I really admire the early stage seed venture firms like Y Combinator, Seedcamp and TechStars. Their model is to make make small cash investments in very early stage companies and then provide mentoring and support as the company grows. I think this is a good model but I have been thinking a lot about how this could be improved.

Thinking back to my own experiences of starting and growing a company, a lot of the time the issue is not funding it is knowledge and experience. What about instead of just seed capital you could get experience to a whole team of advisors and operators who worked with you on your business. Could the traditional seed capital model be extended so that there is an operational presence in the portfolio of companies, and also some shared resources?

I thought that I would leave the obvious draws backs to this model aside (e.g. scalability) and come up with some guiding principles for this new kind of venture that could add an extra edge to start-ups.

1. Focus on revenue not exit

I have posted about this before but I believe businesses should have a clear business model and clear path to operating profit. In my view a business should make money. People will always quote the exceptions to the rule companies like Twitter do not make a profit nor did Facebook for a long time. But these businesses are few and far between, I would much rather reduce the risk and work to create value for investors via regular profit sharing from operations.

Creating a business geared for an exit does not always mean that you make the best long-term decisions for the business. It is very hard to predict when and if your business will be acquired or floated.
A portfolio of companies all delivering increasing profit each month is the best way to build a solid foundation for investment success.

2. Build for the long term

I read on the Y Combinator site recently that they “help start ups through what is for many the hardest step, from idea to company”. I disagree with this. I think the hardest part about building a business is once you have your technology platform in place; creating a proposition, getting you positioning right and selling into your chosen marketplace, building your brand. All of these take time, dedication and focus. If you take a long term view you are more likely to focus on quality, customer service and creating an incredible brand that people trust and believe in.

3. Operations not investments

Instead of the core ventures team looking for investments and working on new deals, they should be helping operating the businesses. The core ventures team would act as close advisors and actively help in operating the portfolio of companies. This huge wealth of knowledge and experience would enable the business owner to accelerate business growth and not fall into common pitfalls and super charge their progress.

4. Centralised technical team and shared business resource

The portfolio of investments should have a centralised shared technical team. There is no need to have a set of programmers for each business as there would be massive overlap and doubling up of resources. A central team would be responsible for the technical requirements of all the portfolio. Having a common platform, unified technical approach will mean more expertise and greater stability.

I would even extend this to include a shared business resource e.g. admin, bookkeeping, accounting etc. Everyone uses the same tools, same calendaring system, same accountancy package etc.

Let the business owner get on with building the business and leave the admin, accounting and programming tasks to the central team.

5. Find ideas that solve the user’s pain

The best kind of businesses are the ones that solve a real need in the marketplace. These businesses make a very attractive proposition to the prospective buyer and are an easy sell.

6. Share the effort, share the equity but no big money investments

This is a joint effort, both business owner and venture team are working creating the best business possible. The equity should be spilt 50-50 and there would be no large cash buy in for the venture stake.
An equal split means that both parties are totally motivated to success.

7. Bootstrapping

All the businesses in the portfolio should be very aware of their cash burn. Keeping costs under control until profits can sustain the operating costs of the business.

Summary

There are issues and problems with this approach but I think that it could be an interesting option for a seed capital venture company:

• Find the best ideas and back the best founders
• Team them with an experienced, successful team
• Remove any unnecessary tasks of admin, programming and accounting to create laser focus
• Focus on the business model
• Build for the long term
• Bootstrap to create maximum profit and value

I like the sound of this business and would be interested to hear people’s thoughts on whether it would work in reality.

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This entry was posted on Monday, November 23rd, 2009 at 11:00 am and is filed under General.
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