Here we are at the end of another fraught year, and it seems every print, broadcast, and electronic medium is brimful of listicles and commentaries attempting to make sense of the past 12 months or predict the shape of the next 12 months. The annual ritual continues in spite of the extremely short shelf life of so many of the offered conclusions.
Humans are notoriously bad at predicting the future; a consistent contributing factor to that prognostic shortcoming is an overreliance on past experience — lagging indicators — that obscures the significance of new experience or dismisses data that are incongruous with familiar patterns — leading indicators.
Forbes explains leading and lagging indicators this way:
“A simple way to differentiate leading indicators from lagging indicators is to think of your business as a car. When you are looking out the windshield, you are looking at what’s ahead of you—those are leading indicators. Conversely, looking back at the road you just traveled, as you do in a rearview mirror, describes lagging indicators.”
This explanation is helpful not only because of the immediately recognizable visual metaphor, but also because it clearly centers the sometimes subtle way in which the particular, limited, and self-referential perspective of the observer can be misleading and even hazardous.
Objects in the mirror may be closer than they seem
There’s a famous Gary Larson cartoon riffing on the inscription on passenger car side mirrors, in which a bloodshot eye fully fills the mirror. The notion that something so huge managed to get so close that only the eye is visible in the rearview mirror is comic horror at its best. Here in the final days of 2021 I’m hard pressed to propose a better metaphor for where we are right now. Many huge developments escaped our collective notice over the first part of this century, until they are now terrifyingly right on top of us. One possibility is perhaps we had our mirrors adjusted wrong, so that they do more to reflect a sliver of our vehicle back to ourselves, rather than show us the world around us as they are designed to do.
Another possibility is that we failed to think about what our vehicle-based mirrors can’t show us. Those mirrors can only show what lies behind us right now, in the lanes we are currently traveling. They can’t show anything above or below the vehicle, or even most of the vehicle itself, not to mention what has happened outside our narrow lanes.
So are you paying attention to the right lagging indicators? What are you missing?
Here at Reinventure we see several alarming lagging indicators getting insufficient attention from LPs and capital allocators. These include:
- Venture industry historical performance as reported by Cambridge Associates and others, indicating that headline-making IPOs and near-religious veneration of VCs notwithstanding, industry performance continues to be highly variable not only year to year, but also fund to fund, with wide standard deviations within vintage years.
- Multiple reports from McKinsey and others, summarizing findings that investors have foregone trillions — that’s right, trillions, with a T— of dollars of value creation by failing to allocate capital to BIPOC and female founders and fund managers (see a small sampling of reports here, under Debunk persistent falsehoods).
- Again, widespread reports that in 2020 and into the first half of 2021, the venture sector raised and deployed a record amount of money; however, excited utterances about racial and gender equity didn’t translate into those investments. Relative to the sector at large, capital allocations to BIPOC and female founders and fund managers fell.
Earlier this year, GenderSmart Investing published a blog post challenging investors to face into these lagging indicators and reframe:
As Tracy Gray of The 22 Fund has said, “No one has done the research proving that investing in white males 98% of the time is meeting their fiduciary duty. And no one is doing historical analysis on failed white male managers as proof that investors should look elsewhere.” But perhaps we should. Internal investment teams, CIOs, and Heads of Research should do backwards analysis on their performance and ask themselves why they have continued to invest with traditional frames, even as returns erode and they are pushed into riskier and riskier asset classes.
It is time to shift the burden of case-making and ask “mainstream” investors to make the economic and moral case for the status quo.
Where did THAT come from?
Looking forward through the metaphorical windshield feels like it ought to be easier than consulting the rearview mirrors. And yet how often are we caught in a thousand yard stare, driving with our minds entirely elsewhere. Or absently (or angrily!) watching an object in the rearview mirror. Or worst of all, actively distracted by our devices, or passengers, or other drivers. After a collision or a near miss, we exclaim, “I never saw it!”, or “it leapt out of nowhere!”
It’s true that life is full of surprises, but just like instructors and parents harp on student drivers, the majority of accidents are entirely avoidable if we keep alert to our full field of view. Paying attention to what lies in front of and around us doesn’t only equip us to avoid hazards. It also enables us to perceive opportunities.
Here at Reinventure, we see several leading indicators in our forward field of view that suggest LPs and GPs alike can do far better than the status quo, including:
- Hundreds of exciting young companies led by BIPOC and/or women founders, backed and supported by the likes of Digital Undivided, Backstage Capital, Angeles Investors, WOCStar, Ureeka&1863 Ventures, and others (see more on our website, under Channel Capital).
- Billions of dollars in new capital commitments and investments catalyzed by communities of practice such as Racial Justice Investing, The Billion Dollar Fund for Women, and others; instigated by the likes of newly-launched Known Holdings, among others; articulated by programs such as The Reconstruction, among others; and reported by researchers such as Project Sage, among others.
- Our own vigorous pipeline of extraordinarily insightful, talented, and effective BIPOC and female founders from all over the US, leading high-value enterprises built to scale profitably (see our first four portfolio companies here, contact us to learn more about who is on our radar screen, and stay tuned for exciting news in 2022).
What are you focused on, and what do you see?
What are your lagging and leading indicators? Where is your attention focused? What hazards have crept up on you? Where are your blind spots? What opportunities could you capture by correcting your mirror alignment or making an alert change of course?
What could you see if you were to step out of the car for a moment and take in a wider set of vantages?
Looking back and looking forward.
Reinventure Capital invests exclusively in US-based companies led and controlled by BIPOC and/or female founders, at breakeven and poised to grow profitably. When we started, it was difficult to find capital allocators who were willing to invest in an explicit racial / gender equity strategy.
Now at the end of 2021, we’re finally coming to the conclusion of our capital campaign, a lagging indicator after seven years of sustained effort. We are thrilled with the first four founders in our portfolio, a leading indicator for our next seven to nine years of effort. Both our LPs and our portfolio company founders are expressly aligned with our conviction that it is indeed possible to invest for both meaningful change and top-tier returns.
Peering ahead into 2022, we don’t expect the coming year will be easy. But we see abundant reason for optimism. We enjoy vigorous, high quality deal flow, our nascent portfolio is already outperforming projections, and our predecessor fund returned 32%* — perhaps most importantly, we know leading and lagging indicators alike concur that greater racial and gender equity is a causal driver of greater opportunity and greater prosperity.
If this set of observations resonates with you, please contact us to explore how we might join forces. And please share so others can join you as well!
Meanwhile, wishing you safe and joyous holiday celebrations, and all the best in 2022, whatever the year may bring.
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Photo credit: Nigel Tadyanehondo and Brittani Burns on 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 real 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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