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Mark Wallace
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I'm an American (EEUU) by birth, but certainly a mutt by ethnicity. I prefer the Southern Hemisphere nowadays, and I try to spend time on at least 3 continents per year, in more than a few different countries. While there I explore intriguing social, investment, business and lifestyle... More
My company:
Capex Ltd.
My blog:
Capitalist Exploits
My book:
Mongolia Investment Report
  • Angels, Incubators, Venture Capital And Crowdfunding... 0 comments
    Apr 25, 2012 4:09 PM

    A while back I spoke to my friend Jeff Bone in an interview entitled The Technology Entrepreneur, I encourage you to read it if you haven't, so you can get a feel for who Jeff is and why we think he's a genius!

    Jeff had promised to talk to me again and get a bit more in-depth about tech startups, VC's, incubators and the newest rage - crowdfunding.

    Chris and I are involved with an incubator that is creating and rolling out mobile apps and is also building out a unique crowdfunding platform that we are extremely excited about, so getting Jeff's feedback on the business model was super valuable

    Let's see what Jeff has to say, and feel free to post comments, let's get a nice dialog going on this topic!

    --------

    Mark: Jeff you're a long-time techie. What do you think separates those who succeed in this space versus those that struggle along?

    Jeff: I've started several technology companies over the years and had a couple of successes, a couple of failures, and one remains-to-be-seen. I've spent most of my career in these companies with one extended detour into computation finance in a company I did not found myself, and I've spent a lot of time thinking about what factors have contributed to the success (or lack thereof) of these various endeavors.

    There are of course several: concept, timing, team, execution, market readiness and approach, business model, competition, and so on. One consistent theme, and one that is largely in control of the entrepreneur, is funding. In particular the funding model, what you get out of it besides money, and the impact the overall funding model has on the business and its key players.

    My most successful ventures have been largely or exclusively angel-funded. My least successful ones, and certainly the most frustrating ones, have been venture funded by traditional venture capital firms.

    I have spent as much as 15 months "on the road" trying to get an A-round done for one company (post dot-bomb and post-9/11, not a good time to be looking to fund a speculative technology play). Correlation is not causation, of course, but I've spent quite a bit of time thinking about why this -- angels and other alternatives implying better likelihood of success vs. traditional VC -- may hold.

    Mark: Last we spoke I asked you to chat with me about that very subject, and also on the incubator model, and on how the current capital markets and venture landscapes are evolving. I thought it would be really useful for our readers.

    Jeff: OK, great, well then the rest of this interview I'll basically just sort of hypothesize out loud, as concisely as I can in a kind of stream-of-conscious manner, about those topics.

    Mark: Perfect, I'll try to keep up (laughs).

    Jeff: #1 - FOCUS, FOCUS, FOCUS

    There are several things that can happen in an early-stage startup that are severe distractions. One is growing too fast or getting the burn up too high too quickly. Internally, a quickly-growing team at the outset, particularly pre-product and pre-revenue, creates coordination challenges and dilutes the consensus about what the vision and market is and how to go about tackling them. Ironically getting too much money in the door too quickly can contribute to this.

    The trend of late has seemed to be towards smaller, faster-iterating, and bootstrapped or minimally-seeded teams. I think that's a good thing in general, as it avoids this problem. It also puts the focus of the key employees -- the founders -- on what's truly necessary rather than having them spending all their time initially out beating the bushes for money.

    Larger venture funds generally have little time to vet and actually understand the vision and business of a really early-stage company, and even when they do make such investments this disconnect can lead to excessive iterations of explanation and modification of plans. Almost every VC thinks they are an expert in every subject, which clearly cannot be the case; the founder generally knows the audience, market, and technology / product issues and trade-offs far better than anyone else, yet is constantly on the defensive to the degree that external money is sought and / or obtained.

    A vibrant angel community, local if possible, and or participation in an incubator can help alleviate this.

    #2 - VALUE-ADDED MONEY

    Look for smart money. If you can get funded by people and organizations who have experience that's actually relevant to what you're doing, go for it.

    This means more than just general business experience; it means people and groups that have prior experience or active investments in synergistic companies and areas. Real expertise.

    If the point-guy from your lead VC has a background in, say, enterprise software sales and you're trying to build a consumer hardware-software product, he's going to have lots of great ideas -- none of which are relevant. Similarly if he was the CFO of a company that went public and your exit strategy is most obviously an acquisition, you're going to have some interesting conversations... that you don't need to have right now.

    There's not just one kind of smart money, of course. But to the extent that the "smart" in your smart money isn't really relevant to what you're doing, it's an unnecessary distraction. Look for people who both "get it" and have something to add to what you are *actually* doing that can truly help you grow your business in both unanticipated and *valuable* ways. Success is about hitting the vision, the timing, the market; you know what you're doing. Find others who do, too, rather than distract.

    #3 - THE INCUBATOR MODEL

    I'm a big fan of the incubator model. By incubator I mean a fund that tends to focus on and have a somewhat structured approach to investing in companies of a particular type or set of related types.

    I managed to stick my foot in my mouth criticizing Paul Graham at one point on a mailing list, so this is a perfect time for a retraction: I am a HUGE fan of Paul Graham and in particular the Y Combinator model, as well as the other "incubator" and similar funds and models that have sprung up in its wake.

    The idea behind the incubator is to take some of the guesswork out of both the funding and the mundane startup process issues. There are some fairly consistent sets of issues that all startups (or at least all startups in a given area, say web apps, mobile apps, what have you) face, and having somebody sort of commoditize and manage that workflow mechanically takes some choices that the founder / entrepreneur might have to make off the table.

    And these incubators and funds have other advantages: they tend to be specialized in a given area, which concentrates expertise in that area, avoids distraction by irrelevant experience, and allows for cross-pollination among the various companies; in effect encouraging sharing of methods, if not specific trade secrets and IP, that lead to success as well as avoiding common failure modes.

    By their nature incubators tend to be run by people who have relevant been-there-done-that, and so the value-add over funding is high. And many of them have structured funding models, term sheets, tranche structure, etc. which takes the guesswork out of getting the money in, getting the *next* money in, and so on. This is a huge win versus casting a broad net with big venture funds.

    #4 - CROWDFUNDING

    Kickstarter is an amazing disruptive innovation in financing new products and companies. I've backed several projects on Kickstarter at various levels and am a huge fan. This --- crowdfunding --- is in my opinion just about the optimal funding model out there *if it fits* for a given product or project.

    It's not suitable for all products and companies of course, but if your basic idea starts with a single well-defined product that can be created in a reasonable time with a very small team, it doesn't get much better than this.

    First, getting the funding is *equivalent* to market-testing the idea; if you can't get the funding this way, perhaps the product concept or your presentation of it or something isn't right. Second, you don't have to dole out equity in your company in order to get an assurance of funding. It may not pay the bills in the meantime, but perhaps you can somehow factor the Kickstarter pledged funding to in effect borrow the seed you need if you can't self-fund long enough to get the initial product out. (I haven't tried this, so I'm speculating here.)

    There are numerous initiatives along these lines and I'm very, very enthusiastic about them. I tend to think that modulo various securities laws, micro-funding via equity sales (i.e., miniature private placements, possibly with some uniform and legally-acceptable structure) may be on the horizon as well. But if I were interested in building a single product (perhaps that could be a springboard for something larger) which could be built quickly and by myself or a very small team, Kickstarter would be my first stop.

    Mark: We agree 100% on the crowdfunding model, and I'm also a huge fan of Kickstarter. I want to talk with you more about the crowdfunding space in the future.

    Jeff: Sure, absolutely... That's just sort of a brief overview / personal perspective. Happy to take questions and or pontificate at greater length on any of these things.
    --------

    When you get a chance to talk to someone of Jeff's caliber it's a pleasure. The depth of knowledge he can share on this topic would make an excellent book (hear that Jeff?).

    We'll visit with Jeff again in the very near future. He's a busy guy, and Chris and I appreciate every word he contributes for us. We always feel smarter and better-informed after talking to him!

    - Mark

    "It's a really good time to be an entrepreneur. If you have a halfway decent idea, you can get it completely funded." - Peter Thiel

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