Partly because I’m a former aerospace engineer, partly because I’m teaching Innovative Social Enterprises again this term, partly because my family has been tossed into a new context following my dad’s sudden and unexpected death at the beginning of this year, and probably for several other reasons besides, I’ve been thinking a lot lately about frames of reference.
The American Heritage Dictionary of the English Language, 5th Edition, defines frame of reference this way:
noun A set of coordinate axes in terms of which position or movement may be specified or with reference to which physical laws may be mathematically stated.
noun A set of ideas, as of philosophical or religious doctrine, in terms of which other ideas are interpreted or assigned meaning.
In the investing worlds, frames of reference may be defined in terms of asset class, timescale, geography, or numerous other coordinate axes and ideas. Just as in the realms of physics and engineering, these frames of reference may often be moving rather than fixed.
Right now the room in which I am typing this post seems quite firmly stationary to me, but it is in fact situated on a point on the earth’s surface which is both rotating on its axis and revolving around the sun, which is in turn moving through space as our galaxy spins and the universe expands.
Which frame of reference do I choose? Which is most relevant or illuminating?
The answer depends entirely on what I want to understand or do.
How do you define risk?
We think of risk as having a fixed definition, but like position or movement, risk is specified with respect to a frame of reference.
Once again let’s turn to the American Heritage Dictionary definition of risk:
noun The possibility of suffering harm or loss; danger.
A factor, thing, element, or course involving uncertain danger; a hazard: : “the usual risks of the desert: rattlesnakes, the heat, and lack of water” (Frank Clancy)
The danger or probability of loss to an insurer.
The amount that an insurance company stands to lose.
The variability of returns from an investment.
The chance of nonpayment of a debt.
One considered with respect to the possibility of loss: a poor risk.
transitive verb To expose to a chance of loss or damage; hazard. synonym: endanger.
transitive verb To incur the risk of: His action risked a sharp reprisal.
idiom (at risk) In an endangered state, especially from lack of proper care:unsupervised children who are at risk of dropping out of school.
In our work at Reinventure, we routinely hear investors refer to BIPOC, womxn, and other persistently overlooked founders as high risk. We likewise hear capital allocators refer to small and first funds as high risk, especially when they are managed by BIPOC, womxn, and other underrepresented professionals. These statements are proffered as objective certainties, as fixed facts.
Yet just like the long-held belief that the sun revolves around the earth, these statements are actually ideas expressed in terms of other ideas — subjective perceptions local to a self-referential frame of reference. The self-referential frame and dependent perceptions are not merely subjective, however: they are contrary to both observation and analysis. [See just a small sampling of the articles and reports dismissing these persistent myths under Debunk persistent falsehoods.] That is quite risky.
Moreover, I have never heard a VC or capital allocator acknowledge the vast scale of risk associated with hyperconcentrated investment portfolios managed by overwhelmingly homogeneous professionals and comprising overwhelmingly homogeneous founder teams located primarily in just a few urban hotspots. Apparently that risk is either invisible to them, or — what amounts to the same thing — undefined in local coordinates.
Similarly, many diligent investors across asset classes, not only venture, dismiss the readily measurable negative impacts of their portfolio holdings as externalities. Again, this is an accepted practice of interpreting selected information as insignificant or irrelevant — non-material — because it is not congruent with the locally defined system of ideas.
These disconnects with observable reality are not accidental. They are intrinsic to self-referential frames of reference.
Isn’t that recursive?
Yes, it is. Well-spotted.
If I believe that I am stationary, that the earth (or more specifically, Boston or NYC or Silicon Valley or any other earth-based reference point) is the center of the universe, then of course I am predisposed to further believe that the universe revolves around my vantage point.
Furthermore, my belief frames my interpretation of observed and reported evidence: I interpret what affirms my centrality as true, proven, reliable, and practical; conversely, I interpret what challenges my centrality as false, unfounded, risky, and unrealistic. As a result, when other frames of reference are presented, I reject them as a threat to the stability of my universe.
But that doesn’t apply to me. I know the earth is round, and I strictly adhere to best practices.
Unfortunately, best practices in business, finance, and even medicine are defined with respect to a frame of reference which is implicitly — and in many cases explicitly — centered on a fixed and narrow white male hegemony. That frame of reference is so familiar and ubiquitous that it is imperceptible to professionals of all identities who have inhabited it for so long that it appears rather to be a set of proven, rational, and unbiased principles.
The very premise of best practices can make it very difficult to recognize that there is a frame of reference, let alone that it might not be the only — not to mention best — frame of reference available.
It’s like David Foster Wallace’s fish parable:
There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”
This is water.
The burden and the privilege of being a responsible steward of capital — my own or someone else’s — is actively considering the question, “how’s the water?”
In order to do that, first I have to / get to recognize that there is a thing called water, and that I inhabit it. Then I have to / get to observe the water. What is its quality? Is there a current, and am I being carried along in it, for good or ill? And (how) is the water different from yesterday or last week or two years ago or when I first entered it?
Returning to our Hub of the Universe figuration, what if I’m not at the center of the universe? What if the best practices I’ve relied upon are skewed or even damaging in ways I never noticed before? What if my conception of prudence has led me to accumulate unexamined risks I never consciously agreed to accept, and to reject materially better propositions or even basic diversification? What if the universe is far larger, more fecund, and more manifold than dreamt of in [my] philosophy?
Here’s the great news: these are exactly the kinds of frame-shifting questions that not only lead to outstanding investing insights, but make investing far more interesting and enlivening in the process.
It may seem burdensome, frightening, or even blasphemous to question the assumptions, preconceptions, and context of long-held best practices. To be sure, adopting new perspectives and forming new habits does require an active effort and often involves some degree of friction and conflict. However, the privilege becomes increasingly apparent — along with the benefit — as you bring your full intellectual and creative faculties to bear on “discovering” new vistas all around you.
Who is in frame?
No human frame of reference can encompass all that is.
The key is choosing appropriate frames of reference by which to interpret available evidence and take sound action. By definition, any investment strategy is about making selective choices. The ideal investing frame of reference for any asset class, geography, or other context illuminates opportunity and risk where others fail to perceive them; the corresponding strategy demonstrates consistent access to and execution of advantageous choices informed by that frame.
For us, a critical question is who is centered, and who is included, in our frame of reference?
Reinventure invests exclusively in US-based companies led and controlled by BIPOC and/or womxn founders, at breakeven, and poised to grow profitably. We readily acknowledge that this frame of reference does not include everyone. It intentionally centers founder teams who are widely misperceived as low-return and high-risk, growing self-sustaining companies into economic engines that create wealth and opportunity for all stakeholders — investors included.
As we point out at every possible juncture, there is a large and growing body of evidence that this frame of reference and this strategy drive high quality deal flow and deliver advantageous returns to LPs. The combination also advances social / racial / gender justice, and creates expanding ripples of virtuous economic, environmental, and other positively reinforcing beneficial impacts for all of our stakeholders.
Yet because all of these readily verifiable facts lie outside the best practices frame of reference, the overwhelming majority of investors and capital allocators — no matter how sophisticated, accomplished, well-intentioned, or respected — simply cannot perceive them as real. Our chosen frame of reference serves to illuminate and make actionable a prodigious opportunity set which is incompatible with their frame of reference, and therefore invisible in it.
What is your frame of reference?
How’s the water / how vivid is your universe?
Have you already traded in best practices for an intentionally selected frame of reference? We would love to find ways to join forces with you. Please contact us. And please share so others can join you!
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Photo credit: Reinhart Julian/Unsplash
*While there’s no such thing as a guarantee in investing and no one can reliably predict the future, Ed’s prior track record delivering 32%IRR to investors provides direct evidence that it is indeed possible to consistently invest for both financial returns and social value creation. If you are an accredited investor and would like to learn more about investments that can advance social, racial, and gender equity by supporting high-value companies led by women and/or people of color, please contact us to start that conversation.
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