Raise your hand if you’ve ever heard a venture firm touting its “proprietary network.”
For example, here is a fairly representative use of the phrase, lifted verbatim from a vc website: “The wide reach and ongoing expansion of this proprietary network enables us to source and evaluate exceptionally high-quality investment opportunities.”
Maybe you’ve encountered claims like this one so many times that they seem reasonable, even convincing.
I posit that not only is the assertion of a proprietary network both hyperbolic and problematic — only a slaveholder, chain gang overseer, or perhaps mob boss can realistically claim to have a proprietary network — but the underlying premise that a proprietary network would be advantageous is grossly misguided.
Rather than seeming reasonable, whenever someone touts their proprietary network it ought to set off alarm bells.
Definitions seem in order.
Noun
- A fabric or structure of fibrous elements attached to each other at regular intervals.
- Any interconnected group or system
- A directory of people maintained for their advancement
- (broadcasting) A group of affiliated television stations that broadcast common programs from a parent company.
- (computing) Multiple computers and other devices connected together to share information
Verb
- (intransitive) To interact socially for the purpose of getting connections or personal advancement.
- (transitive) To connect two or more computers or other computerized devices.
- (transitive) To interconnect a group or system.
Noun
- A structure that bars passage.
- An obstacle or impediment.
- A boundary or limit.
- (grammar) A node (in government and binding theory) said to intervene between other nodes A and B if it is a potential governor for B, c-commands B, and does not c-command A.
- (physiology) A separation between two areas of the body where specialized cells allow the entry of certain substances but prevent other substances to enter.
When is a network actually a barrier?
Ideally, a venture capital firm’s network serves as a highly sophisticated distributed sensing and intelligence-gathering organ, identifying previously unknown talent and ideas and surfacing unanticipated connections that illuminate novel possibilities. A finely attuned and effective network should yield opportunities that are aligned with a venture firm’s investment strategy, and which are particularly valuable because they do not closely resemble or conform to the well known or familiar. The highest value networks are persistently exciting — introducing novel stimuli that invigorate the firm to operate as a robust adaptive system.
Far too often, however, vc networks function primarily as barriers to dampen or block unfamiliar stimuli: gatekeepers for warm introductions; filters for shared backgrounds, credentials and hobbies; enforcers of homogeneity.
One more definition.
Noun
- The part of a country which borders or faces another country or unsettled region
- The most advanced or recent version of something; leading edge.
- (obsolete) An outwork of a fortification.
Adjective
- Lying on the exterior part; bordering; conterminous.
Is my network actively expanding my horizons? Or securing them?
The venture community loves to frame new investments as reincarnations of its biggest past wins: the next Google, etc. And to be sure, in order to be successful over time, it’s absolutely necessary to understand what led to one investment being successful and another not. The implicit hazard, of course, is that the desire to replicate prior successes can lead to a degenerate mode of learning: dysfunctional pattern matching that merely reinforces habit.
So, for example, channeling ~90% of US venture capital to white men from a dozen universities, as a result of mistaking those combinations of gender and alma mater as the predictive indicators or causal drivers of future success, when they are simply correlated artifacts of highly collimated past investment decisions, a small fraction of which ultimately proved financially rewarding.
As much as the venture sector claims to prize disruption, when venture firms tout proprietary networks, closed boundaries, restricted access requiring warm introductions, that really signals an expectation that others will be disrupted while venture partners remain comfortably ensconced behind high-walled borders that permit only the familiar to enter.
The mindset of proprietary networks affirms preconceptions and reinforces the status quo, when the biggest opportunities are at the edges, the fringes, out beyond the fortifications.
Trade up from the proprietary network myth
The myth that the venture community has target lock on all the best talent and opportunities has been roundly debunked in a long and growing list of publicly available reports, the takeaway summarized pithily by TechCrunch: “You’ve likely missed huge market opportunities by getting stuck in pattern matching — but it’s not too late to turn that around.”
We do not have a pipeline problem. We have a network problem.
There is no shortage of investable talent, deals, investment strategies and stages, or products. “[E]xceptionally high-quality investment opportunities” aren’t even all that exceptional — they are abundant. It’s the proprietary network mindset that makes them appear rare.
There are now hundreds of funds and platforms investing in vibrantly diverse founders and communities, and the entrepreneurial population is gloriously heterogeneous — all skin colors, all ethnic identities, all genders, all economic strata, all geographies, etc. Our own informal tally of peer firms in the US numbers well over a hundred different funds, and others tell us they have counted more than twice that many, not to mention those in other countries — none of which are echoing mainstream vc complaints of a shortage of high-quality dealflow.
If you are a direct investor or a limited partner (LP), you have a bounty of options. Maybe your own network or screening practices have prevented you from seeing and benefiting from them until now, but as TechCrunch pointed out, you can [and should] change that.
For our part, Reinventure invests exclusively in US-based companies led and controlled by BIPOC and/or womxn founders, at or about breakeven, and poised to grow profitably — high-value talent that proprietary networks dismiss, discount, and turn away. We are intentionally and constantly making connections, seeking collaborators, and exploring communities who are new to us. We know both from prodigious third party evidence and from firsthand experience that actively exercising our networks to make them more expansive, more open, more generative raises the standard of excellence for our portfolio and benefits LPs.*
If you’re ready to trade up to the superior — more diversified, more innovative, lower risk, higher return — opportunities that proprietary network adherents are missing, please contact us. We will be delighted to welcome you. And if you are already actively exercising more excellent networks in your investing, please share so others can join you!
Image credit: Chronis Yan / 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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