In Innovation Funding, the Second Funder Makes All the Difference
By Richard Marker
Venture capitalists and innovation funders share a motivation: to discover and cultivate a successful startup that makes a big difference. In VC, the payoff is a big payday. In philanthropy innovation, the payoff is a big “impact,” however elusive the definition of impact may be.
Those of us who have been on the funder side of innovation know that it is high risk. Evidence is always derivative since the idea or project has yet to be proven. There is always the challenge to distinguish what is enthusiastic hype by a budding charismatic personality from an authentically new idea. Or, perhaps, personality matters more than the idea. Guessing wrong about either or both can lead to money down the drain, a dashed dream, and another notch on the failure post.
Yet, truth be told, funding innovation can be fun as well. One meets lots of really high energy people, hears lots of interesting takes on the world, engages lots of new ideas, and feels derivative excitement from the enthusiasm of highly charged, [usually] young entrepreneurs. From a funder perspective, if we are willing to live with the risk, it is not a bad way to spend our time.
And, also typically, to be an early stage funder, especially in the not for profit sector, is not a very expensive investment. One can be a budding hero for a relatively modest amount of money.
But, what happens next? The challenge for us as funders is not so much when a project doesn’t make it. We did a good thing, we gave the project a shot, but we guessed wrong. Some money may be lost but we did give someone or something an honest shot.
However, it is when a project shows promise that the challenges for us as responsible funders grow. If we are the exclusive funder, are we doing this entrepreneur a favor by continuing to be the sole backer? Has our early stage investment implicitly obligated us to invest even more to allow the project to grow? On the other hand, as the primary funder, are we taking the risk that the project will be identified as “ours” – and only as ours? If we then decide to stop funding, have we been unfair with the hopes, dreams, ambitions of someone we have anointed with our start-up funds?
Here is where a second funder becomes crucial. A second funder gives the project legitimacy for others. It makes it clear that this is not simply a pet project of the first investor. It reflects an endorsement that the idea or funder has passed the first hurdle of credibility and fund-ability. It allows the first funder to develop a healthy and less burdensome relationship with the project. And the innovator begins the necessary process of developing a more stable income stream.
Being a second funder has another advantage. Few funders are interested in or have the capacity to invest in every interesting new idea. A second funder is still funding at the enthusiastic early, high-risk stage, but it is a project that has begun to show promise. At this point, risk is shared, and there is already a sense of what the needs and potential are, and what kind of resources should be applied.
When I was CEO of a foundation, we valued being the second funder. Our endorsement was often the imprimatur that quickly brought other early stage funders to the table. We valued that sweat equity and first funding had yielded sufficient results so that our investment could begin the move toward something sustainable. Our endorsement showed that the idea was not simply a single funder project. Often, it allowed us to bring different expertise to the table than the first funder did in ways that had exponential impact in the effectiveness of the project. Looking back over time, it is fair to say that many projects where we were the second funder have lasted longer and were often more successful than those where we were the only funder, and even when we were the first funder among many. And as I peruse the innovation ecosystem, it appears that our experience was not unique.
So that there is no misunderstanding, this post is not addressing the totality of funding needs. This early stage of funding, even when thoughtfully provided, is not a guarantee of sustainability and rarely is it sufficient for scalability. That is a topic for a different discussion. Further, I know that not every innovation funder likes being the second funder – after all, the first funder took the first risk and deserves the first bow. It requires a good deal of ego strength and willingness to be a responsible funding collaborator to be second.
But to those who are committed to innovation funding, I encourage you to take this role seriously. In many, many cases, a second funder is the one who can make a project, a program, or an idea viable.
And isn’t that why we are innovation funders in the first place?
Richard Marker advises funders and foundations on their philanthropy strategy through Wise Philanthropy, and teaches philanthropists and foundation professionals at both Penn’s Center for High Impact Philanthropy and NYU Academy for Funder Education.