Unintentional Benefits and a Test for NYC Seed

Last December,  Owen Davis from NYC Seed decided to make my company, Path 101, the fund's first investment.  Given my recent announcement that I'm taking a full time job at First Round Capital and that the Path 101 team is going part time, I have to imagine we've been written off as an investment--from a financial point of view.  God help the next company that has to pitch to the NYC Seed board now.  The board is a room full of about a dozen folks, which is about ten people too many for making early bets on seed stage companies.    Undoubtedly their mindset after the news will shift even further to risk mitigation versus additional risk taking, especially after what our experience might be saying about the funding environment. 

That would be a mistake, however.  Experienced angel investors know that a 50% loss rate is about average--they expect half their portfolio not to return any capital.  That's how the business works.  So, if another NYC Seed company fails soon, that would pretty much be well within normal expectations.  I feel like a group of government folks isn't really going to buy that, but they have to.  The Bloomberg administration trumpeted the fund as a way to spur on innovative technology ideas and fill the funding gap for cutting edge startups.  If it had to only pick from companies that could break even on $200k, you'd see little in the way of large scale market disruption coming from these companies.  In other words, you don't pick the next Google by mandating that the company generate enough funds to cover itself within the next nine months.  You might as well invest in a couple of accounting firms or food stores--very little chance of losing your money on those. 

In fact, one could easily make the argument that a heck of a lot of good could be done while still losing the whole entire fund--laying a big fat goose egg.  People learn a lot from failure, and having a culture that excepts high failure rates is critical to a truly innovative scene.  Also, when companies don't work out, founders and employees often move on to other startups, taking their experience and making themselves more prepared for the next challenge.

Take the investment in Path 101, for example.  By enabling us to continue an extra year, we were able to build better relationships with the innovation community and investors.  I was able to pitch and continue communication with Josh Kopelman from First Round Capital.  In turn, First Round is now opening an office here in NYC.  There's no doubt in my mind that First Round will invest *at least* $2 million more dollars in NYC than they would have anyway now that they have an office here--so this development is actually a net positive for the city.  We all said there wasn't enough early stage capital located in NYC, and now, we have a new top tier VC fund setting up shop right in the Union Square/Shakeshackville area.  Add in the fact that my partner Alex Lines is joining Betaworks.  Who knows, he could hack something up that winds up becoming huge.  In a way, NYC Seed enabled him to find someone to fund his hacking.

Plus, we've now unleashed machine learning PhD/scientist Hilary Mason's data mining expertise on the NYC startup market.  After moving here to NYC, she's now looking for neat data projects to work on, particularly locally.  She has a highly soughtafter expertise and our company attracted her back to NYC in the first place. 

By allowing the Path 101 team more time to be out there in the market, NYC Seed unintentionally deposited some innovative human capital back into the innovation ecology here.  The results are likely to be way better than anything just our one company had a realistic shot at, but I wonder how this fund will be measured...  Net returns or overall economic impact.  I hope the board will take a broader view of the impact of the fund and even extend it's life past the mandate for $2 million.  It certainly can't help the portfolio's risk profile if Owen is making bets thinking he's only got six bullets left in his gun and that's what he's going to be judged by.