According to Bloomberg and BlackRock, over $50 trillion in potential investment capital is sitting on the sidelines. Billionaires, alone, are holding $1.7 trillion in cash, according to CNBC. By mobilizing $1 trillion of this capital, we can restore the American Dream, while simultaneously solving some of the most pressing global problems.
Tackling Pressing Problems
The American Dream will be fueled by the rise of new ventures, both non-profit and for-profit, which will create jobs and stimulate regional economic growth. In order for these ventures to become profitable, or secure funding in the non-profit case, they must provide value to society by solving tangible problems. Businesses could survive solving trivial problems, such as poor dating app response rates, but those are not pressing billion-dollar problems. We want entrepreneurs tackling global food security, water scarcity, healthcare, and the AI control problem. How do we persuade entrepreneurs to start job-creating ventures to tackle these pressing global problems?
Education, Investment, and Accountability. Organizations, such as 80000 Hours and The Frank Batten School of Leadership & Public Policy, are educating, as well as influencing, the next generation of entrepreneurial leaders on pressing global problems. Investment Firms, such as Village Capital, run programs focused on specific problems and sectors, making investments in peer-selected companies that are tackling global challenges. In the past few years, GiveWell and other charity reviewers have emerged to hold non-profits accountable so that the highest impact performers receive more funding.
Now, let’s discuss mobilizing capital. How do we fund the entrepreneurs who will be building up economies and solving society’s ills?
The process includes 5 levels:
- Capital Mobilization: philanthropy, private investment
- High-Level Financing: non-profits, school endowments, hedge funds, institutional investors, direct investors
- Ground-Level Financing: governments, venture capital funds, micro-finance institutions
- Investment Strategies: social impact bonds (SIBs), development impact bonds (DIBs), program-related investments (PRIs), job bonds, economic development grants, traditional investments (equity, revenue sharing, dividends, royalties)
- Street-Level Entrepreneurs: non-profit, for-profit
Here is what will happen at each step:
- People will choose to deploy their capital through either philanthropy or investment. Holding cash or cash-like assets will hinder the process. Two factors should motivate people to part with their cash; the opportunity to generate financial returns and the chance to do good in the world.
- If people choose the investment route, they can put their money with hedge funds or institutional investors, such as pension funds. Their third option is to invest directly in ground-level financiers or entrepreneurs. If people choose the philanthropic route, they can donate to non-profits or educational institutions, such as colleges and private schools. Educational institutions can invest their endowments in the same ways as private investors. Non-profits can make program-related investments that further their missions. As with phase one, it is critical that the actors in phase two do not choose to hold money in cash.
- Although certain individuals and high-level financiers will invest directly in entrepreneurs, most money will go through ground-level financiers. The key players at this level are governments, venture capital funds, and micro-finance institutions. High-level financiers will invest in funds or government bonds, which will provide ground-level financiers with capital to invest in entrepreneurs.
- Entrepreneurial non-profits will receive financing through social impact bonds, paid out by governments, and development impact bonds, paid out by the private stakeholders. Both non-profit and for-profit entrepreneurs will receive economic development grants from governments, as well as job bonds with private investors providing up-front capital. For-profit entrepreneurs will receive funding from non-profits through program-related investments, along with private sector financing. These investments will take a variety of forms (equity, revenue sharing, dividends, and royalties).
- Entrepreneurs will work to generate economic returns for their investors, while simultaneously solving society’s problems. Investors and third-party evaluators should hold entrepreneurs accountable for achieving environmental, social, and governmental (ESG) returns.
This flow of capital to entrepreneurs appears easy enough. However, one of the largest barriers is hedging against risk. Investors hold capital in cash and cash-like assets because they want to protect against overexposure.
In order to encourage investment in entrepreneurs, it will be important to de-risk startup investments from the viewpoints of investors. This can be done in two ways. First, we can mentor, train, and connect entrepreneurs by using entrepreneur-support organizations to establish infrastructure for new ventures to thrive. Second, we can work to influence investors’ perceptions so that they see entrepreneurs tackling global problems as de-risking the world. The latter mechanism will involve convincing fiduciaries, as well as the general public, to value ESG returns. This may require changes to ERISA’s definition of fiduciary responsibility.
Investing in entrepreneurs could also be seen as a way to de-risk portfolios in and of itself. One reason that investors hold cash-like assets is to hedge against the risk of stocks and bonds moving in tandem. Investments in entrepreneurs and ground-level financiers could be viewed as diversification strategies, especially if entrepreneurs are operating in emerging markets or the non-profit sector.
Most importantly, people need to ask themselves whether they want a higher quality of life. If the answer is yes, then it is time for us to band together and mobilize our capital to improve our world.
One possible way to bring people together and direct sidelined capital toward entrepreneurs is to use status networks, explained in an MIT paper called “Social Status in Networks.” In a similar fashion to Bill Gates’ Giving Pledge, fundraisers and community organizers can design status networks to influence people to invest in entrepreneurs. Using psychological concepts, such as social proof and upward status comparison, organizers can capitalize on relationship ties to channel money into entrepreneurship.
These exact same concepts currently cause echo chambers in venture capital and angel networks, resulting in multiple investors following others to invest in a single startup. Status networks should be applied at a higher level to generate investment in ground-level financiers and entrepreneurial ecosystems.
What Can You Do to Restore the American Dream and Solve Global Problems?
- Demand investments in entrepreneurs and ESG returns from non-profits, schools, and fiduciaries.
- Create crowdfunding mechanisms for SIBs, DIBs, and job bonds.
- Engage in activism to include ESG accountability in ERISA’s definition of fiduciary responsibility.
- Raise awareness about investing in entrepreneurs as a diversification strategy.
- Design status networks to increase investment in entrepreneurs.
- Ask your government representatives to invest in entrepreneurs.
- Start community angel investment groups.
- Invest your cash in funds and government bonds.
- Donate to schools and non-profits that invest in entrepreneurs or VC funds.
- Mentor, train, and connect entrepreneurs to de-risk investments.
- Launch and grow ventures.
Glossary of Terms
- Development Impact Bond (DIB): Private investors fund an expansion of social services through non-profit service providers. If services produce pre-determined social outcomes, then investors receive returns, paid by a third-party donor.
- ERISA: The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.
- Job Bond: Private investors fund a venture. If the venture produces pre-determined job creation or tax revenue, the investors receive returns, paid by the government.
- Program-Related Investment: A non-profit makes a for-profit investment in an outside entity. The investment must align with and further the non-profit’s mission.
- Social Impact Bond (SIB): Private investors fund an expansion of social services through non-profit service providers. If services produce pre-determined social outcomes, then investors receive returns, paid by the government.
- Social Proof:Also known as informational social influence, social proof is a psychological phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation.
- Upward Social Comparison: Individuals make upward comparisons, whether consciously or subconsciously, when they compare themselves with an individual or comparison group that they perceive as superior or better than themselves in order to improve their views of self or to create a more positive perception of their personal reality.