Scarcity can be a very nasty thing. People war over scarce resources: oil, water, investment capital. For social entrepreneurs and impact investors, the war is not life-or-death, but it often does have a profound effect on one’s livelihood.
When people think there is not enough to go around, self-interest kicks in, as does short-term thinking. The result is rarely ideal, even if money is made on both sides. So the question arises: If the scarcity mindset is so dangerous, why don’t we all just presume abundance? This week, two impact investors challenged us all to do just that.
Kim Scheinberg and Rafe Furst made news last year for their involvement in life investing. In life investments, like the ones offered on ThrustFund.com, an investor provides an entrepreneur large sums of cash in exchange for a percentage of that entrepreneur’s lifetime earnings (e.g., $300,000 upfront in exchange for 3% of one’s annual income until death or buyout). What many found exciting about this arrangement is that it truly is a life-long investment, both parties are in it for the long-haul.
Life investing is interesting, but also polarizing. People either love it or hate it. For this reason the odds of life investing becoming widely adopted seem low. Presumed Abundance, on the other hand, has the potential to be a game-changer because angel investors, entrepreneurs, and people who run incubators (like me) can immediately see why this makes so much sense.
The video above does a great job of describing Presumed Abundance (so watch it!). In short, here’s how it works:
- An entrepreneur connects with an investor to raise money for a company.
- The two agree that the investment agreement will include a very important provision. Both parties will set aside some equity for a shared fund that they will co-invest in the future.
- If the entrepreneur’s company is successful, both she and the investor win. In ordinary situations, this is when the two parties would part ways. Presumed abundance is different because there is still money on the table, which is co-owned by the entrepreneur and the investor.
- The entrepreneur and investor now work as partners to invest this money in a new venture, but really the partnership began years ago when they first met and transformed their relationship. From the beginning they had a mindset of abundance and a commitment to everyone’s success.”
You might be thinking, “That sounds nice, but why do you think it’s a deal breaker? Why did TBD call Presumed Abundance ‘Social Investment’s New Deal’? Why did Nathaniel Whittemore of Change.org describe it as ‘groundbreaking‘?” There are two reasons:
- 1. Presumed Abundance transforms the relationship between investors and entrepreneurs. It gets everyone sitting on the same side of the table. They agree to invest together when their first deal pays off, not part ways like most people do. It sets the relationship right from the beginning and paves the way for a long-term partnership.
- 2. Presumed Abundance can be widely adopted. It could become popular with incubators like Y Combinator and TechStars, taught in social entrepreneurship classes around the world, and incorporated into MBA courses on investing.
If you are an entrepreneur or investor and want to get involved, go here. If you’re still skeptical, show this post to an entrepreneur and she’ll tell you why this is a game changer.