If there's one unassailable maxim in start up investing, it is that one invests in team first, everything else second.  One of the major points of vetting a potential team is whether they've been through the start up cycle before, with more credence given to teams that have that experience.  As we've been working on start up projects for the past couple of years, sometimes that held, and sometimes it didn't.

And last week I read this in HBR:  "New Research Suggests Start-Up Experience Doesn't Help Social Entrepreneurs".  While it only applies to B-Corps, it bears some re-thinking of our deeply held assumptions:

If these early tabulations are any indication, there is no systematic evidence that prior founding experience is translating into superior performance for social entrepreneurs. Their ventures don't have larger on-line followings, superior early-stage commercial performance, or greater social impact.

Are seed investors really leaving money on the table by clinging to old maxims that may not be true in the brave new start-up world?

Ran across a post from someone who is pondering platform building.  As someone who has been building platforms for a while, I figured I should provide some feedback!


There are very few standards in this area.  Few can even agree on what a "platform" truly means.  OMG is doing some work around the cloud based platforms, but it's more about the cloud than it is about a platform.  With that in mind, a couple of thoughts:

Tenets of building a platform are very familiar to those of us who came out of SOA and BPM worlds.

• First, encapsulation of each sub-capability of the overall platform with proper granularity to get to modifiability.  This addresses points 4 and 5.  
• Second, build the "structural steel" into the platform - things like measurement, management, and security (to name a few) usually wind up being bolted on after the "minimum required functionality" is achieved.  In the world of platform thinking, they ARE an integral part of the minimum required functionality. 
• Third, build to patterns of technology capabilities - not technology.  The only known known is that technology will change.  The modifiability of platforms becomes critical, as does the classification of technology capabilities.  
• Fourth, build the platform one piece at a time.  The capability model of the platform should be (mostly) known up front.  The iterative approach can then be used to "fill" the pieces of the capability model as it evolves in response to market and regulatory pressures.  

Finally...  Platform building is a ride, from highs of the peaks (of inflated expectations) to the lows of the troughs (of disillusionment.)  Steady leadership is more than just important - it is a requirement.

Regards,

AAB

Calculating Total Cost of Ownership (or TCO for short) is something that's familiar to those of us who've been through the large organization planning processes.  Yet, there is no shortage of entrepreneurs that believe they can move mountains with nothing more than bubble gum and shoe string.  And there's no shortage of investors who believe that they can fund the next Google with $25k.

Well, as John Adams quipped, "facts are stubborn things, and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence."  Today brings news of investment freeze by Joystick Labs, a Triad-based video game accelerator.  Accelerators and incubators can be attractive to investors than an a single startup since they provide a rudimentary diversification mechanism, and hence reduce risk.  But without proper due diligence, the foundation on which this diversification is based is shaky at best.  And TCO is part of that due diligence (at least in our model.)  Bubble gum and shoestring, duck tape, and other such pronouncements may sound soothing, but things take as long as they take and there's still no such thing as free lunch.

Joystick Labs seems to have found this out the hard way:

John Austin, managing director of Durham-based Joystick, said the prevailing economics of the video game market – which have changed considerably since Joystick was launched in 2010 – requires more financing than Joystick and its investors could afford.  "It has become very difficult for an independent developer to get noticed,” Austin said. “For every ‘Angry Birds,’ there are literally tens of thousands of great companies not getting noticed.”

Did the prevailing economics of their market changed that significantly since 2010?   Or is it that they found through two years of experience in launching new video game companies that the startup TCO for their market wound up being much greater than anticipated?   Not a day goes by when I don't hear from entrepreneurs and investors questioning why something costs much more than they "feel" it should.  Those of you who know me (which is probably why you're reading this in the first place,) I'm not into feelings, I'm into numbers, and numbers only deceive those who want to be deceived.

AAB

Read more here: http://www.newsobserver.com/2012/10/22/2430856/joystick-labs-ends-funding-for.html#storylink=cpy

This week at the Funding Post event in NYC one of the panel discussions focused on how VC model is going to evolve over the next several years.  There were several interesting points made that I would love to get this blog's readers thoughts on:

1. Talking only to people you or your trusted network knows (or "we don't want nobody nobody sent" paradigm) is a limiting and self-defeating factor.  Yet most (almost all) angel and VC groups won't even talk to anyone who's not known.  Group think?
2. The model of investing and waiting years before an exit event leads to payback (and hopefully more) may be great for CPG based investments, but internet and mobile business models move quicker and not guaranteed to produce the exit event.  Therefore a new model may be required for these investments - one suggestion was to use a real estate investment model.
3. Very few investors talk about the economic benefits of tax liability mitigation due to new investment.  There were two people in the audience who were shocked that including and tracking these benefits as part of the VC business model is not commonplace.
4. Crowdfunding will have a significant impact on investment community.  Some thought the lead investor paradigm would still be required for projects using crowdfunding platforms, but is that reality or misplaced hope?
5. Speaking of crowdfunding, has anyone really thought through the implications of diversification requirements of the Jobs Act?

Over the next few weeks, I'll post my thoughts on these points, but would love to hear what other Business and Enterprise Architects think on how to design the new business model of VC that addresses them.

AAB

For those of us in the Enterprise Architecture, impressing the value of discipline on the world that is incentivized to ignore it, is par for the course.  Whether it's due to great expectations, unrealistic timelines, lack of coherent planning, or all of the above, ensuring and enabling others to follow a method or process with trust that success will not come from taking shortcuts is a Herculean task.

So when we transitioned to a Capability-Driven Startup Incubator model, we essentially doubled down on the belief that if done in a disciplined way, we can help entrepreneurs launch companies that are successful, profitable, and not hampered by capability debt (debt of suboptimal decisions made for expediency or based on incomplete information, or by wrong people in wrong positions.)  You'll see the results of that bet start appearing in the public light next quarter so you can judge whether our bet is paying off.

It is from a discipline perspective that I ran into a very curious piece on Chicago digital startup community that appeared in PandoDaily.  It centers around defining the "Midwest Mentality" of pragmatism, as follows:

Pragmatism is defined as dealing with issues on a practical level, rather than a theoretical one. What does this mean in the context of startups? Well, it means that there is no “let’s build a cool tool and then figure out the business model”. No. In fact, if you do that here, you don’t belong. That’s a plain fact that I have found very few people disagree with.

And while the author (Trevor Gilbert) goes on to provide both pros and cons of pragmatism, he spends the majority of the article blasting pragmatism in context of digital startups.  He delves into working hours, missing the point that amount of work doesn't usually correlate to success.  Those of us with kids don't just stop working once we go home - I see many of my married with kids counterparts firing up the laptop after their kids are in bed.  But we can debate whether parents working 9pm to midnight is more productive than their single counterparts spending that time having fun at a bar - either is simply anecdotal and should be taken with several grains of salt.  It'd just be nice if Trevor thought to research his arguments a bit more.

And in that failure of discipline, he makes and then fails to expound on the major point of why Chicago startup community is so different from Boston or Silicon Valley:

Without hot startups, you are left with the problem of attracting investment and talent with names observers don’t truly know.

Here Trevor inverts the causality in support of his argument.  That is shoddy at best, sensationalist at heart, and substandard thinking at worst.  The cause of few "hot startups" is not our pragmatism.  It's the fact that there is a "problem of attracting investment and talent with names observers don't truly know."

If Trevor actually listened to the Chicago VC community, their investment dollars usually go to people they have built a relationship with - over several years.  It's not that talent, intelligence, adaptability, and stick-to-it-itiveness of the idea don't play a role.  It's that in order to be rated on these measures, the prospective entrepreneur has to clear a very high barrier to entry of building a relationship with the prospective funders.  Perhaps it's a throwback to the old Chicago politics paradigm of "we don't want nobody nobody sent."  But perhaps it's not strictly a Chicago issue (here's a WSJ article bemoaning that fact nationwide), just more pronounced here.  Regardless of cause, this state of affairs limits our city to be the backwater of seed investment dollars.  Either way, I'm not sure that "Midwestern Mentality" has much to do with it.

AAB