De-Risking Risk Capital: A Lightweight Angel Fund

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This discussion springs from Boris Mann‘s post today, which touches on the need for “fail money” in Canada.  I agree with nearly everything he says, and it can’t be disputed that more active capital is required to continue the growth of the startup economy in Canada and build our web and digital media industries.

My reaction though is centred around (1) I hate the term “fail money”, but I know what he means is that we need more capital going to companies to TRY, and half will fail, which needs a high risk tolerance and (2) I’m a small-time angel investor myself, and at my level this concept makes me very nervous as an investor.

The issue is that I’m not investing enough to create a portfolio effect to counteract the high risk of any single investment.  I know others in the same boat, people with tens of thousands to spend, which only enables 1-3 investments, which gives you a really high risk.  We need a mutual fund of angel investing.  While startup accelerators and angel funds or super-angels come close to this, it’s not working well in Canada right now.

I talk about this quite a lot in my MBA thesis, which is a startup accelerator business plan (posted on this blog earlier today).

What I’d like to create is an investment vehicle that is very public about the status of its fundraising rounds, through an investor portal.  Any investor with at least $5,000 to spend can create an account, see the status of any rounds being raised by the fund or its portfolio companies, become accredited, and commit funds to any of the rounds.

The benefits of a very open, public, and broad approach include:

  • Creating a valuable contact database of interested potential investors
  • Remove barriers to participation for small investors
  • Significantly de-risk startup investing by allowing portfolio approach
  • Remove fundraising risk by casting a wide net
  • Open approach will generate significant attention and interest
  • Open and frequent communication keeps investors and prospects engaged with our companies and efforts
  • Open and requent communication also increases investor satisfaction, leading to high rates of initial and repeat investment
  • Ability to offer rounds being raised by portfolio companies and other unrelated startups to this investor portfolio, perhaps in return for fee or equity

This structure is a modification of the currently popular super-angel approach, and would obviously require one or two active investing partners to be doing the legwork.  The innovations here are around the broad community of investors and the unusual level of openness and transparency.

From my business plan, here’s a mockup of how I imagine the investor portal looking:

A Startup Accelerator Business Plan

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As part of my Queen’s MBA we don’t do a thesis, each student crafts a new venture business plan.  Because I’ve been excited by the potential of the startup accelerator model, I created a plan for an accelerator based in Vancouver and inspired by Bootup, Y-C, and TechStars.  I believe, and I know I’m not alone, that when dealing with very early stage teams it’s IMPERATIVE that the investment be paired with a strong mentorship presence and a lot of coaching and learning.

I’m proud to publish the full business plan here, I’ve redacted a few names that I included without their permission pending a response from them.

What I’m especially proud of are a few innovations that I think are necessary:

  • The investor portal (pp 6 and 16) – in Canada, the biggest issue is raising the funds for investment.  I want to create a lightweight and very public system that allows many small investors to participate, which does three things:
    • Fulfill the capital requirements with a MINIMUM of partner time spent, especially in subsequent rounds
    • Communicate clearly and frequently with investors, increasing their satisfaction at participating, and creating a lot of engagement with investors and potential investors, leading to higher repeat investment
    • Generates a lot of publicity and attention, creating a high level of investor awareness and participation
  • The creation of an endowment fund (pp 11, 12), which receives a portion of the exit funds on behalf of both the investors and the management, so on an ongoing basis the reliance on additional fundraising is reduced, and the management and investors who worked on one round will have a limited participation in all future rounds.
  • A focus on coaching startups as high-performance teams.  Mentorship on product development and pitching is valuable, but as I say on page 7:

Our initial education program will be significantly different from those of other accelerators in its inclusion of content for improving personal effectiveness and coaching high-performance team practices in the startups. The short length of the program means that one of the most effective things we can do to improve the success rate of our graduates is to improve their ability to perform both individually and within their team long after their graduation. We intend to outperform our peers in this market in part through helping to launch more productive, better performing, and emotionally healthier teams.

Why aren’t I starting this?  This plan has one significant weakness, which I included intentionally for the purposes of this as an academic project: even with the innovations around investor attraction and retention, it’s probably not possible to operate an accelerator as a going concern in Canada that requires annual fundraising.  The successful American accelerators and angel funds are backed by $30+million endowments that remove the uncertainty of funding next year’s cohorts and the partner time required to go fundraising.

Here it is, in all it’s glory.  I must give significant credit to Boris and Danny of Bootup Labs for their knowledge and assistance, to Jed Christiansen for his thesis analyzing the accelerator model, and to Ben and Mack from Compass Engine who helped with the founder perspective.

Startup Accelerator – Business Plan

Agile Budgeting – Followup

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Here’s a few more resources that have surfaced since my post on Agile Budgeting / Startup Cash Flow Management:

Geof Harries (@geofharries of subvert.ca) pointed me at Pulse (pulseapp.com), which encapsulates much of my process in a nice web tool.  I haven’t had the chance to try it out, but it looks like it captures the key steps of estimating, scheduling, repeating, and editing.  One benefit of using our Excel spreadsheet was that we could do 30-second “what-if” experiments.  Move a customer payment to a later date and see if you still make payroll.  Increase your monthly billing by 10% and see if you can hire another developer.  This flexibility and control is key to this being something you are willing to use.

Fred Wilson’s (@fredwilson) excellent MBA Mondays series has included a few posts that introduce the basic accounting reports of balance sheet, profit & loss, and cash flow.  My post focused on the cash flow, as it’s the most important real-time report for a bootstrapped / low-capital startup.  He also has his own post on Budgeting in a Small, Early-Stage Company.  I’ll explain why I disagree with his recommendation (at least for the very early stages) but you should go read everything he’s written.

I still think that annual budgeting, as he recommends, is not useful in the early stages, when your business plan, revenue model and cost structure are changing frequently.  Focus on your market fit, your repeatable revenue model, and watch your cash.  Once you’ve accomplished those (reaching the Optimize and Scale levels of the Startup Pyramid @seanellis) then your company will be static enough to spend the time on annual or semi-annual budgets.

Moving forward, I hope to crank out a few more posts on lean processes that I’ve used in the past so we can get away from old BDUF time wasters throughout the company.

The Startup Library

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I love books.  I’ve done almost all of my learning from books and web pages.  So following up on a post by Boris about finding startup books in Vancouver, I wondered what would be the required reading list for a startup (or a Bootup cohort company).

Here’s my tentative list, from personal experience.  What else needs included?  Is there a great Drupal book?

Business

  • Four Steps to the Epiphany – Steve Blank – on my TO READ list, the bible of customer development.
  • Startup Lessons Learned – 2008-2009 – Eric Ries – I’m not listing blogs on this post, because there’s plenty of resources for that.  But I get to cheat and include this book form compendium of Eric’s posts.  This material is invaluable, for the detailed discussion of continuous deployment practices and the lean startup business model.

Engineering

  • Test Driven Development by Example – Kent Beck: the how-to book for applying test-driven development (a great Extreme Programming technique for rapid reliable code, and very applicable to continuous deployment) and unit tests.
  • Refactoring to Patterns – Joshua Kerievsky: if you’re writing a lot of code hopefully you’ve read both Refactoring and Design Patterns, but this book puts the two together and gives you strategies for migrating spaghetti legacy code to nice patterned code.
  • Facebook Cookbook – Jay Goldman: this is a great book that covers all aspects of Facebook platform and Connect programming, from ideation and planning to viral marketing and API code samples.  The only downside is that the API is constantly changing and portions of this were already out of date when I bought the book last year.

Personal

  • Getting Things Done – David Allen: on my TO READ list – sounds like the least gimmicky, most lean and effective way to stay focused on what’s important and cut out your wasted cycles.
  • Getting To Yes – Fisher,Ury: how to negotiate effectively in all areas of your life (with employers, investors, spouses, fishmongers) by avoiding positions and addressing underlying interests.
  • The Seven Principles for Making a Marriage Work – John Gottman: <preach>Some things are more important than your next round or release.  Without strong support at home you can’t succeed, and whether your startup succeeds wildly or flames out, you will have failed if you lose what’s important to you.</preach>

Please, let’s fill this in with more.  And then get Chapters or Amazon to sponsor a set for new cohort companies 🙂

Entrepreneur’s Creed

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From the book New Venture Creation, which lists common responses when entrepreneurs are asked an open ended question about what they believe to be the most critical concepts and skills:

  1. Do what gives you energy – have fun.
  2. Figure out what can go right and make it.
  3. Say “can do” rather than “cannot” or “maybe”.
  4. Illegitimi non carborundum: tenacity and creativity will triumph.
  5. Anything is possible if you believe you can do it.
  6. If you don’t know it can’t be done, then you’ll go ahead and do it.
  7. The cup is half full.
  8. Be dissatisfied with the way things are – and look for improvement.
  9. Do things differently.
  10. Don’t take a risk if you don’t have to – but take a calculated risk if it’s the right opportunity for you.
  11. Businesses fail; successful entrepreneurs learn – but keep the tuition low.
  12. It’s easier to beg forgiveness than to ask permission.
  13. Make opportunity and results your obsession – not money.
  14. Money is a tool and a scorecard available to the right people with the right opportunity at the right time.
  15. Making money is even more fun than spending it.
  16. Make heroes out of others – a team builds a business, an individual makes a living.
  17. Take pride in your accomplishments – it’s contagious!
  18. Sweat the details that are critical to success.
  19. Integrity and reliability equal long-run oil and glue.
  20. Accept the responsibility, less than half the credit, and more than half the blame.
  21. Make the pie bigger – don’t waste time trying to cut smaller slices.
  22. Play for the long haul – it is rarely possible to get rich quickly.
  23. Don’t pay too much – but don’t lose it!
  24. Only the lead dog gets a change of view.
  25. Success is getting what you want, happiness is wanting what you get.
  26. Give back.
  27. Embrace sustainability.
  28. Never give up.

A few old chestnuts in there, and a few that really ring true.  I especially like 8, 11 and 16.

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