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Interview: Kim Scheinberg on how Presumed Abundance turns angel investing into lifelong collaboration

   /   Jul 26th, 2010Finance, Interviews

Kim Scheinberg has a habit she can’t seem to kick: investing in social entrepreneurs who have business ideas to change the world. The problem is she doesn’t enjoy haggling over percentage points when she’s dealing with start-up entrepreneurs who are desperate for cash and trying to do good. To get around the problem, she and her friend, Rafe Furst, have created a new pay-it-forward fund: Presumed Abundance, which makes early investments in social ventures. The key difference is that all the profits generated by the fund must be reinvested in other social enterprises.

The most intriguing part is that Scheinberg and Furst take a backseat role and encourage the business entrepreneurs themselves to choose whose dream gets funded next. Thus, their partnership in social change may continue long after their original business deal. Here, Scheinberg explains how creating long-term relationships makes investing more enjoyable and holds the promise for launching many more social entrepreneurs.

Dowser: What’s at the heart of the Presumed Abundance idea?
Scheinberg: Long-term partnerships with superstars, based on aligned interests. Social entrepreneurs are looking to make the world a better place, and I want that, too. I’m looking for the most win-win way to achieve that.

Why ‘Presumed Abundance’?
If an angel investor and a for-profit social entrepreneur enter into a business relationship operating from a place of abundance, a sense that there’s enough for everyone, the interactions are better for both sides, and I think, for the world. Yet we usually operate from scarcity mode: that your win is my loss. It doesn’t have to be that way.

For the uninitiated, what’s an angel investment?
It’s an early investment made by someone of means that helps an entrepreneur get to a place where they can raise larger amounts of capital from more traditional investors. Sometimes it’s a friend or a family member just trying to help out, other times it’s someone who sees an opportunity to get in early and potentially make a killing.

And what do you mean by ‘scarcity mode’?
Both sides start off excited about the idea, but when you start talking money everything changes. At that point the investor is primarily thinking: ‘What’s the most I can get out of this?’ Let’s say the social entrepreneur has a good business idea for solving irrigation in Kenya. He needs cash. But it’s only natural for him to think, ‘Why does a rich guy have to get richer to get water to poor farmers?’ He doesn’t want to give up any equity that he doesn’t absolutely have to.

Isn’t that dynamic a given?
If you think of a conventional angel investment as a marriage, then the term sheet [the outline of the deal] is a prenuptial agreement that you’re hoping to use. And that’s why the negotiation is so fraught. Because you’re negotiating a planned divorce. Even though you’re all hoping to divide a bigger pot than you started with, it’s still adversarial. I’m saying that we can change that dynamic by changing what we’re negotiating for.

Instead of starting out by planning how to split the profits, we start by planning how to invest the profits together–on more good ideas for making the world better. The upside for the social entrepreneur and the investor is aligned. They both get a quantifiable social return: more money invested in more good ideas.

What does a Presumed Abundance deal look like?
Let’s say my investment buys me ten percent of their company. If they get bought out by Google or they’re paying shareholder dividends, they can keep their 90%, but my 10% we invest forward as partners in the next iteration of social entrepreneurs. Together we decide who those people will be.

What’s the average size of your investments?
Between $10,000 and $25,000.

You and your partner, Rafe Furst, started with $250,000. How many deals have you done so far?
Two for sure and two others are extremely likely right now. The original $250,000 will fund 15 businesses. If two succeed and the fund grows and we continue to have two successes out of every 15 investments going forward—in 15 years we could have helped start a few hundred companies.

How did you get the idea to do social investments this way?
I was trying to do an angel investment with some people who were starting a social enterprise I believed in. Our meeting was going great, they played with my kids, we nibbled on kale chips, but the minute we started talking terms, the dynamic changed. We were on opposite sides of the negotiation. Should I get 5% of the company, or 10%? What would be fair? Everybody became uneasy.

What made you uneasy?
The idea that I should extract monetary value from the transaction was troublesome to me because, like most angel investors, I don’t need more money. What I really want is to be able to keep doing this. So instead of buying a piece of their company to keep for myself, I thought, why don’t I use it to invest in more guys like them—’cause this is my junkie habit. That, and I like long-term relationships. So that’s what I proposed.

How did they react?
When I presented it to them that way, their reaction was, ‘Instead of 5 or 10%, why don’t we give you 20%?’

That certainly is a different dynamic.
And I thought, ‘Why not make this deal with as many people as I can?’

You’re now reaching out to other angel investors to adopt a similar approach. What’s your vision?
If we can shift our perspective of capitalism to one that presumes abundance, a lot of other problems get fixed. But it’s going to take a big shift.

What kind of reactions are you getting?
I’ll tell you how a lawyer reacted the first time I mentioned it. He started grilling me: ‘How do you get your investment back?’ And I said, ‘I don’t.’ ‘But what if you need it?’ And I said, ‘If I gave $125,000 to the Michael J. Fox Foundation and I needed it could I get it back?’ And he said, ‘What if you stumble upon the next PayPal and your $250,000 becomes $500,000,000?’ I said, ‘Great, instead of funding 40 more companies we can fund 10,000.’ He said, ‘You would maintain a majority vote, right?’ I said, ‘They just launched a company successfully. They should have the majority vote because they probably have a better sense of who to invest in next.’

What did he say?
He said, ‘You’re going to need a tax lawyer, a convertible note, and a voting agreement.’ I said, ‘Yeah, I knew we were going to have to set aside money for all that.’ And he said, ‘I’m going to give it to you for free. I can have it to you by the middle of next week.’ I thought to myself, ‘He just told me he’s going to give me $40,000 worth of work for free in five days.’ I probably have proof of concept.

What do you think is the most fundamental change brought about by this type of investing?
We’ve equalized the relationship between the investor and the entrepreneur. We’re sitting across this table and there’s this fiction that I am more successful than you because we tend to define success by bank accounts. But the truth is, you’ve got this great idea to go out and make the world a better place and I would like the world to be a better place. In doing the transaction this way I’m not saying, ‘I think you’re going to be successful someday, therefore I want to extract value from that.’ I’m saying, ‘I already know you are successful and I have no interest in planning our divorce.’

Photo: Kim Scheinberg

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