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.

Startup Reading – Do better in stressful conversations

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Startup Reading is an ongoing reading list of articles and resources that I think will be of great value to startups and entrepreneurs.

Taking The Stress Out of Stressful Conversations

full PDF $6.50 from HBR

There are three common patterns of stressful conversations in this article, and I’ve had the pleasure of experiencing each of them, almost exactly as they play out in the examples.  Stressful conversations aren’t something that can be avoided, but in fact are probably some of the most important conversations you will ever have with your co-workers, partners or employees.  The times when emotions are running high and important information needs to be heard are critical make-or-break moments for your relationships and, over time, your company.

Luckily, there are a few key findings from behavioral research that give us tools to use when preparing for a stressful conversation or managing one that’s gone seriously sideways.  The situations and tactics are well described in the article, but a few brief extractions are:

– Disarm by acknowledging responsibility for your part of a problem, even if it’s in the form of “I feel like I’ve let you down by not bringing this up in the past, because I value our relationship and your contributions here, but we need to rectify this issue…”

– Disarm by restating your intentions – often people hear something completely different from your intentions, so it’s not necessary to give ground but instead work to clarify what you really mean: “I can see how you took that from what I said.  That wasn’t what I meant though, so let’s go through this again.” – Don’t argue with them about their perceptions, instead take the responsibility for aligning your words with your intentions.

– Fight tactics, not people.  Some people use aggressive “thwarting” tactics that prevent you from making your points.  The best way to neutralize a tactic like this is to name it, as people are generally not comfortable raising the bar and continuing to be aggressive once it’s out in the open.

A worthwhile read, that pretty much anyone can use to improve their conversational abilities where it’ll do the most good.

Schedule some slack

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I was having a beer with a friend yesterday, discussing how I’ve crammed my life close to the bewaking point with a toddler, a new baby, an MBA program, a job search, some mentoring and networking, and he asked me what pearls of wisdom I could bestow on him for when he finds himself in a similarly hectic spot.  And I came up blank.  It’s not that I haven’t found shortcuts and processes that let me handle this without losing my head, it’s that I haven’t stepped out of the flow, gone to a 10,000 foot view and checked out what’s going on.  This reminded me of something one of our profs said when discussing innovation and creativity: there can be no innovation without organizational slack.  If you (I) don’t stop fighting fires or attacking your task list, you’ll (I’ll) never improve our abilities/capacity to deal with the situation.  No matter how busy you are, if you don’t stop to breathe and evaluate your activities and formulate some strategy, you’re going to get demolished by something you didn’t see coming.  Keep your head up!

So today’s advice / resolution is to create time for slack.  Even with my schedule being crammed to 30-second intervals (I’m working out, doing dishes and debating preschool with my wife while I write this – partially kidding) I figure I can make the time to sit alone at a coffee shop or my front stoop for an hour every week and let myself think about bigger pictures than my todo list.  In fact, if you’re busy like me, I think it’s required that you put it in the schedule. That’s what they tell us about workouts and it applies here – put it in the calendar, make an appointment to do it.

Sometimes though there just isn’t time.  And I think when that happens, in a lot of cases, you can move towards it incrementally.  If you’re fighting fires 18 hours a day, and your organization or family is always in crisis mode, there’s probably something wrong.  You might not be able to go ponder what that is without seeing something else blow up, so just ask five questions when you fix the problem.  Address the immediate fire, sure, but also use this technique to tease out the root causes and commit to making a corrective action at each level of the analysis.  This way you slowly, incrementally improve your processes and behaviors, instead of just dousing a single flame.  Over a few iterations you will start to see the number of fires decreasing, and you can pop up to 10,000 feet for a few seconds for a clear view.

Motivate with PROGRESS

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In a recent HBR article (What Really Motivates Workers) it was revealed that workers are motivated less by the usual suspects (incentives, recognition, …) than we thought and that in fact progress in their work is the key driver of daily satisfaction.  How can we take advantage of this in software development to crank up real and perceived progress, and keep workers happier on a daily basis?

First, it seems we’re an industry uniquely situated to take advantage of creating perceived progress.  I don’t mean false progress, but with the real time metrics available such as compile errors, bug databases, unit tests passed or test runtime, we have the tools to demonstrate progress in several ways depending on the project.  The trick may be to identify the ones that are most valuable to your product, and to keep some perspective on how much you emphasize them.  If you keep cheering up your team by pointing to the diminishing bug list, you’ll have a hard time rallying them when a large dump of bugs comes in from new testing.  Keep it focused on customer satisfaction and percent of code under testing.

Second, there are methodologies and tools for software engineering that support constant progress and prevent the kind of backslide that kills morale and motivation.  Specifically, I’m thinking of agile methods that cut out time spent on exhaustive planning and requirement specifications that doesn’t feel like progress to the person writing it, and creates the opportunity for big negative progress when it turns out they’re misguided.  Then tack on test driven development to allow constant, incremental additions while locking out the possibility of backsliding again, and continuous integration and deployment to keep your work rolling forward instead of halting and going back.

These are very pragmatic, and well tested methods that, used together, will hugely increase the number of days your team can go without a big backslide, adding incremental improvement or capability day in and day out.  And, according to the article, this is a key driver of motivation.  So in addition to the benefits we already knew about (faster results, less wasted time, better tested code, no ‘ocean boiling’ integration and release cycle) we can now say that agile methods keep your team happy and motivated.

What other techniques support constant progress?

The need for authenticity in startups

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The need for authenticity in digital media companies
As we begin to trust more and more of our private data to cloud companies such as Dropbox, Mint and Facebook it is becoming critical that the companies clearly communicate their intentions and principles, and then unfailingly act on them.  They must be authentic.  In the current online ecosystem of small, single-function companies such as Dropbox and Mozy the relative anonymity of the company hasn’t slowed adoption by users.  It seems that when it comes to trust, no information is just as good as positive information.
This can’t be sustained as the company grows though, as sooner or later the public will get more information about a company and its owners, executives either through direct communicatin or the press.  Once this happens, the trust will only be maintained if the personality of the company is trustworthy (think “Don’t be evil” over a chair-throwing Ballmer) and they act authentically to support their personality.
For small companies, the trust seems to start at a tangible level, based on things like privacy policies and practicalities.  I trust my data to Dropbox because really, with 3M+ users, they’re not going to dig through my docs.  As the company develops more personality, their actions and communication need to be authentic to that initial trust in order to sustain it.  I trust my email to Google and my friends to Facebook because I know that while they analyze my data to show me ads, they won’t jeapordize my trust by acting inauthentically.  In both cases, their trustable personality has become their greatest asset.
What do small companies need to do?
1) Establish tangible trust.
Have a privacy policy.  Clearly communicate how you store and use people’s information and data.  In all of your communication, stay in alignment with those policies, and
2) Always communicate authentically
Authentically means you act in accordance with the trustworthy policies you established in (1).  This is where your corporate personality starts to take shape, and you need to work to communicate in a professional, trustworthy way.  I’ll trust data to a few kids in a garage, but only if I thnk they have a long view that values retained customers and pride in their work over a quick buck from a marketing company.
3) Recognize that trust as your most valuable asset.
Once you have company that customers implicitly trust, you have to protect that with everything you’ve got.  Your employees and communications all will impact your ‘personality’ in a postive or negative way.

As we begin to trust more and more of our private data to cloud companies such as Dropbox, Mint and Facebook it is becoming critical that the companies clearly communicate their intentions and principles, and then unfailingly act on them.  They must be authentic.  In the current online ecosystem of small, single-function companies such as Dropbox and Mozy the relative anonymity of the company hasn’t slowed adoption by users.  It seems that when it comes to trust, no information is just as good as positive information.

This can’t be sustained as the company grows though, as sooner or later the public will get more information about a company and its owners, executives either through direct communicatin or the press.  Once this happens, the trust will only be maintained if the personality of the company is trustworthy (think “Don’t be evil” over a chair-throwing Ballmer) and they act authentically to support their personality.

For small companies, the trust seems to start at a tangible level, based on things like privacy policies and practicalities.  I trust my data to Dropbox because really, with 3M+ users, they’re not going to dig through my docs.  As the company develops more personality, their actions and communication need to be authentic to that initial trust in order to sustain it.  I trust my email to Google and my friends to Facebook because I know that while they analyze my data to show me ads, they won’t jeapordize my trust by acting inauthentically.  In both cases, their trustable personality has become their greatest asset.

What do small companies need to do?

1) Establish tangible trust.

Have a privacy policy.  Clearly communicate how you store and use people’s information and data.  In all of your communication, stay in alignment with those policies, and

2) Always communicate authentically

Authentically means you act in accordance with the trustworthy policies you established in (1).  This is where your corporate personality starts to take shape, and you need to work to communicate in a professional, trustworthy way.  I’ll trust data to a few kids in a garage, but only if I thnk they have a long view that values retained customers and pride in their work over a quick buck from a marketing company.

3) Recognize that trust as your most valuable asset.

Once you have company that customers implicitly trust, you have to protect that with everything you’ve got.  Your employees and communications all will impact your ‘personality’ in a postive or negative way.

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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