, I started to ask the question, if the art of investing is really about identifying great talent early, then lately I feel like I'm working at the wrong abstraction layer. Investing in financials, products, market opportunities, companies, ideas even--these are all second-order consequences of something more basic. I want to invest in the underlying asset. I want to invest in first principles. I want to invest in him (or her).
It seems to me it should be possible to make an equity investment in a person's future. It can be proscribed for entrepreneurial activities, or it can be structured around future income. The point is to give future entrepreneurs the validation and resources to take chances early in their careers. Imagine the Omar Hamouis and Caterina Fakes that could have been if they just had the flexibility to leave their day job and take a chance.

How does one actually make any of this happen? How do you value entrepreneurs? I hand-wave for now and leave that to wiser folks (like Forbes readers). But I do know where I'd put a couple of these bets. I've seen a twinkle in a few eyes lately and I want to double down.

Saad Khan is a partner at venture capital firm CMEA Capital where he leads CMEA's Web, digital media, and twinkle-stage investments in Pixazza, Blekko and Jobvite. He blogs at SaadWired.com and cmea.com/blog. You can follow him on Twitter @saadventures.
 
See Also:
Why Entrepreneurs Don't Need VCs
Venture Capital's Future
Venture Capital's Midlife Crisis
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