Human Capital
The Future of Funding: Part 2
If you’ve got your ear to the ground, you may have heard of a new type of fundraising model that’s causing a stir in Silicon Valley. There’s no established name for it yet, though I’ve seen it called things like “human investing,” “human IPOs,” or “talent investing.”
I’m calling it human capital.
In this practice, venture capital firms invest directly in people rather than companies. The firms give some large amount of money to entrepreneurs themselves and hold the legal right to a percentage of any wealth those entrepreneurs may create in the future within a given time frame. It’s kind of like an ISA, which we explored in part 1 of this series.
With traditional VC funding, an investor will research a startup, decide whether it’s worth the risk, then write a check to the founders in exchange for a percentage of ownership in their company. Those founders can then use that money to build a (hopefully) successful company, thereby generating a return on investment (ROI) for the investor. It’s a pretty risky arrangement, since most companies fail, but if it’s done well, everyone wins and everyone’s happy.
With this new model of human capital, though, VCs don’t invest in a founder’s company, they invest in the founders themselves. Many founders are serial entrepreneurs, and if a founder starts company X, she may start company Y or Z later on; so while company X may not be successful, there’s a higher likelihood of success in the long run. If a VC backs an entrepreneur directly, then the entrepreneur may eventually start a company that generates a strong ROI over the years.
When I first heard of this practice, I was struck by two things:
First, this sounded like a very bad deal for founders, since they forfeit their future potential earnings, which they may be undervaluing.
Second, it sounded kinda creepy, like a dystopian hyper-capitalist form of indentured servitude.
But maybe there’s something valuable here. After all, traditional VC can work really well for companies and help them get off the ground, so might the same be true for people?
Let’s look at some hypothetical advantages:
If you’re a founder who receives a human capital investment, the company you start today may completely flop, but even if it fails miserably, you’d still have a source of cash to try your hand at new ventures.
That’s pretty sweet! Raising capital can be really difficult, and traditional investors are wary of backing founders who started failing companies (since they don’t have a good track record). With human capital, you wouldn’t have to worry about jeopardizing your relationship with new investors, since you’d have the means to pursue your next venture anyway.
The second advantage is the immediacy. To get human capital, you don’t necessarily need an idea for a company, and you can still get an influx of cash that will help offset the cost of living and the early expenses of whatever company you start in the future. That’s really enticing: if you know you want to start a company, and you manage to secure this type of funding, you’re immediately given access to capital that would be otherwise impossible to come by (since banks don’t give loans for no reason and angels don’t invest without some company traction).
So there are definitely attractive aspects to human capital, and I’m sure that some founders would greatly benefit from receiving this type of funding.
However, founders who enter into such an arrangement should do so cautiously. We should always be wary whenever we’re agreeing to give up something in the future in exchange for something today. I worry that if this fundraising practice becomes more widespread, we’ll see the creation of a new indebted class of people whose fruits of hard work will be divided among the rich.
This leads us to the question: who exactly will be getting this human capital in the first place?
After all, what investor in their right mind would give money to some random person without a plan to make a return?
Because this practice is very new, there aren’t a lot of data we can examine to help us answer that question. There are a few “talent investors” out there, like Entrepreneur First, Pioneer, and Antler, but these are more akin to accelerators than anything else, so they only provide a limited sample size. On the other end, there are trading platforms like Human IPO, which you can use to buy and sell the shares of people, not companies. These hardly seem developed, their sites are rife with typos, and their liquidity is really low (though let’s not forget that 70% of their assets are water 😂).
So in the absence of evidence, who can we expect to receive human capital investments if this funding paradigm becomes mainstream?
My guess: the type of people receiving this money will already be in the good graces of investors. They will have high value signals on their resume (ivy league universities, YC, Thiel Fellowship, etc.). They will be the beneficiaries of “who-you-know” capitalism — the darling boys of already established VC firms. The VCs will likely generalize based on past examples of the successful founder profiles they already know, which I wager will keep the recipient pool mostly male and white. It’s like a predictive neural net: by weighting certain values and basing their judgments on biased information, they will almost certainly generate a biased outcome.
I’m not a total techno-skeptic, but I am nervous about how this new fundraising model will be applied and who it will be benefiting. With the advent of any new technology, policy, or economic paradigm, those of us who are interested in prioritizing human welfare should ask ourselves “Is this gap-widening or gap-closing?”
We need to examine this model carefully and see whether we think it will perpetuate inequities or diminish them. Will it further entrench the positions of the wealthy, or will it genuinely be a rope-ladder for young innovators? Will it ossify existing power structures, or will it upend them?
Looking at human capital, it’s not entirely clear, but I have to admit that I’m not particularly optimistic.
With regards to funding models, perhaps there are better alternatives that are truly founder friendly, risk aware, and compelling for those who are financing our future innovators.
In part 3, we’ll take a look at a few under-utilized tools that VCs can use to do exactly that.
