Reaction Blog - December 2020 By Bill Ozturk

Chaos has created a leadership moment for innovations that matter

Major economic, ecological and social crises affecting our increasingly connected planet in recent times have created havoc across economies and industries. The ongoing COVID pandemic has been the latest clear case. Within this chaos, opportunities will abound across the globe as entrepreneurs dream of creative solutions to current and impending problems.

It is predicted that more innovations will be created in more countries and more industries over the next decade than in the previous 50 years. But the question needs to be asked: is the current world of venture capital equipped to fuel future innovations around the globe? Will it be nimble enough to take advantage of a greater nexus between solving social and environmental challenges as the key indicator of commercial success? Indeed, if current trends continue to accelerate, we may soon be living in a future where unless a company has a clearly defined goal to play a socially positive role and solve challenges facing their communities, it will cease to exist.

Venture Capitalists struggle to look beyond their ‘my world’ problems to broader ‘real-world’ problems

With the internet now driving much of the world’s commerce activity, it’s not difficult to see why so many venture capitalists have taken the easy money on offer by investing in relatable things like photo-sharing apps, fast fashion marketplaces and food-delivery services. Yet, conversely, as a dramatic and quite chaotic 2020 draws to a close, more venture capitalists are growing attuned to the altruistic belief that there’s big money in solving big real-world problems. Challenges in health, food security, weather and education are affecting vast segments of the planet’s population, and are expected to grow more complex and multifaceted over the coming few decades.

These are indeed big problems but essentially, they are basic problems. Almost anyone could face them as an individual, and indeed billions of people do. At Reaction, we share a vision for a world where innovation can meaningfully change more lives in less time and our mission is to measurably improve one billion lives, within a decade. It’s for this reason one of our first investments was in Jumbotail, India’s leading online wholesale marketplace and new retail platform empowering local ‘mom and pop’ kirana stores to help build a better India. More recently, we have proudly partnered with Mango Materials, a leader in biodegradable plastics founded by women with an ambition to scale a completely sustainable closed loop solution to convert abundant methane gas into biodegradable materials that at the same time can be carbon negative.

According to entrepreneur, Steve Blank, who currently teaches at Stanford’s engineering school, venture capital will soon likely face a reckoning if it is to improve and thrive. “I’ve watched the industry become a money-hungry mob”, Blank told the The New Yorker recently. “V.C.s today aren’t interested in the public good. They’re not interested in anything except optimizing their own profits and chasing the herd, and so they waste billions of dollars that could have gone to innovation that actually helps people.”

Separating “what we do” and “what we care about” is a mistake

Entrepreneur and venture capitalist, Ross Baird, has hammered home many pertinent points in his book The Innovation Blindspot. As defined by Baird, the blindspot occurs because so often we compartmentalize “what we do for a living” and “what we really care about” into two fields, when really, they should be in “one pocket”. Recent academic research conducted by leading universities suggests this isn’t utopian or pie-in-the-sky thinking, but instead just good old plain business sense.

Returns prove that purpose matters

In 2014, researchers with Cambridge University conducted a study which concluded that funds which intentionally integrated social impact to financial returns performed similarly in developed markets while outperforming in emerging markets.

A study conducted a year later by researchers from Wharton Business School showed that smaller funds which integrated a social purpose outperformed others that didn’t. One could also think here of the general truism of industry superannuation funds usually outperforming their commercial counterparts. A purpose or sense of belonging to a community may not just be good for an individual, but also be a key driver for profit in the near future.

Our innovation blindspot, and the need to stay attuned to a form of “one pocket thinking” to help overcome it, is increasingly noticed by some of the world’s largest companies, such as Siemens Energy. Announcing its decision late this year to not take on any new coal power projects due to concerns over climate change and global warming, Siemens Energy CEO, Joe Kaeser, publicly voiced his belief that "inclusive capitalism will be the model of the future”.

VC’s look at hundreds of opportunities before selecting one. But they are all from the same pond

Meanwhile, capital largely continues to flow like a slowly draining river, to North America, and to the traditional money-making centres such as New York, California and Massachusetts. All this despite a rapidly changing situation in history where entrepreneurs need little more than a smart phone to launch the world’s next big idea.

The world of venture capital is largely dominated by a few dozen firms which control hundreds of billions of dollars. To many outside the ecosystem, it comes as a shock that more than 90% of V.C. firms are not generating enough returns their investors need, to endure the associated risk, fees and illiquidity. While the planet contains the unique potential of almost 8 billion people, the V.C. world still overwhelmingly tends to rely on the same type of faces and places and invest in “my world problems”.

Moreover, a PitchBook research report released in early 2020 provided compelling evidence Silicon Valley is overpaying for innovation. Statistics provided by PitchBook showed that California represented 35% of the total deals done in the United States and an overwhelming 62% of the deal value. On the other hand, less mainstream markets like the South represented only 6.7% of the deals and just 2.8% of the deal value. Why? Are ventures based in California exponentially better than those in Texas or the South?

Could there instead be truth in the hypothesis that ventures located in California are overpriced by nature of simply being in California, not because they happen to be any better or smarter than a start-up in Austin harnessing new solar energy solutions or a small business in Kerala, India with an innovative solution for the local community’s seemingly never-ending water crisis?

A lack of diversity continues to limit investment in minority and female led ventures

A study by the Harvard Business Review found that 65% of venture capital firms have no female partners, and 81% have no Black investors at any level. Other reputable surveys suggest about 80% of professional venture capitalists are male. Meanwhile, only an estimated 1% of venture capitalists are believed to be Black women.

Cleo Capital founder, Sarah Kunst, a Black entrepreneur and backer of female-founded brands like Love Wellness and Glow Bar, put it succinctly when she told media outlets “know that people tend to invest in people who look like them”. This lack of diversity can have major real-world effects. The main consequence is that great business ideas, ones that could generate immense profit and provide solutions to major community issues, are never seen let alone entertained.

Positive change. Positive returns.

However, a change may be on the horizon. We are seeing significant growth in the area of impact investment with the Global Impact Investment Index estimating that at the end of 2019 there was USD $715 billion allocated to impact investing, an increase of roughly USD $200 billion from the prior year. Reaction is also by no means alone in our mission to build a more inclusive venture landscape, having already collaborated with a number of likeminded catalysts for exponential change.

At Reaction, we aim to generate both greater change and higher financial returns with our investments. We will only be able to do this by taking innovations that really matter to the global communities that surround us, taking innovation from anywhere to everywhere, and most importantly of all, including everybody. We truly believe that broader participation in economic systems will foster a stronger society, for all.

For further information about Reaction please visit the Reaction website at reaction.global or contact the Reaction team at change@reaction.global.

About the Author

Bill Ozturk is an angel investor focused on investing in visionary women founders in developing countries, Founding Partner of Reaction, and a Director with a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges when it really matters. Bill is an Australian and Turkish citizen, and is based in Dubai, UAE.

About Reaction

Reaction is about creating exponential change. We are a global community of entrepreneurs, investors and executives who share a vision for a world where innovation can meaningfully change more lives in less time. Why now? Because more innovations will be created in more countries and more industries over the next decade than in the previous 50 years. Many will offer the potential to solve global issues. But will fail to reach the markets they could have benefited most. Reaction was founded by a global team of Stanford alumni who united to solve this problem together. Our mission is to measurably improve one billion lives, within a decade, by scaling innovations that will change the world.

Innovation from anywhere to everywhere