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Trends on Community: The New Competitive Edge for VCs and Fund Managers

Community is a pillar of modern capitalism. Founders are already starting to pick up on this. Some are even building a community before a product — as is the case with most web3 projects.

In this article we build on these trends and make the case that fund managers can benefit from building community.

In fact, building a community may increase your fund’s performance over time… more on that down below. But first let’s explore this transition away from the old way of capitalism and into the new world. One where more people benefit, not just shareholders and owners.

Community is a Pillar of Stakeholder Capitalism

The old way of capitalism was built in siloes, with information trading freely behind closed doors. Access was minimal. Deals were done by elites. The main goal of large companies was to deliver value to shareholders. As such, we called this shareholder capitalism.

But the new way of capitalism is much different.

Information trades freely in the open. Transparency is the new value and access is easier than ever. Deals are done by those willing to take risks.

We’re seeing this play out in the web3 world where community members are rewarded with ownership and team-play is highly encouraged. We call this stakeholder capitalism and it’s designed to benefit a broader set of contributors of the company: employees, customers, and community members.

Community is the backbone of stakeholder capitalism. Those that focus on building community first will thrive in the new world of stakeholder capitalism. More on this in the next section.

“Lean Startups” vs “Community Led Startups” Model for Venture Capital

We love Greg Isenberg’s take on the new model for startups:

This same model goes for VC firms and solo GPs too.

Take Harry Stebbings for example: he built a community of podcast listeners first. Then he leveraged this audience into a $140 million fund to invest in startups — all because he delivered value to an audience hungry to hear from VCs about the world of venture capital.

So it follows: by focusing on community, you build trust with a group of people that would be happy to be your investors.

Community + Capital Raising Is a Game-Changer for Diverse Communities

At Allocations, we believe in the power of community-powered SPVs to democratize the private markets.

But it’s not just investment vehicles or regulatory shifts that drive change — it’s ambitious, courageous founders like Richie Serna.

Serna is a first-generation Mexican-American self-taught coder and Harvard grad — the first in his family to go to college. His entrepreneurial drive and leadership has garnered his company — Finix — the attention of the most noteworthy investors in the world.

In August 2021, Serna raised $30 million in an extension of its Series B from heavyweight investors like:

But he didn’t feel that was enough. He wasn’t living up to his values as a founder of color. He also knows how important access to capital is for Black and Latinx investors. So what did he do? He put his cap table where his mouth is.

He created an SPV and raised an additional $3 million and brought in more than 80 diverse founders that lack access to great deals.

This isn’t just a one-off case either. Serna and Finix have pledged 10% of each of their future rounds to Black and Latinx investors, utilizing SPVs to bring in multiple investors in a simple, seamless way.

We at Allocations believe that SPVs can be a driving force in democratizing the private markets. And we agree with Jewel Burks Soloman who says it best:

“Access is the primary determinant of wealth creation. So creating an opportunity for access to folks who might not otherwise have it is game-changing.”

VC Firms Who Build a Community Perform Significantly Better

Community data will become easier to obtain and track as the private markets flatten. Already though, there are signs of a strong community:performance correlation.

That is, solo GPs and micro VCs that build communities build better-performing portfolios. Penn University did a study on this where they tracked the connections between VC networks and their investment performance. Their findings were significant.

“We [found] that VCs that are better-networked at the time a fund is raised subsequently enjoy significantly better fund performance, as measured by the rate of successful portfolio exits over the next 10 years”

Translation: VCs with a stronger community go on to build a successful portfolio of companies that exit and return capital to them and their LPs.

The reasoning makes sense in practice too. Given that deal flow is so important for VCs, it’s easy to make the argument that community is the foundation of deal flow. Penn University cites 3 reasons:

  1. Reciprocity: “VCs invite others to coinvest in their promising deals in the expectation of future reciprocity”
  2. Viability: “They can measure their conviction against another firm, sharpening their decision-making by confirming their hypothesis — therefore, testing the viability of an investment without putting capital on the line”
  3. Knowledge: “VCs tend to have sector and location specific knowledge — community allows them to borrow the sector and location knowledge of others”

Taking Our Own Advice on Community

Allocations is built by community, for our community. So when we went to raise our Series A, we asked our angel network first — a group of over 1,000 members. With our community as the foundation, we were able to raise $4M at a $100M valuation in less than 2 years.

But the value of our community doesn’t just lie in our own deal. Our members have seen strong results too. Here’s what angel investor Hershel Mehta said about the group:

“[Allocations Angels] 10x’d the quality of my deal flow and 1000x’d the quality of my network.”

From Hershel, from our experience, and from industry-backed data, the punchline is clear:

Community is the foundation of the modern fund manager’s strategy.

Tips for Building and Getting Involved in Community

Here’s a few actionable takeaways on building community + our favorite tools:

  1. Slack, Discord, and Telegram Groups. For building 1:1 relationships and sharing group knowledge and experience. Each of these tools have one or a few people that help you onboard and find new members. These are usually called Community Managers and they’re the best source of knowledge on how to make a community valuable.
  2. Events and Conferences. It’s old school but meeting in person works. It’s often the best way to start to build social media relationships. The industry term for this is meeting “IRL”.
  3. Connect with other people in your space online. Slide into DMs, add value, and ask questions. It may not scale well but building 1:1 relationships is the best way to bootstrap a community.
  4. Get involved in incubators. More and more, investors and fund managers start by helping entrepreneurs through incubators. There are even online incubators now like On Deck. Founders and investors interact in public, mostly on Twitter.
  5. Leverage existing communities you’re already in. Look around you for groups that you may already belong to. Think Alumni Associations and Local Meetup Groups of which you share an interest.

We believe in the power of community to drive high-impact, entrepreneurial change. That’s why we’re so proud of what we’re building at Allocations: easy to use, powerful, digitized tools for fund managers and micro VCs. Book your demo today.

Disclaimer: The information provided in this document does not, and is not intended to, constitute legal, tax, investment, or accounting advice; instead, all information, content, and materials available are for general informational or educational purposes only and it represents the personal view of the author. Please consult with your own legal, accounting or tax professionals.