A Literacy of the Imagination

a deeper look at innovation through the lenses of media, technology, venture investment and hyperculture

Filtering by Tag: venture capital

A New Venture Model: '5 and 15'

A couple of buddies of mine (Mike McCracken and Miles Gerson) and I are exploring a new kind of funding model that disrupts the traditional '2 and 20' model. Here are a few main reasons why we've been compelled to do this:

- VCs tend to invest way later stage and are good at sourcing and structuring, but tend to struggle with (or ignore) operational efficiencies. We've known this for a while, but things have come to a head given that a lot of early stage companies that are in revenue are also lacking support in their critical growth stages. Many of these same companies are coming to us for that support, along with help in raising strategic capital.

- Incubators and accelerators have done a great job of helping get startups off the ground, but have significant challenges of scale. At K5, we've been exploring ways to partner better and network the investments for startups we take to the seed through A series raises.

- Corporate venture arms are exploding; I've mentioned P&G-backed Cintrifuse in other posts (a fund of funds model that Mike helped develop through Ernst & Young), but there are many others coming onto the scene, such as this new $100mm fund from Siemens. That said, many of the corporate venture groups we've talked to still lack visibility to new startups 'on the ground' and also have challenges with vetting them. As important, we've seen and heard about lots of acquisitions and early exits go south because of poor integration with corporate business units or as units managing their own operations and P&Ls.

- Family funds are also changing face; some of the family offices we've spoken with are pivoting towards more operational roles inside of their portfolios; much of this has to do with a need for investment transparency and stronger vetting processes.

- On the capital front, crowdfunding is and will continue to transform the business landscape, and the equity crowdfunding space, specifically, is very interesting in terms of accredited investment. We'd like to develop ways to hybridize capital and equity requirements so as to make funding scenarios more flexible and extensible.

So the central idea here is that we can provide operational value to early stage companies. Mike has deep experience running companies and financing them (with UGO entertainment, for example, he raised 13 rounds of funding before they exited), while I have a lot of experience building platforms, developing products and taking them to market, and I've done this both on the corporate side and at the startup level. Miles has solid experience managing a fund, vetting and structuring deals, and has been building up his network on the corporate venture side.

The funding structure itself is still nascent and frankly a little messy, but the notion of '5 and 15' (5% management fees and 15% carry) rests on the premise that we can generate fees from active management of the companies in which we invest. Some VCs we've spoken to have actually said that the trend is dipping below a 2% management fee, but with the caveat that the LP (limited partnership) model is still in place.

I'll share more as we progress with this...

Socially Conscious Investing, Work & World-Building

Happy New Year! 2014 has already proven to be quite fruitful and full of new roads for discovery.

As a follow-up piece to previous posts on conscious capital, co-op investments and discovering value in the age of bitcoin, I thought I would share a video of my talk in Grasse from October. Some of the corporate examples of sustainable innovation you're probably familiar with, but it goes a bit more into how these kinds of efforts can scale in a global marketplace. Many companies are still hesitant to invest in sustainability efforts, and I believe that's because disciplines like CSR are more about good branding than good business models. But that's all changing.

The real emphasis is on how people can transcend their roles and responsibilities at work and in everyday life to become progenitors of change. This has been the core philosophy behind the innovation experiments we've been running around the globe, and it involves much more than good technology and fancy methodologies (although those elements are, of course, important).

In this case -- enabling executive stakeholders in the cosmetics industry to imagine a different world through their products -- we were able to spend four days developing creative muscles, nurturing personal and group awareness, as well as running through role-playing scenarios. The participants literally built worlds or ecosystems that reflected ecological and emotional connections to their companies, and the economy itself. One CEO even remarked that in doing so, she envisioned a new world without economic bubbles.

(*sidenote* we're editing a documentary film of the whole experience which we plan to distribute in Q3...)

Related to 'anti-bubble' economics and scale, Marc Andreessen was featured in an insightful piece in the Wall Street Journal a few days ago. That said, I thought the interview with him below is a terrific view into the immediate future (what I call the 'Future Now'). In particular, it's interesting to hear his thoughts on globalization and how value is created in competitive markets through an entrepreneurial mindset. I wish that he and other innovative investors would address more of the 'human problems' we face (Mr. Andreessen does touch upon on it in spots), but their intentions seem to be headed towards more of a socially conscious approach to investing, alongside of building sustainable companies and economies.

As I've mentioned in other posts, the concept of work is completely transforming, and not just as a by-product of repatriation, disintermediation and other production or transactional efficiencies (which are becoming more and more obvious). Passion and empathy are co-opting 'work' as a cultural edict and a form of social responsibility that embrace the complexities of human discourse. People want to change the world -- they need to, and they're figuring out how to make it happen for themselves and their communities.

And what a wonderful thing that is to see.

 

Accelerating Human Growth Through Participation #K5Launch #startups #accelerators #venturecapital

Tom Taulli was kind enough to run a tiny piece on K5 this week in Forbes (thank you, Tom). I wanted to tell more of the full story of what we're up to here, because I am very proud - and also very humbled - by the work we're doing with the accelerator.

For starters, K5 is not your typical accelerator. There are a number reasons why this is the case, not the least of which is the fact that we approach the investment process in a very unique way.

On K5's differentiation:

It is no great surprise that the worlds of technology, investment, business and culture are converging. In some ways, they are colliding. We are transacting in an economy of relationships, and this challenges our notions of scale and scarcity. It means that the way we incubate, build and invest in businesses must take into account the dynamics of a flat world, one that puts the needs of people, and the markets in which they play, first. It also means that the way we invest must be reinvented through critical elements such as time, attention, goodwill and social relevance. In short, we need to make smarter, measured investments in human capital.

So here’s our charge:

1. To build a networked system that places collective import on participatory reward, with all the compensatory arrangements to boot (salaries, equity, etc.), but those that align investors, mentors and entrepreneurs to cultural values first and foremost;
 
2. To socialize that system in the form of both commercial and non-profit uses, such that innovation becomes as pervasive of a mindset as the decision to invest in the “latest and greatest startup”;
 
3. To grow this system as a platform as our name K5 suggests -- 1,000 companies (or projects) in 5 years -- in a manner that allows the system to grow its own independent systems nurturing ideas relevant to local markets, and to which those respective businesses flourish by the terms and conditions of those markets.

What we look for in a company...

First and foremost, great people. Every investor will tell you about the importance of great management and great company culture, but beyond that, we invest in the good intentions of entrepreneurs by helping them to understand how they can impact the world, and by helping them translate their intentions into businesses and markets of cultural scale. If a company exhibits that level of desire and that kind of ethos, we support it. If it starts with a good idea, even better.

It's simply not enough to accelerate an idea or a business for the purposes of positioning a company for an exit. We have to look at how that company fits into an ecosystem that can actually create change -- predicated on real market needs and values that are important to the average person.

The stages of the program...

Acceleration -- clinically defined as a process of moving an idea to the next level of business investment and formation -- is just one cog in our approach. It's a mechanism, not a solution. Without giving away our proprietary IP, it involves cultivating values that are tied to human development as they relate to the participation in an idea, and what comes out of that participation.

The values are many, and exist in varying degrees as the core to fundamental human business relationships, but are mainly these: trust, transparency, empowerment, connection, purpose, membership, exclusivity, accomplishment.

Connection and accomplishment, to our mind, represent the pillars of participation. And the primary mechanism for participating in a way that discovers talent unbound -- the outliers of our business and cultural circles -- that happens through experimentation. 

So, in short, our approach looks at how experimentation fosters individual and group growth, such that the investment in time and attention produces a return on hard (transactional) and soft (transformational) values.

Selecting candidates...

What we look for in an applicant are primarily the qualities openness and resilience. Openness allows someone to be receptive to direction, but also allows that person to want to participate, even if it is determined that his or her role might be different in the program or within the company going forward. Resilience is something that tends to show up in all entrepreneurs, but speaks to how someone can actually deal with adversity, how he or she can pivot to a new model, or how he or she can effectively manage people within the company.

The tendency of most accelerators and incubators is to think that if a candidate is given the right set of tools and the right amount of money, that he or she will succeed, but that's clearly not the case. A lot of candidates have experienced backgrounds, but we focus more on their aptitude for failure rather than their past achievements or accolades; it is critical that they understand how to fail forward because this process is about breaking down ideas and building them back up. This experience -- what we try to recreate in our process -- resembles the lifecycle of any successful business.

A bit more detail on our process...

Here's a graphic that encapsulates the nature of our process:

At the idea stage, essentially the entrepreneur is asked to "bare all"; he or she presents an idea in all of its merit as well as in all of its weakness. The way the candidate presents the idea actually speaks to his or her level of commitment, and how much he or she is willing to sacrifice for its betterment and that of the group. The way the group interacts around that idea starts to reveal its benefit, and the true characteristics of the team.

Then we enter a prototype stage; this can entail everything from coding a piece of software to developing an experimental model. When this happens, the group starts to coalesce and we see a learning dynamic take place amongst the members of the group. It's also a point at which group members start to make a stronger connection with each other, and with the mentors.

Once that happens, we can test the market. This could mean that the startup acquires a small group of beta testers and conducts a multivariate run on an application or a feature set. It also means that as users react and provide feedback, the roles within the group become more defined and refined in response to that feedback. The group starts to develop a sustainable, shared vision.

From there, the revenue and growth opportunities become clear -- and what we establish is a crucial relationship between what is being offered to the marketplace, and how that offering is being supported by a team that truly believes in the business idea. It also paves the way for membership in that business, and the values that each person exudes as an exclusive member of the business, and the K5 network. Essentially, meaningful participation affords you that privilege.

So, in sum, we go from the rejection of an idea, to an opportunity built around what's really possible.

All in all, we believe that company and individual growth must be symbiotic. Without it, startups are simply doomed for failure. And most of them do fail by design. We endeavor to buck that trend.