The Rise of the Microgrant

What is the most effective way of distributing wealth to ambitious people who have a vision for the world, but need some extra capital to achieve their goals? I have been thinking about this question a lot, especially considering I have been the beneficiary of a grant that helped jumpstart my career in software. One of the most common answers to this question in the human capital space has been through using Income Share Agreements, where people could raise money upfront for their project or education in exchange for a portion of their future income.

This model doesn’t work for a number of reasons. Income Share Agreements, while an effective way of increasing access to education, are offered by institutions and investors who expect a return on their investment. Therefore, if somebody is working on a project that has not yet gone to market, or will take a long time to get approval (for example, in pharmaceuticals or biotech), then they will not be able to earn a return on the ISA for some time, and so investors would be less likely to invest in a person via this security. In addition, Income Share Agreements are also high maintenance and have terms that are consistently evolving with the changing regulatory landscape, and at scale, it would be difficult for someone interested in investing in talented people to maintain the program.

So if Income Share Agreements are not an appropriate method to help ambitious people working on a project raise money, what would be better? Many people have approached this problem from a venture capital standpoint, and have established clear expectations for returns from those in whom they have invested. It is unclear whether or not basic venture economics such as the “Babe Ruth effect” — which venture relies on — would apply to human investments due to the fact that one is investing in a person, not a company. Human capital is poised to become an increasingly more popular space in the future, and while I agree that arrangements such as ISAs have a place in the future, there is another way that we can fund interesting projects at scale. In this essay, I am going to explore the rise of the “microgrant”, and how they can be used as a method to invest in talented individuals.

There has recently been a rise in “microgrants” — small grants issued to a wide range of people which are offered to help people achieve a certain goal or work on a specific project. These grants, issued by institutions such as 1517 Fund and Emergent Ventures, are being used as a way to invest in the next generation of innovators at the earliest possible stage. Because these projects are grants, the beneficiary owes nothing in return and thus can use all of the money as they see fit in order to advance their own education and projects. Microgrants have traditionally been issued by communities and philanthropic organizations for charitable reasons, but they are taking on a new meaning in the human capital space. [1]

The opportunity in microgrants is to make it easier for dedicated people to raise money that can use to finance their ventures, whether it be a new project, a blog, living costs so they can pursue a course, or something similar. Microgrants could be considered “venture capital for individuals” in a way. Right now, venture capitalists invest large amounts of money into companies in exchange for a portion of equity in that company. If the company succeeds, the venture capitalist will earn a healthy return for taking a risk on investing in the company. However, for individuals who are pursuing independent projects or other ventures which are not companies, it can be very difficult to get access to the capital that one needs to pursue their goals. [2]

An important distinction to make would be that while venture capital is invested in a certain company and to be used for a certain purpose, microgrants normally come with no strings attached, which means that people are free to use the capital as they see fit. The main benefit of this is that the recipient can use the money to explore, spend it on their education, cover living costs, and pay for anything else which may help advance themselves, in addition to the project they are working on. A common purpose for many microgrants today is to travel to San Francisco or other such reasons because of the significant benefits associated with experiencing the SF culture and all it has to offer.

The fact that most microgrants come with no strings attached means that the money can go to the areas where it will make the most impact, and the recipient will likely be very thankful for receiving a grant which helps them not just in their project, but in their life too. Consider this: if you are about to move to NYC to work for a tech startup and you raise money to help you move to pursue the opportunity and to help you start a side project, that money can go to covering all associated moving costs which means that you can have a smoother transition and focus more on your work and side project.

The most valuable ideas to start with are not usually venture-backable anyway because they are in such a nascent state and not enough progress has been made to demonstrate their viability at scale. Microgrants allow innovators to focus their resources on showing that their idea could work and thus can generate great economic value if they are successful. The microgrant may help them build a prototype which they can show to investors and perhaps raise a venture round to finance their expansion. In areas such as VR/AR, biotech, pharmaceuticals, and other industries with high up-front research and development costs, microgrants can help accelerate the development of these projects and get them to the point where they can raise more money. Microgrants could be considered a pre-pre-seed round — invested in the individual to help finance their personal and project’s expansions.

In addition to the capital raised, grants present a variety of networking opportunities for both the grantee and the investor. The most prominent being that a mentor-mentee relationship will likely be formed between both parties and a culture of celebrating wins and collaborative working will be developed. As the grantee succeeds, the investor will also benefit from the sense of liberation and accomplishment which one gets from helping someone grow. Microgrants allow people to invest in someone at the earliest possible stage, and the grantee is likely to keep in constant contact as they succeed. The people that believe in someone from an early stage hold an important part in somebody’s life, and microgrant allows even more people to benefit from that effect.

The capital aspect of a microgrant is only the means by which someone will finance their projects, it is not the entire benefit of the grant. Committing a small portion of capital toward helping a person succeed can help raise their aspirations and encourage them to think bigger. There is a very powerful effect that exists with microgrants in that giving capital to someone, even if it is a small amount, can signal that somebody believes in the work they are doing. For an ambitious young person who is still trying to figure out what to do with their life, this can help them reaffirm their passion and can provide them with the validation that they need to reach their full potential and generate more value for society.

As a recipient of the Pioneer grant, the fact that somebody believed in me enough to invest money in my future ventures gave me the encouragement that I needed to continue in the direction I was going, which has thus far proved to be the correct path. There is a real opportunity for microgrants to be issued to “free learners” as well or those who are pursuing education on their own terms in the areas that they feel passionate about. Investing in these people allows them to continue their educational journey and the capital aspect of the grant can help them sustain their lives while they embark on their unique educational journey.

Critics of microgrants have made comments regarding the effectiveness of the grants due to their small size. The majority of these critics are generally speaking from a position where they have access to all of the capital that they need for their lives, and do not fully understand the benefits that even a small amount of money can provide to a young person. For most 16-year-olds, a $5,000 grant would be considered a very large amount of money, and that would go a long way to helping them discover the path they want to take and would help them get their project off the ground. These grants can have a massive impact on the beneficiaries because they are being made at a pivotal moment in a young person’s life — they have a passion and a vision for the future, but need capital to help bring their idea into fruition. Although for some, microgrants may be ineffective due to the large upfront costs of their project, but for most a small grant is all they need to get started.

In 1992, George Soros led a community of Russian scientists to stay in the field after the USSR collapsed. Soros made $500 grants to over 28,000 basic scientists who showed potential to write quality work in the future. At the time, these $500 grants were a large amount of money because of the unstable economic conditions that the people were facing. The result was that most of these scientists published around five papers or reports for the next few decades after receiving their grant. Soros invested money to help these people get off their feet and gave them the capital they needed in order to pursue independent research on their own terms. The grant recipients generated a significant amount of value over the following decades, which can be largely attributed to the grants that they received at the time. This shows the potential of investing in people who show potential at a large scale, and also indicates that these arrangements have been present for a while.

More recently, grants such as Pioneer, 1517 Fund, and the Thiel Fellowship have been founded which aim to invest in passionate young people who are working on a project and need capital to continue to build and scale their project. These grants operate on the premise that by investing in people at a young age, they can help encourage young people to take bigger risks and explore entrepreneurship as a potential career path. The Thiel Fellowship, for example, believes firmly in the fact that if people are given enough freedom then they will be able to generate more value and do more meaningful work than they would otherwise be able to do in a traditional institution. These grants also have one thing in common — they believe that everyone has a different path and should be given access to the resources they need to succeed. Thiel Fellows have gone on to start successful companies, and Pioneers and 1517 Fund grant recipients have realized that same effect. [3]

An understated value of microgrants is the value add that they provide to their recipients, aside from the capital. More microgrants are now being distributed with added services, such as mentorship, access to resources or credits, and the ability to access a community of grant recipients. These added services are provided because of the concept of aligned incentives — the more each portfolio individual succeeds, the better the public perception of the grant. For many individuals, especially those without an established network, being able to receive mentorship, as aforementioned, from an expert in a subject matter they are pursuing can be a very powerful motivator. The grant issuer may also open up their network to help the young person interact with those who can advance their project. In addition, the resources provided such as cloud credits for people building compute projects can help ensure that all of the money from the grant is redirected towards useful aspects of the project and personal development, rather than being used to cover cloud costs or any other resource costs which can be very high in some industries.

Another important aspect of microgrants to consider is the community value that they provide. Pioneer has likened their platform to the online version of the Ivy Leagues, and exploring the leaderboard and reviewing weekly updates is the digital equivalent of comparing notes and sharing ideas. Other microgrants also have this effect where recipients have access to a community of ambitious people working on a diverse range of projects. For the people that may not have a well-established technical network, the community of fellow grant recipients can allow people to participate in more intellectually stimulating conversations and seek help from people who are experienced in the areas they are working on. Even those who do have a network can still benefit from being able to explore in-depth ideas outside of their specialized subject matter, and can thus broaden their horizons while participating in the grant.

This is amplified by the branding of microgrants which could become more important as the concept is explored in more depth. Students in academia can drop the name of their college which affords them access to a variety of different resources — alumni communities, for example. Stating that one went to Harvard or Yale is a good signal of the quality of institutionally-provided work that they can generate. The same thing applies to companies. Alumni of Y Combinator, TechStars, and other startup accelerators have access to more communities because of their status as an alum. In the future, microgrants may have a similar branding effect where they become a signal not of an individual’s accomplishments in academia or company-building, but rather in learning about and exploring projects in the area they are passionate about. The status of being a Thiel Fellow or a Pioneer has already illustrated the strong community and branding value of grants — albeit larger grants — which sets a strong precedent for the potential that microgrants have in this area.

Microgrants are also an interesting human capital solution for the reason that there are very low barriers and costs for entry and maintenance. Income Share Agreements, publicly traded people, and other human capital investments have high up-front entry costs and can be very expensive to maintain at scale. ISAs especially require larger legal and accounting departments to run at scale, and as more contracts are issued, even more issues arise. Microgrants, because they can be managed and maintained by a single person or two, do not suffer from such limitations because there are very few maintenance costs (taxation exemptions may even apply), which means that an individual program can scale more effectively. Although microgrants should stop operating after all of the capital has been invested in people, this scale effect still applies in terms of general management throughout the duration of the fund

Despite the low maintenance costs, there is one major limitation that would prevent wide-scale adoption of microgrants — the quality of grant-givers. The success of grants such as Pioneer and 1517 Fund can be in part attributed to the network of the founders and their willingness to devote their own time to help recipients. Microgrants can help even more people access new and exciting opportunities, although this effect will be limited based on how many people meet the aforementioned profile. Grant funders need to be experts in their field and have the capacity and technical knowledge required to help their recipients (or at least refer them to someone who can), and must have a strong enough network in order to attract the best talent, which will make the program worth the time. Future grants that are started by people without a strong enough network and limited technical capabilities may stunt the growth of recipients because many of them will depend on the grant giver for assistance and advice on their road to success.

In sum, Microgrants present an interesting way in which we can deploy capital towards meaningful projects while being able to invest in the potential of future innovators. There are many people out there who have capital which could be invested in new ventures or charity, and microgrants present a way in which every single dollar invested would go straight to people who have demonstrated their potential and are looking for capital to scale their work. Microgrants allow anyone — not just philanthropic organizations — to invest in people they believe in, and give them the capital and mentorship they need to generate more economic value and reach their full potential. Microgrants also present one additional value for the grant-giver — people never forget those who believed in them at their earliest stages. This effect is immensely powerful and may encourage more people to get involved in this form of human capital investments. Human capital investing is becoming increasingly popular, and the rise of the microgrant is only one part of this emerging trend.

Notes

[1] Tyler Cowen, operator of Emergent Ventures, a $4.5 million grant fund, has penned an article regarding the philosophy behind the program, and how microgrants and grants may be a more effective method of philanthropy. Nadia Eghbal, the former operator of the Helium Grant, has also written about her experiences running the program and the low maintenance costs associated with starting a fund here.

[2] Perhaps in the future grant givers will adopt the identity of venture capital for individuals, because the success of their grant will depend on the quality of applicants. It is also worth noting there is an incentive for grant givers to invest a lot of time in reviewing and vetting applications. Grant givers will want to be able to say that they funded people who have started large companies or were co-creators of a revolutionary new science paper, and will help them attract “deal flow” (new and better applicants). Deal flow begets deal flow.

[3] Past portfolio individuals of the Thiel Fellowship include the founders and CEOs of Figma, the collaborative design tool, Ethereum, the blockchain-based technology, and Luminar, a company that develops high-performance LIDAR systems.

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