The Innovation Blind Spot

1. The Innovation Blind Spot: A Broken System for Funding New Ideas

In this book, I’ll argue that most great innovations don’t see the light of day, for reasons entirely of our own making.

Innovation is concentrated. Despite the perception of a "golden age of innovation," the reality is that new firm creation in the United States is at a thirty-year low, and entrepreneurship is in crisis. Most great ideas are overlooked because the system for nurturing, supporting, and investing in them suffers from significant blind spots. This concentration of resources means that while a few "unicorns" (companies valued over $1 billion) capture headlines, the broader economy struggles to generate new jobs and solve critical problems.

Uneven distribution of capital. The current innovation economy is far from a meritocracy. A staggering 78% of U.S. startup investment, and half of all global startup investment, flows to just three states: California, New York, and Massachusetts. Furthermore, less than 5% of investments go to female founders, and less than 1% to African Americans and Latinos. This systemic bias means that brilliant entrepreneurs like Jerry Nemorin, who founded LendStreet to help people escape predatory debt, struggle to secure funding because they don't fit the prevailing patterns of investors.

Solving "my-world" vs. "real-world" problems. Investors often prioritize ideas that resonate with their own experiences, leading to a focus on "my-world problems" like convenience apps, rather than "real-world problems" such as healthcare, education, or financial inclusion for underserved populations. This blind spot not only stifles impactful innovation but also exacerbates societal divides, as communities outside the innovation hubs feel increasingly left behind. The 2016 election results, with states that voted for Donald Trump receiving only 15% of venture capital, starkly illustrate this growing disaffection.

2. The Outdated "One-Size-Fits-All" Venture Capital Process

The two-and-twenty structure encourages investors to raise as large a fund as possible, meaning they are more likely to overlook ideas that seem “too small.”

Whaling industry origins. The modern venture capital process, particularly its "two and twenty" fee structure (2% management fee, 20% profit share), is a direct descendant of 19th-century whaling expeditions. This historical model, designed for high-risk, high-reward voyages, has become a "one size fits all" approach that often misaligns incentives and overlooks promising innovations that don't fit its rigid framework. Fund managers are incentivized to raise massive funds, which then creates pressure to deploy large sums of money quickly, favoring bigger deals over potentially more impactful smaller ones.

Inundated by ideas, lacking evaluation tools. Venture capital firms are swamped with thousands of pitches annually, with the average firm spending less than four minutes evaluating each. Faced with this information overload, investors rely on "fast and frugal" heuristics or shortcuts, which often lead to biases. These shortcuts, while efficient for quick decisions, systematically exclude most of the best ideas that don't conform to established patterns or come from unfamiliar backgrounds.

Bigger isn't always better. Counterintuitively, studies show that smaller venture capital funds often significantly outperform larger ones. This is because large funds face immense pressure to deploy capital rapidly, leading them to chase "unicorns" (billion-dollar startups) and overlook ideas that might require more nuanced understanding or longer development cycles. Thoughtful investors like Fred Wilson of Union Square Ventures and Brad Feld of Techstars intentionally keep their funds smaller or adopt hyper-local models to foster innovation more effectively, demonstrating that process innovation is as crucial as product innovation.

3. "It's Who You Know" Trumps Meritocracy in Innovation Funding

Free-market economists would maintain that New York City and San Francisco get more money because they’re more productive than other places. But in reality, “It’s not what you know; it’s who you know” drives resource allocation.

The myth of meritocracy. The innovation economy is often touted as a meritocracy, but in practice, "it's who you know" heavily influences resource allocation. The story of Theranos, which raised $800 million despite a non-functional product due to its founder's connections and Silicon Valley pedigree, starkly contrasts with Fin Gourmet, a successful fish processing company in rural Kentucky founded by an Asian immigrant, Lula Luu, which struggles for funding. This highlights how proximity to capital and established networks often overshadows actual product viability and market traction.

Bias in people and place. Investment is heavily concentrated geographically and demographically:

• Geography: 78% of U.S. startup investment goes to just three states (Massachusetts, New York, California), despite no statistically significant difference in financial performance across states. Investors often won't consider companies that require a connecting flight.
• Networks: "Warm introductions" from trusted friends and colleagues are often prerequisites for investor meetings, excluding those outside elite circles.
• Demographics: Venture capital firms with female partners are three times more likely to invest in female-led companies, yet only 6% of partners are women. Studies show male entrepreneurs are more likely to receive funding, and attractive men even more so, regardless of the idea's quality. Racial biases also play a significant role, with identical resumes from "Jamal" or "Lakisha" receiving fewer callbacks than those from "Greg" or "Emily."

Ignoring lived experience. Investors frequently overlook ideas because they don't personally understand the problems being solved. Sara Blakely's Spanx, a billion-dollar company, initially struggled to gain traction with male buyers who didn't grasp the product's value. Similarly, Tony Aguilar's Student Loan Genius, which addresses student debt, faced skepticism from investors who, lacking personal debt, couldn't empathize with the problem. This "my-world problem" bias prevents capital from flowing to solutions for critical "real-world problems" and limits access to vast untapped markets.

4. "Two-Pocket Thinking" Limits Both Impact and Profit

Giving back implies, at one point, that you were taking. We’re dissociating what we do from what we value, and it’s becoming very difficult to improve the world as a result.

The artificial divide. "Two-pocket thinking" refers to the artificial separation of business decisions (maximizing profit) from philanthropic or social values (giving back). This mindset, exemplified by a businesswoman who keeps her "business pocket" and "philanthropy pocket" separate, assumes that integrating social purpose will compromise financial returns. However, this dissociation hinders societal progress and, paradoxically, can lead to long-term financial underperformance.

Philanthropy's limitations. While foundations do valuable work, their impact is constrained by the "5% rule," which mandates only 5% of assets be given to charitable causes annually, with the remaining 95% often invested in capital markets without mission alignment. This means trillions of dollars in philanthropic endowments might inadvertently support companies whose practices run counter to the foundation's mission. The philanthropic sector, though well-intentioned, is too small to solve systemic problems created by a much larger, profit-driven economy.

Moral licensing and short-term gains. Two-pocket thinking can lead to "moral licensing," where a small good deed (like funding a few nonprofits) justifies ignoring the broader negative impacts of other investments. This mindset also encourages building companies "to flip" for quick profits rather than "to last" for long-term value creation. While quick exits can be lucrative for a few, they often neglect the deeper, more complex problems that require sustained investment and a holistic view of value—to shareholders, customers, and society. Studies by Wharton and Cambridge Associates show that funds integrating social purpose often perform as well as, or even better than, traditional investment firms.

5. Empowering Entrepreneurs (Makers) to Judge New Ideas

Makers were better evaluators of new ideas; they tended to view their peers’ ideas not through a lens of “How well does this act resemble what has worked in the past?” but rather “How likely is this to succeed in the future?”

Makers vs. Managers. Traditional investment decisions are often made by "Managers" (expert investors) who rely on "pattern recognition" – assessing new ideas based on past successes. This approach often stifles truly novel innovations. In contrast, "Makers" (entrepreneurs) are better at "forecasting" potential, evaluating ideas based on their likelihood of future success, even if they don't fit existing molds. This insight, observed in diverse fields from circus acts to microfinance, suggests that shifting decision-making power to those intimately familiar with the challenges and opportunities can yield superior results.

The Village Capital peer selection model. Inspired by microfinance's "village bank" concept, Village Capital pioneered a peer selection process where entrepreneurs evaluate and decide which of their peers receive investment. This transparent, structured approach, underpinned by the VIRAL (Venture Investment-Readiness and Awareness Level) framework, mitigates cognitive biases inherent in traditional top-down investment. It fosters collaborative feedback and rewards honesty, leading to a more diverse and resilient portfolio.

Better outcomes through diverse decision-making. The peer selection model has demonstrated compelling results:

• Geographic diversity: Only 10% of Village Capital's portfolio companies are from the three VC-heavy states, compared to 78% in traditional VC.
• Gender and racial diversity: 40% of portfolio companies have a female founder/cofounder (vs. <10% in traditional VC), and 20% are founded by people of color (vs. <1% in traditional VC).
• Performance: Companies with women cofounders in Village Capital's portfolio outperform male-led firms by at least 20% in revenue and job creation.
• Survival rate: 90% of Village Capital's companies survive and grow after seven years, compared to 50% in mainstream entrepreneurship.

This bottom-up approach, along with innovations like crowdfunding platforms (e.g., Indiegogo, where 50% of successful fundraisers are women) and "cold e-mail" funds (e.g., Backstage Capital), democratizes access to capital and unearths breakthrough ideas that traditional systems miss.

6. The "Rise of the Rest" Illuminates Untapped Markets and Talent

If we take a page from Coach Bubas and change the way we recruit for entrepreneurs, talented kids anywhere can have a shot at success in business—and open untapped markets for the people who support them.

Beyond Silicon Valley. Just as legendary basketball coach Vic Bubas revolutionized athlete recruitment by looking beyond local backyards to find talent nationwide, Steve Case's "Rise of the Rest" initiative aims to find and fund entrepreneurs in unexpected places across America. Case, who built AOL outside Silicon Valley, recognized that innovation isn't confined to a few coastal hubs. His bus tours invest seed capital in local startups, demonstrating that significant opportunities exist in "flyover country."

Leveraging local competitive advantages. Instead of trying to clone Silicon Valley, cities should embrace their unique strengths and competitive advantages. For example:

• Detroit: With its manufacturing heritage, Detroit is home to companies like Shinola, which creates high-quality goods and jobs, and Rocket Fiber, which provides the fastest internet in America, powering the city's resurgence.
• Nashville: Leveraging its healthcare industry, Nashville fosters startups like Aspire Health, which addresses end-of-life care challenges.
• Iowa City: Home to the ACT and major education companies, Iowa City is a natural hub for edtech innovators like Pear Deck, which improves classroom engagement.

These examples show that local expertise and industry clusters can provide a unique edge for startups, leading to successful companies that attract mainstream investment.

The shifting landscape of talent. The concentration of talent and capital in a few "alpha cities" is beginning to reverse. High costs of living and a desire for community are driving millennials away from the Bay Area. Four U.S. regions already boast a higher per capita unicorn success rate than Silicon Valley, with Salt Lake-Provo, Utah, leading the way. As 86% of Fortune 500 companies are based outside the traditional innovation hubs, the next generation of industry leaders is likely to emerge from diverse geographies, creating new opportunities for investors willing to look beyond the familiar.

7. Become a "One-Pocket Investor" for Integrated Value Creation

We know what things cost but have no idea what they are worth.

Integrating values and investments. "One-pocket thinking" means integrating financial returns with social and environmental purpose across all investment decisions, rather than separating them into distinct "business" and "philanthropy" pockets. Bryce Butler's Access Ventures in Louisville, Kentucky, exemplifies this by building an institutional-quality portfolio where every dollar is invested with the intention of creating quality jobs and improving the local community. This approach recognizes that long-term financial success is intertwined with societal well-being.

A holistic portfolio approach. Access Ventures' portfolio demonstrates how one-pocket investing can be applied across various asset classes:

• Public Equity: Investing in publicly traded companies that create quality middle-class jobs and exhibit strong governance, rather than those solely focused on short-term quarterly returns.
• Private Equity: Direct startup investments in local businesses and financial services technologies that improve the financial health of working-class Americans.
• Real Assets: Owning and developing affordable housing and commercial real estate in underserved neighborhoods, reinforcing other community investments.
• Private Debt: Providing small-business loans to ventures like Scarlet's Bakery, which offer living-wage jobs to vulnerable women, and supporting infrastructure banks.
• Public Debt: Investing in municipal bonds for community-building projects (e.g., schools, environmentally friendly initiatives) while avoiding those for projects like private prisons.
• Grants: Aligning philanthropic grants with investment goals to build local ecosystems, such as bringing Kiva to Louisville for micro-lending.

Challenging the status quo. Most investors, including pension funds and 401(k) holders, are unintentionally "two-pocket" investors, often subsidizing convenience apps for the wealthy while their capital could be deployed to solve critical societal problems. By asking questions about where their money is invested and demanding transparency, individuals and institutions can drive a shift towards one-pocket investing. Innovations like Program-Related Investments (PRIs) for foundations, royalty-based financing for entrepreneurs, and Employee Stock Ownership Plans (ESOPs) offer alternative structures that align financial and social goals, creating more equitable wealth distribution and sustainable businesses like New Belgium Brewing.

8. Big Companies Must Proactively Address Innovation Blind Spots

What causes big companies to fail are blind spots.

The Kodak problem. Big companies, despite their resources, are highly susceptible to innovation blind spots, as famously demonstrated by Kodak, which invented the digital camera but failed to commercialize it, leading to bankruptcy. This often stems from an inability to see beyond existing patterns and a reluctance to embrace disruptive ideas, even when they originate internally. For big companies to thrive, they must actively seek out and illuminate these blind spots.

Innovating hiring practices. The path to better innovation starts with diverse hiring. Traditional resume-based hiring and reliance on social networks perpetuate biases, leading to a lack of diversity in tech (e.g., only 8% Latino, 7% Black, 29% women in Silicon Valley). Diverse teams, however, outperform less diverse ones by 15-35%. Companies should:

• Adopt resume-blind processes: Use skills-based assessments (e.g., Shortlist, Interviewing.io) to evaluate candidates based on aptitude, not pedigree.
• Eliminate unpaid internships: These exclude talented individuals from lower socioeconomic backgrounds.
• Offer inclusive benefits: Programs like student loan repayment (e.g., Student Loan Genius) attract diverse talent.
• Foster inclusive culture: Address subtle biases (e.g., office decor, happy hour alternatives) that make some feel like outsiders.

Direct experience and internal innovation. Leaders must gain direct experience with the problems they aim to solve, as Dan Schulman did by living homeless to understand the financial realities of the poor, leading to PayPal's one-pocket mission. Companies should also empower internal innovators. Nick Hughes's M-Pesa, a mobile money revolution, emerged from a Vodafone employee's volunteer work in Tanzania. Jewel Burks's Partpic, a visual search tool for auto parts, was born from her job at McMaster-Carr after her idea was dismissed internally. Companies like Quicken Loans' "Cheese Factory" proactively source ideas from all employees, recognizing that front-line team members often have the most valuable insights.

9. Government's Crucial Role in Fostering Inclusive Innovation

Government can do things that no other actors can.

Encouraging economic development. Government plays a vital, often underappreciated, role in fostering innovation and economic growth. Instead of primarily attracting large businesses with tax breaks ("build, don't buy"), governments should focus on nurturing local entrepreneurship, which creates the vast majority of new jobs. This includes:

• "Job bonds": A mechanism where private investors fund local businesses, and the government repays them based on the increased tax revenue generated by the jobs created.
• "Opportunity Zones": Legislation like the Investing in Opportunity Act encourages investment in underserved communities by offering capital gains tax deferrals and exemptions for long-term investments.
• Accelerating "Rise of the Rest": Government policies can incentivize broad private investment across all regions, ensuring innovation isn't confined to a few wealthy zip codes.

Driving innovation through policy. Government is the "original venture capitalist," having funded foundational technologies like the internet and GPS. Today, it can continue to drive innovation by:

• Supporting PRIs: Clarifying IRS rules to encourage foundations to make Program-Related Investments in mission-aligned for-profit businesses.
• Strategic tax policy: Implementing "Small Business Repatriation Holidays" to incentivize corporations to bring offshore capital back to the U.S. for investment in R&D and startups addressing national imperatives.
• Concierge services: Establishing programs (like former NYC Mayor Bloomberg's initiative) to guide startups through complex regulatory processes, reducing compliance burdens that disproportionately affect small firms.
• Opening up funding avenues: Supporting crowdfunding regulations (like Title III of the JOBS Act) to democratize access to seed capital for a broader range of entrepreneurs.

Leveling the playing field. Government has a responsibility to ensure everyone has a fair shot at the American Dream. This involves:

• Second chances: Partnering with organizations like Defy Ventures to support entrepreneurship among formerly incarcerated individuals, significantly reducing recidivism rates.
• Immigration reform: Implementing policies like a "stapled green card" for foreign-born U.S. graduates who start businesses, attracting global talent.
• Alleviating student debt: Offering "Startup Student Loan Deferment" to give new entrepreneurs the financial breathing room to build their ventures.
• Supporting veterans: Developing a "GI Bill" equivalent for business investments, recognizing veterans' entrepreneurial potential.
• K-12 entrepreneurship education: Creating national contests and infrastructure to identify and nurture entrepreneurial talent from a young age, regardless of background.

10. Innovators: Strategically Navigate the System to Break Through

If you’re a founder, you should assume the best of people who claim to be interested in investing in you, but don’t let them have power over you.

Turn blind spots into assets. If you're an innovator in a blind spot, strategically reframe your perceived weaknesses as strengths. Clarence Bethea, founder of Upsie, a transparent warranty platform, faced investor skepticism due to his background as a Black entrepreneur from Minnesota with a past criminal charge. By proactively addressing his story and presenting his unique perspective as an asset—someone who intimately understands consumer exploitation—he transformed a potential barrier into a compelling narrative that resonated with supportive investors.

Trust, but verify. Time is an entrepreneur's most valuable asset. Be wary of investors who make grand claims without concrete commitments or transparent processes. Always verify an investor's track record, ask about their typical deal flow and decision timelines, and ensure they have the capital they claim. The author's experience with an investor who promised $100,000 but couldn't deliver highlights the importance of due diligence on the investor, not just the startup. Don't let vague promises or prolonged "due diligence" processes drain your resources and momentum.

Relentlessly ask for help. Successful entrepreneurs rarely achieve greatness alone. Embrace the "give first" mentality of strong entrepreneurial ecosystems and don't hesitate to ask for specific help. Yvette Ondachi, founder of Ojay Greene, a Kenyan agricultural supply chain company, built her business by seeking advice and support from farmers, investors, and mentors at every stage. Frame your requests clearly, stating your goal, the value you offer, your agenda, and explicitly asking for permission to engage. Remember, "No is my second favorite answer" – it frees you to pursue other opportunities.

Think big and articulate vision. Many founders, especially those from underserved backgrounds, are hesitant to ask for significant capital, fearing they'll be perceived as unrealistic. However, investors are often more attracted to ambitious visions for growth than to requests for minimal funding to "keep the lights on." Instead of saying, "I need only $100,000," articulate what you could achieve with unlimited resources. Show investors the massive market opportunity and the transformative impact your idea could have, demonstrating that you're building a company with the potential for substantial success, not just survival.

11. Ecosystems, Not Just Individual Heroes, Drive Lasting Change

The people who have been re-weaving the national fabric will be more effective if they realize how many other people are working toward the same end.

Beyond individual heroes. Our tendency to celebrate individual innovators like Steve Jobs or Mark Zuckerberg often overlooks the collaborative "rainforests" or "ecosystems" that enable their success. True, lasting change comes not from isolated heroes, but from communities of people working together. The "Big Sort," which concentrates talent and capital in a few alpha cities, has hollowed out many communities, but a "reawakening" is underway, driven by local leaders fostering "topophilia" – a deep love of place.

Building integrated ecosystems. Dan Gilbert's "Family of Companies" (FOC) in Detroit exemplifies ecosystem building. By relocating Quicken Loans downtown and investing over $2 billion in real estate and infrastructure, Gilbert created a "more-than-profit" ecosystem where:

• Interconnected investments: Investments in high-speed internet (Rocket Fiber) power the entire FOC and the city.
• Shared values: "ISMs" like "We are the 'they'" foster a collective responsibility for Detroit's success.
• Wealth distribution: Quicken Loans is Detroit's largest employer and largest minority employer, creating jobs and revitalizing the community.
  This integrated approach demonstrates that when businesses invest in their communities, the entire ecosystem thrives, leading to both social impact and financial returns.

The Boulder thesis and beyond. Brad Feld's "Boulder thesis" provides a playbook for ecosystem development, emphasizing that successful communities prioritize the collective good over individual firm success. Boulder's ecosystem includes:

• Grassroots initiatives: Startup Weekends for idea generation.
• Inclusive pipelines: Techstars Foundation for underrepresented founders.
• Accelerators: Techstars for early-stage growth.
• Venture capital: Foundry Group for scaling companies.
  This comprehensive approach has made Boulder a per capita startup capital. The key is to avoid simply cloning Silicon Valley; instead, communities must identify and leverage their unique strengths, creating "archipelagos of startups and reinventions" tailored to their local context. Investing in an ecosystem means supporting the entire pipeline—from education and community building to diverse funding mechanisms—to ensure that the best ideas, regardless of origin, have the chance to flourish.