Peer-selection by accelerator participants is the best model for making investments, because it leverages the industry expertise of the participants themselves, while aligning the success of the entrepreneurs and investor, according to Greg Bennett, investment analyst at Village Capital Investments.
Disrupt Africa reported Village Capital recently concluded its FinTech for Agriculture East African accelerator programme; with two startups – Farmerline and Atikus Insurance – receiving US$50,000 in investment each. However, the winners of this funding were chosen by their peers, as Village Capital uses a peer-selection model for its investments.
At the end of the three month accelerator programme, participants are asked to rate their peers between one and four on a series of six criteria, covering aspects such as the team, product, financials, and impact. The entrepreneurs rate each other face-to-face, and must be ready to defend their ratings. The teams with the highest final ranking receive the Village Capital investment.
According to Bennett, the peer-selection model is a solid method for deciding on investment, as it draws on the concept of group accountability, as well as the entrepreneurs’ own industry expertise, to identify the most successful startups.
“Ross Baird, Village Capital’s founder and executive director, pioneered the peer-review model for investment. It draws from the concept of the “village bank” in microfinance, where collaboration and group accountability yield success. We also feel that early stage entrepreneurs working in our five focus sectors are more knowledgeable about who will be successful than most investors,” Bennett explains.
“It’s cost effective for due diligence, it’s a proven qualified deal flow pipeline, it’s scalable across countries and sectors, and it’s aligns our success with the success of the entrepreneurs,” he says.
Throughout the programme, the entrepreneurs are taught to understand and analyse the various criteria on which they will judge each other – and be judged. Like this, Bennett says by the end of the programme they are poised to become “the eye of the investor”.
“We do not [have any input in the peer-reviewing], and the curriculum is set up to expose all the criteria ahead of time and prepare the entrepreneurs to review companies as if they were an investor – the “eye of the investor,” if you will. Village Capital sets up the structure, ensures that the entrepreneurs understand the system, and explains the finer points. The entrepreneurs are the only ones who do the ranking,” Bennett says.
Bennett believes the peer-selection model makes the accelerator the least competitive, and the most collaborative around. Further, he says the transparency of the face-to-face reviewing process makes the model fool-proof against biased or strategic ratings.
“Our accelerator is the least competitive, as you rely on everyone else voting for you. Over the last five years, we’ve seen the same thing happen over and over: within the first few days of working together, the entrepreneurs realize they will gain much more from collaboration. Having a group of entrepreneurs working in the same sector (albeit in different subsectors) that you can trust and rely on for support, connections, sales contracts, partnerships, etc. is incredibly valuable as an entrepreneur. They also realize that the more quality feedback they give, the more they receive,” Bennett says.
Over the five years between 2009 and 2014, Village Capital launched 32 accelerators reliant on the peer-selection model, across nine countries globally. The organisation claims a 93 per cent survival rate across its portfolio.
In Africa, Village Capital has run five accelerators so far, and invested in 10 African startups. Bennett says the organisation plans to continue running programmes across Africa for the foreseeable future.
“We plan on continuing our programmes in East Africa – including one focused on renewable energy hardware later this year, in partnership with Gearbox -, and are exploring launching a West Africa programme as well. We plan to continue running programs across Africa for the foreseeable future.”