September 25, 2023

Reflections on 2023 Kauffman Fellows Global Summit

Happy Monday, friends. I’m a little late getting the newsletter out this week because I attended the Kauffman Fellows Global Summit in Nairobi, and I’ve been playing catch up since getting back last week. As a former VC and current alternative capital and RBF investor, I wanted to share some takeaways from the event, which was geared largely to VC investors.

I’ll start with what Kauffman Fellows is: a highly selective two-year program and global network where the biggest players in venture capital gather. For me personally, it was a transformative and crucial experience — one of those things that creates a new trajectory in life. I loved it, and I evangelize the program to anyone who has an interest in joining.

Obviously, I’m a bit of a misfit there these days, as I am no longer a VC investor. To be clear, I was a VC when I was accepted into the program in 2015 (read: when I somehow tricked them into letting me into the program). Fun fact: Near the end of my fellowship in 2017, I actually made revenue-based financing the focus of my thought-leadership project, and it was the foundation for what Carlos and I launched shortly thereafter as Novel.

Side note: it is not uncommon for Kauffman Fellows to become entrepreneurs or take diverging paths — it’s actually a great Fellowship for entrepreneurs. After all, 800 or so VCs are members and will take your call!

Anyway, the purpose of a Global Summit is generally to highlight an ecosystem that is on the rise, and where there is opportunity for early stage investors to start placing bets. We had one in Kansas City in 2016. I’ve been to Summits in Singapore and Mexico City as well. Generally, the host city is a place where capital formation is on the rise, but where investors are not familiar or generally inclined to invest yet.

This year’s Summit was in Nairobi, Kenya, and it was incredible. I will leave aside for now the deep cultural significance of Kenya (other than to say, as the Governor of Nairobi said to us, “Welcome home,” because the earliest hominid remains are actually found in Kenya…btw, the Nairobi National Museum is one of the coolest places I’ve ever been — the fossil collection spanning the evolution to Homo sapiens is absolutely stunning). I digress…

I was puzzled by something at the Summit. The Kenyan ecosystem, along with the East African ecosystem in general, is on the rise. Capital formation is a key area of focus because of the opportunity, particularly in fintech. But just as in other ecosystems that want to hit their stride, the focus seems to be on venture capital. The President of Kenya even came to speak to the importance of venture capital for the future.

Now, I get it. Risk capital is critical to the growth of any ecosystem. But I was surprised by how little attention was paid to alternative forms of capital, which is to say: none at all.

It seems to me that the “venture capital is the most important driver of economic value/economies/etc” idea is a little over its skis. Honestly, most companies in Kenya should not get VC dollars. Right? I mean, most companies anywhere shouldn’t, so it stands to reason that the same is true in Kenya. Other than in a couple of industries that will obviously take off like a rocket (fintech, logistics), it seems like other forms of capital are the right fuel for economic growth and productivity.

Don’t misread me here: I am not anti-VC at all. I am very much pro-VC when it makes sense. I just don’t think it’s the panacea that everyone thinks it is. I’ve approached the problem of capital formation from the lens of an economic developer, a VC, and now as an alternative capital investor and entrepreneur, so I see the problem along several dimensions.

So why do burgeoning ecosystems crave it so much? Because it’s sexy! There’s nothing less sexy than reasonable expectations for a risk-adjusted return in an emerging market when the alternative is a 1000x unicorn. Who wouldn’t get excited about the latter as an area of focus when the alternative might be some downside-protecting debt with just a reasonable yield as the return?

The problem is this: when government and economic development agencies focus on promoting the inflow of venture dollars, they focus less on the kinds of capital more relevant and helpful for a broader array of businesses. That means that the majority of businesses in that ecosystem will not be helped or funded.

And that will lead to the no-man’s land. The capital gap. That dead space between venture money and traditional lenders where businesses can’t find capital and they struggle to grow.

It leads to what we see here in the US. It happens everywhere.

Actually, now that I think about it, means there’s going to be a lot of opportunity between the extremes in East Africa. If you’re alternative capital investor, it’s worth learning more about the market and exploring it. I hope to see you there!