Impact Investors are Making Bank!

In 1946, Georges Doriot, a French-born, American professor at Harvard who had served as a Brigadier General to the Americans during WWII and would later found the globally respected business school INSEAD, formed ARD with his buddies – the American Research and Development Company – and became the father of venture capital. As you can see, Georges was a real under-achiever.

Professor Doriot wrote white papers about his plans. He said he would invest in companies being built by the GIs returning home to the US after the War with some pretty good ideas about the innovations, as he called them, that would power the human existence on planet earth for the next century. Massive risk, massive reward. He postulated that 2% of his investments would pan out and 98% would be rubbish.

Massive Risk. Massive reward.
The U.S. government immediately got involved, providing tax benefits for investors taking these massive capital risks. The leaders understood that the country that owns the technologies of today and the near tomorrow owns the planet.

And so, the Americans did. We got to the moon. We took computers out of large buildings and put them on desktops. Today, we hold in our pockets more power than took humans to the moon in 1969. 

Then, in 1994, there was a crack in the universe as the World Wide Web exploded around the world. It was not ARPAnet, or bulletin board services or even email that made the difference. It was arrival of color and shortly thereafter sound that changed life as we knew it.

.gov, .org, .edu and even .com – they belong to the US. Because we invented the thing! .co.uk, .fr, .dr… everyone else: stand in line.

There followed Satoshi Nakamoto’s cryptocurrency that is changing the world at a slow-burn pace which is picking up pretty quickly now. And in 2023 there was another crack in the universe as AI, which had been around for some 80+ years, and which has again, changed everything became democratized and commoditized.

Today, some 74 years later, survival statistics for venture equity investments are brutal. They should everyone pause: investors, entrepreneurs, and governments alike.
• 80% of all venture-backed companies die within 5 years; more thereafter
• 16% continue to function, but return nothing to their investors
•   4% - double George’s expectations - have a Happy Exit, defined as 3X returned to investors

The question is begged, did VCs make a mistake on 96% of their investment decisions? It’s their JOB to return an ROI to their funds and only 4% of their investment did it! How else do you want to look at it?!

In truth, that's thin thinking. 

This is the venture equity model. You invest in 20 companies, burn 18 or 19, and the 20th has a meteoric exit so large that it covers all of the losses, all of the expenses of a rather expensive investment vehicle for 10 years (or more) AND returns 3X or better to its investors. Conventional venture equity is the search for the absurdly tiny kernel of companies that could become the unicorn. To everyone’s detriment, we are slathering it over every startup on the planet.

Massive risk. Massive reward.

It should come as no surprise to you then, that 51% of venture capital funds return NOTHING to their investors. You hand them a million dollars and you get NOTHING back! The next quartile returns somewhere between 1 and 3X. And the top quartile will return 3X or better. That’s not unicorn returns, folks! That’s merely 3x or better over the life of a 10+ fund! The very few unicorns we read about crowd out everything else. I don’t have to do this research; the Kauffman Foundation, as well as Boston Consulting Group and many others kindly publish it for me.

Massive Risk. Massive Reward.

We talk far too much about the rewards and far too little about the risks.

The Risk is about far more than money.

For this audience, as for the USA, the risk of investing in unicorns is far greater than the cost of a risky investment that may not pan out. The risk lies in the fact that we are using investment capital to chase a near statistical impossibility rather than investing in companies that could become privately held, mid-cap companies that employ their neighbors and provide a massive lift in the general standard of living among the people with whom you share these beautiful islands of Trinidad and Tobago.

Trinidad’s Gini coefficient of 46.7 is not just any number; it’s a clanging red bell in front of our faces. And it is not so different in the USA now. Slovakia’s Gini coefficient is 24! This situation appears to be disrupting our logical decision-making capabilities. [The Gini co-efficient is the financial delta between haves and have nots in any given country.]

The imbalance of capital wealth is the directly responsible contributor to the record high homicide rate of 39.4 per 100,000 across the nation of Trinidad and Tobago and over 50 per 1,000 in the greater Port of Spain area! 

Lack of a path to or even hope for a better future for oneself and one’s children creates a power vacuum that gangs fill. A 2024 Civicus Monitor report confirms that the violence in Port of Spain and Trinidad and Tobago at large is not random; it is a visceral symptom of the lack of hope for improvement in the quality of life.

And don't think for a moment that this is a contained problem. Gangs are not merely killing one another’s members. Gangs are not just a problem among themselves; they are an alternate power. They are growing in strength. Gangs in Port of Spain are already strong-arming the police and threatening the very governmental stability of this nation. It's getting worse, not better.

In our board rooms and planning rooms, we need to draw a direct line between the financial stability of our enterprises and the economic and social stability of the government under which they operate. 

Calculate the specific costs of not taking action to improve the lives of the next generation. The cost to clean graffiti off building is minimal; the cost of not having a qualified workforce and a stable government can cost billions in higher risk profiles that lead to a higher cost of capital for building projects, expansion, and more. 

We’ve all been taught: always follow the money. This is no exception. Take the rose-colored glasses off and get real about the cost of operating within instability.
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The Solution: Alpha in Uncrowded Fields

The only way to change this is to starve the gangs of people who want to join them. That requires decent education, sufficient food, decent housing and, most of all, hope for the future. Your company must literally become the alternative community to the human requirement for community that is currently being satisfied by gangs. Good corporate governance and good corporate culture is not a nice to have; it’s a survival tactic.

Philanthropy can only go so far. A bowl of fish and rice is not a lifetime skill, let alone a chance to be the business owner of a fishing fleet or grocery store chain – or even a single grocery store. All that comes with CAPex costs. It costs money to start businesses. 

Major enterprises can employ only so many people. And they’re going to need goods and services, which required owners and workers to operate them. Small businesses improve the quality of life at every economic strata of society. We need to launch them, build them, and have communities of customers who can afford those goods and services to sustain them. 

Philanthropy is not the correct tool here. Individuals, family offices, corporations, and governments must INVEST in the world they want to see for themselves and their children’s children. You can use philanthropic budgets and dollars to invest in that world by investing in impact funds and others, but merely making donations and giving lip service in our board rooms to the need to improve the lives of the common man is not going to save any of us – or our families. 

I suspect you all know the numbers around who gets funded in conventional venture equity. All the statistics I am going to share now are WORLDWIDE and applicable at the Series A. Entrepreneurs can get angel investments and even small emerging vc fund investments in the idea, build, and Seed stage. The salient numbers lie at the Series A when a conventional venture equity investment fund team is making an investment decision.

2% of conventional venture equity investments are awarded to startups run by women.
98% is allotted to men

Perhaps more illuminating is the fact that of that 98% of the capital awarded to men, a little more than 2/3 of that capital is awarded to: tall, white, American-spoken, youthful, slender, able-bodied males, from Harvard or Stanford – just two universities in the entire world – with a baritone voice. Everything, including the baritone voice, is points-off if you don’t have it.

Now the guys get a chance to get back up on the 1/3 remaining stage. The women? Not so much. And when we talk about the 2% going to the women, we’re talking about white women! The amount of capital going to women of any other ethnicity other than Caucasian, is less than ½ of 1%!

The tall white men on Sand Hill Road (and in NY, Boston, London…) are replicating themselves. 

As an investor, I dug in. And what I discovered was astounding. While a good social case for balancing the flow of capital can and has been made for a long time, I looked at this issue from another angle altogether. Let’s look at the numbers around women CEOs from a conventional venture equity investor’s lens.

Women get 2% of venture equity investments; men get 98%.

I’d say that the tall white male leader in particular is an over-invested space with inflated valuations. I like finding my unicorns in uncrowded field.

When they are offered a Series A investment, women are offered 16% of the pre-money valuation awarded to men who pitch exactly the same deck. One, six, percent. The Swedes did that work for us. They gave a deck to a guy and gal and sent them all over to pitch, never crossing the same VCs so no one got the idea. They did it again and again and collated the data.

You just got told as an investor that you can get an 84% discount on your initial invested capital value based on the human body standing in front of you. It’s the same deal! 

Oh, you have my attention…

Women are more capital efficient than their male colleagues. Female entrepreneurs raise an average of 44% of the capital raised by men to exit at the same number. She raises this much; he raises 66% more. They both exit up here at the same number.

Every time an entrepreneur raises a buck, we investors get diluted. You just got told 56% less dilution. I like it. Keep talking!

Women generate an average of 2.5X the revenue per invested dollar than a man does. 
In a country like Trinidad and Tobago which desperately needs profitable companies over unicorn-hopefuls that cannot employ the masses, this is a critical strategic advantage.
Women exit 1 – 2 years sooner than their male colleagues, depending on the industry.
Well, time is a risk factor and a cost factor, so I like that too.

And now I ask you to put down your cell phones for a moment and listen carefully. 
I’ve got about 30 years of data on this and I have ZERO doubt that if I had 50 years of data, it would show the same result.

When they exit, women at the helm return an average of 35% higher ROI to their investors.
35%. Hedge funds go nuts for a point. And I’m talking 35! 

And yet, the money does not follow the money. But money always follows the money, we cry. Not this time. What’s going on? Why?

It turns out that the answer lies in anthropological behavior. People are comfortable with people like themselves. I suspect that this comes as no surprise to anyone here. DIFFERENT IS DANGEROUS. And it always has been.

Think of it this way – 
If a humanoid infant had cozied up to a saber-toothed tiger some 30k years ago, it did not last long. It had to instinctively cozy up to its own kind. It turns out we have not changed; and we are no different as adults. The question is what to with that situation in 2025 when it no longer serves the planet?

The first thing is to recognize what’s going on. And then we as investors need to build bridges among one another, bridging the gaps of our reptilian brains by connecting as a community. Community is built on shared values, shared goals, and shared experience. And shared experience will beat out the other by a “country mile”, as we say in the Pacific Northwest. In building those relationships with venture investors worldwide, I connect on subjects that have nothing to do with the subject at hand. This kind of connection establishes comfort and then trust. That’s why deals go down on golf courses, over whiskey, wine, fine Caribbean rum and a perhaps a shared love of old Irish movies. Whatever bridges the gap, make it happen.

I cannot boil the whole ocean. I cannot, for example, invest in sub-Saharan Africa. I do not know if the problem you bring me is real or rubbish. Or whether your solution is functional or nonsense. Or whether that solution will survive the trip to its destination or even be permitted by the government to reach its destination. Or whether the customer will use it. Or whether, heaven forbid, it will have some awful effect on the land that I cannot even imagine. I must trust that my colleagues will address other inequities. When they lead, I can follow. When I lead, I hope they can follow. 

Trusted leadership communities get the job done.

Now, I return to the subject of the hill that I will die on – gender equity. And yes, I trust that my colleagues will address other equity issues. But, as my colleague Anne Kennedy and I established a venture fund manager that invests in companies led by women, we had to answer a rather important question: If we are to invest in women led companies at the Seed stage, how do we return an ROI commensurate with the risk of the asset class to our investors? The women aren’t getting through the Series A! 

We have not changed the 2% numbers since 1946. I am certainly not fool enough to think, no matter how many golf courses I walk or how much whiskey or rum I sample with my colleagues, that I will change these numbers in the next 5 years. 

The answer? We had to literally invent a new investment instrument to accomplish the goal. It’s called a Redeemable Warrant – a redeemable warrant for preferred options. 
Convertible notes were a longstanding investment instrument of the venture equity community. But, it has unfortunate tax consequences. As it is a debt instrument, investors must pay taxes on its annual increased value before they see a dime of returns. Y Combinator blessed us with an iteration to the Convertible Note: the SAFE – a Simple Agreement for Future Equity. This instrument addresses the tax issue; it does not require tax payments before the investor sees a return. Still, both instruments have the options automatically convert to stock when a trigger event is achieved. They are still extremely high risk. 

As a matter of fact, venture equity investing is high risk not only for the investor, but for the entrepreneur.

I often tell entrepreneurs, to their shock and wide eyes, that as soon as you take even one dollar of conventional venture equity from a VC fund, you (the entrepreneur) agree to two very important things.

1. You agree to sell your company. As quickly, expeditiously, and at as high a valuation as possible. In very rare instances, you get to go public. 

That’s the only way the VCs get their money back out. It’s not that VCs are sharks or terrible people. It’s their job to get you to an exit. Someone hands managers of VC funds a box of money and says, ‘How quickly will I get it back and how large will it be?” And the VC must hand you a box of money and repeats to you, “How quickly do I get it back and how large will it be?” The VC is beholden to her investors!

2. And, if how you wish to treat your employees, vendors, customers, or your vison of your trajectory to that exit should differ from your investors, you’ve agreed to a second very important thing: you serve at the pleasure of your Board. And you can be replaced. More than 80% of all CEOs of venture fund backed, successfully exited companies have been replaced. They cannot take it to the finish line. Are you sure you want to make that deal with the devil?

And the entrepreneur looks like a deer in headlights. They just want to launch and run a business. Most of them don’t have visions of grandeur the size of a glowing unicorn. They are, by their very nature, not suitable for venture equity investments.
 
Venture equity investments are designed to capitalize the companies conceptualized by Georges Doriot that we could loosely describe today as, ‘the software that powers the next big thing.” It is NOT designed to capitalize the companies that leverage that software to build the next decent thing. 

And yet, we are slathering venture equity over every startup on the planet. And killing them off at 80% a shot in the process. VCs do not make a mistake on 96% of their investment decisions. These are the finest companies on the planet that we are killing off at a very brisk clip.

Only 0.000002% (zero point 5 zeros – 2) of any company on the planet will ever get venture equity investment. Most of them should not have taken it.

Today’s question is, “How do we capitalize the growth of privately held early-stage companies in ways that will launch and grow a company that will return an ROI commensurate with the risk of the asset class to the investors? How do we make it not only profitable, but replicable?

Because the financial inequities in our nations are leading to a revolution that would make the French blush. None of us have an appetite for whatever the modern equivalent of a guillotine will look like. Yet, we are hurtling to that future with neither a compass nor a solution.

I have one solution to share today. There are many others.

Mastersfund’s Redeemable Warrant for Options.

Mastersfund makes equity investments of ~$150k into revenue-positive, seed stage companies. We work deeply with the company’s leadership, providing leadership advisory, helping them form board of directors, and taking a seat on every one. When the portfolio company achieves its pre-set gross monthly revenue target (MRR), the Company is obligated to begin to redeem the Warrant on a revenue-share basis. The company makes monthly payments of single-digit percentage of its MRR to Mastersfund until redeemed in full, which means a 3X return has been made to the Fund.

At Mastersfund’s option, we retain the right to convert the Warrant to equity, as well as to make equity investments in the future on preferential terms (like any convertible note or SAFE) specified in the Warrant. For companies that will go on to venture equity raises, this redeemable Warrant investment might be part of a larger raise or a bridge to a future priced round.

The key is that conversion to equity lies at the option of the Fund. In a SAFE or convertible note, usually on line 7 or 9, the note reads, “This is not redeemable.” The note WILL convert to equity. Hence, the very high risk profile. The only way a conventional equity investor gets capital returned is through a sale or IPO. I know, there are some secondary markets out there. They are not enough to move the needle. Sale or IPO. Let’s stay focused.

High Risk. High Reward.

But, those rewards come far too infrequently and companies are dying by being pushed to achieve 10X, 50X, and higher YoY growth rates. A Redeemable Warrant provides investors an on ramp to invest in high potential companies AND an off ramp, to exit with earlier, steadier, returns.

It makes all the difference in the world.

Being able to invest in early-stage companies that can change the stars for non-conforming entrepreneurs – essentially anyone who does not fit the tall-white-male-with the baritone-voice from the school that graduated the investor is a game changer. It enables us to INVEST in the world we want to see for ourselves and our children’s children, not just write unending philanthropic checks in the hopes of kicking the can down the road a few more months. It enables us to capitalize the growth of even modest sized companies and receive a reasonable ROI for the risk and capital tie up time.

This is not a social nice-to-have; this is an economic and security imperative. 

Banks can make loans to profitable companies with business history. Venture equity investors can invest in potential unicorns. Government grants are helping cottage industry businesses to launch and others are providing business training for these individuals.

To break the cycle of never-ending philanthropic requirement just to keep an estimated 325,000 of the 500,000 employable people in Trinidad stuck in a subsistence living standard – to create a thriving community, not just a surviving community, alternate investments are needed.

Dividend models
Revenue-share loans
Redeemable equity investments
Venture debt
Subsidized franchises
And finally, perhaps a small bit of conventional venture equity
Are all needed to get the job done.

The risk of investing in unicorns lies in their near total lack of existence. Meanwhile, there remains both a desperate need for mid-cap privately held companies that can diversify the economic base of Trinidad and build a generation of business owners who employ their own neighbors and provide a massive lift in the general standard of living among the 325,000 people who share these beautiful islands with you, but currently have no way to engage in the enviable standard of life which you enjoy.

At Mastersfund, Fund I is fully deployed and returns are coming in. We will close Fund II at the end of the year and we have already begun investing. First returns are coming in less than 3 years from the date of investment with more to follow. As we invest in a broad group of companies, our highly qualified VPs and LPs take board seats, guide CEOs as they shoulder the mantle of being the CEO of a fast-growing company. Four of our investments have warranted follow-on equity investments, which we have made at advantageous discounts. We welcome co-investors, so feel free to ping me to share some of the finest deal flow on the planet. Our women are outperforming the market in time-to-return and capital returns. 

It is not only possible to do very well by doing good; the two are intrinsically entwined. At Mastersfund, we know. We’re doing it and I certainly hope you will consider it as well. The health, livelihood, and stability of both our nations now and in the future depends on it.

You can reach me at gillian@masters.vc 

Thank you!