4 sparks that ignited KnowCap’s reinvention of Venture Capital
I’m going to write this one in the first person because this mission of what we’re building is so dear to me AND I’m the ONLY one who can write this particular piece. Let’s get started. — Stephen
Overview
Every time I talk to a candidate, an investor, or someone who’s just interested in learning more about KnowCap, I always get asked about the inspiration for KnowCap.
So, I thought I would put it into words so that someone who hasn’t met me yet can get the answer to that question too.
I created launched this iteration of KnowCap in June of 2018. It wasn’t supposed to be this way. We spent a year fundraising for our ecosystem model only to get ghosted by every single person we reached out to except for one. Kai Bond at Courtside VC. We had opportunities fall through where we thought we were a sho-in, like Kauffman’s Capital Access Lab, but they decided to fund people/brands who were more well-known.
We don’t blame anyone. Our model is wholly unique and no one’s done anything like it (exhibit A, B, and C). However, we hoped that we would get some conversations where we could explain our entire vision — this didn’t occur until two years later. With that we decided to step out on our own, not only were we pursuing an idea that had never been done, we decided to fund it in a way that was unique.
We’ll save that for another day. Here are the sparks that ignited our movement…
#1: Lack of Diversity in Venture Capital
The first inspiration for KnowCap was the lack of diversity within the venture capital model. 40% of VCs come from Stanford and Harvard (link). VCs usually invest in people they know or have a mutual connection with, so the VC network remains small and many people with great ideas are left out.
If you went to the same school as the VCs, such as Stanford or Harvard, you automatically have a competitive advantage when seeking funding. This doesn’t seem right…right? The meritocracy that everyone was believed to exists is only a mirage of what reality actually is.
We knew that there had to be a way to at least give the “outliers” (who are actually the majority of entrepreneurs) a real chance at scaling a big company. Right now, there are so few $1B companies led by women and people of color, and it’s not because they aren’t good enough to build those companies. It is because if there is no pathway for them to raise the $160M in required capital to reach the scale of a unicorn.
Yet…those founders are being gaslighted and told that it is because their idea isn’t good enough, metrics aren’t strong enough, or that their market isn’t large enough.
Let’s call a spade a spade. Seed investors are de-incentivized because to raise their next fund they need to have considerable portfolio markups. If you don’t believe that a company can raise at the next levels (series A, B, C) then you wouldn’t be smart to invest in them now. They aren’t investing in the best companies. They are investing in the best companies that they believe can raise hundreds of millions in funding. In 2020, that doesn’t include companies led by women or people of color.
Also, 80% of venture capital goes to four states (link), which leaves 46 states competing for 20% of the capital. You are probably also not aware that less than 1% of VC funding goes to black founders.
When I first had the idea for KnowCap, in June of 2018, I was scrambling emailing everyone I could, but no one wanted to take a risk. No one could see the benefits at the global level or at the local level. No one could see the economic impact we would drive or the amount of money KnowCap would make for anyone who invested. So we decided to do it ourselves until people woke up.
#2: Foreign Governments Investments in Domestic Businesses
In 2017, my wife and I sold 95% of the things we owned and left the U.S. to travel the world for a year. We stopped in Africa, Europe, Asia, Australia and lived in places from 2 weeks to two months.
During that year, I kept my eyes open to how other countries support their idea-stage and early-stage entrepreneurs. And when I tell you it was eye-opening, I mean it with every fiber of my being.
I saw that a lot of municipalities and governments care deeply about their startups. Yes, the U.S. government has startup funds and grant programs. However, there are so many people seeking out these programs and there is not a very clear way of applying for them. This leaves VCs practically owning the market for startup funding.
Outside of the U.S., some awesome things are happening. As the government in France claiming to use a digital tax to support their ecosystem. Or, in how countries in the Arabian Peninsula fund startups with their well-capitalized sovereign wealth investment funds. All these other countries use government money, or taxes, to invest in startup companies and then use the money that they receive from the proceeds to reinvest in their communities.
There is power in this model. So why aren’t states in the U.S. doing something similar? Yes….yes…Georgia has the invest GA fund. What is interesting about this fund of funds is that it only invests in the usual suspects (not emerging managers) and those usual suspects, invest in their usual suspects. See a pattern here?
The United States should create a trillion-dollar evergreen fund that invests in companies that may not fit the venture capital model. Then when these startups succeed, the proceeds could be put back into the fund in order to invest in new startups. This would assist with job creation, it would help keep businesses in the United States, and it would increase economic development around the country. Yet our government hasn’t created that type of program.
What I wanted to see where municipalities take real risks in helping businesses get up and running. It looks like that will never happen. So, I took the quote “Be the change you want to see in the world” and dialed it up to 11. Over the course of six months, I created a model that creates a flywheel of innovation in under 90 days from being fully funded.
This flywheel, we refer to it as an ecosystem will have training programs, partnerships, talented experts, and more. Best of all, it will have an exponential revenue model that will allow it to operate as an “evergreen” innovation entity. In short, we designed it to only need to raise funding once
When we started KnowCap it was through the realization that we could help founders who have been overlooked by our government and overlooked by the venture capital community.
#3: A person’s most valuable asset is between their ears
The third inspiration for KnowCap were the Airbnb and Turo business models.
Airbnb was founded on the idea that there is an asset, the empty rooms in your house, that could be making you money as a passive income. These extra funds could help you pay for mortgage down faster, allow you to travel more, or generally improve your quality of life as a host.
For the guests it would provide a less expensive alternative to a hotel, and also a more authentic stay compare to the deep curation of hotels. AirBnB simply serves as the middle man helping these two parties get what they want and taking a cut as compensation for facilitating the connection.
That’s why in our first iteration of KnowCap we aimed to pioneer the Knowledge Capital model. In a nutshell, Knowledge Capital is the value of someone’s expertise when invested in a company in exchange for equity or revenues.
Founders love it because they get access to talent that they wouldn’t otherwise be able to afford. This talent may come from top agencies, corporations, or startups and they are willing to help founders who have had a hard time raising capital.
These experts are people who are looking to experiment with new ideas that they can’t experiment with at their normal job also love KnowCap’s mission and what it represents. They relate to the idea that we’re trying to change the lives of entrepreneurs and their future employees.
When we connect these two (founders and experts) we enable a new kind of venture capital model to exist. One where money doesn’t need to be exchanged when the value of the expertise has clear value.
#4: Knowledge capital is reusable capital
The fourth inspiration for KnowCap is located directly in the name.
KnowCap is short for knowledge capital, which is representative of the concept that people’s ideas, their expertise, and their experiences are worth something. Arguably, they are worth a lot.
We bet that the reusable capital (someone’s experiences and what they’ve learned over time) can be leveraged to give a company a competitive advantage even over well-funded companies. In fact, we think it can be leveraged to a higher point with a higher ROI and a lower cost basis than any other dollar amount.
Why? Because when a founder is at the earliest stages, they may find it difficult to recruit top-tier talent from their current roles. They don’t have the traction, the investors, the product, or any other reasons to help bolster their case for potential recruits. KnowCap does have that and we are able to onboard team members that even larger companies couldn’t sign onto their teams.
Our mindset is that if you invest $1 into a company, on average you have to wait five to seven years for a liquidity event, or even the prospect of a liquidity event. KnowCap can invest $1 into someone’s salary, and they can use that salary to work with four to five different startups (sometimes simultaneously).
So, while most investors are getting $1 in for a few dollars out, we can invest $1 in someone’s salary and get $50-$70 out. That is what makes our model exceptional.
Fortunately, we have a proprietary process regarding how to recruit people and how to evaluate founders. Our process called the Startup Engine, and our Founder OS (Operating System) that we built, have been essential to achieving our mission.
These four inspirations are why we’ve been able to recruit such an amazing team and why I am confident we will not only achieve our goal of helping 4,000 companies launch in the next 10 years…it’s also why I believe that all of those potential partners/investors that ghosted us will be back.
And they will have to pay 10X just to get their foot in the door of what we’re building.
