6 comments

• 

  Kyle Redinger

  1 year ago

  Taylor, I think the incubator model works very well to solve this problem. If you can take away overhead costs (legal, AP, AR, assistants, office, etc expenses) then you can enable entrepreneurs to focus on product/sales instead of all these other limiting factors.
  
  If you are focused on managing a fund which invests small amounts into companies and a significant chunk of your investment is going into paying service provider fees, why don't you subsidize those costs with in house accountants, assistants and other related services?
  
  So, the model is pretty straightforward to me, you exchange a smaller amount of cash (maybe just to fund living expense), but provide the needed infrastructure and advice to start the business and focus on generating dividends for the investors and founders as quickly as possible. That can be organized pretty much anyway you want, via standard/convertible debt, and/or preferred/standard equity.
  
  The bigger problem is efficiency. Why, as a manager of this type of fund, want to deal with 20 small companies when you could deal with 4 large ones? That's a major limiting factor and not an easy problem to get around.
  reply
• 

  Taylor Davidson

  1 year ago

  Incubator model can work well, but it all depends on how it is structured. What should an incubator really "provide"?
  
  In my mind, an incubator under this model would provide:
  1) just enough capital under the right economic and incentive model
  2) advice & connections
  
  It strikes me as fairly inefficient for an incubator to provide in-house legal, accounting, etc. when there are so many companies that provide these services on an outsourced basis, and would likely be able to provide it better, cheaper and more efficiently than an incubator.
  
  Providing office space on a co-working model may fit, however, depending on the types of businesses that are being incubated, and most likely in a partnership with an established co-working or flexible office space (I've been thinking about workspaces also, with this article on IDEO's site as an example: http://www.ideoeyesopen.com/assignments/story/w... ).
  
  In any case, what are investors best at? Investors know how to start businesses and provide the advice and connections to enable them to succeed. Getting into the range of services seems to stray from core competencies.
  
  The more important point, though, is around the economic model. Agreed that there are a range of instruments to provide investment capital: the key to me is that different types of investment capital create different incentives to entrepreneurs and are only "economically relevant" for certain types of businesses.
  
  Which simply means be smart in how you (investor and entrepreneur) structure an investment, to make sure it fits your goals (as an investor and entrepreneur).
  
  Efficiency is a concern, of course, and perhaps my biggest. Personally, whether I want to work with 20 small or 4 large all depends on 1) my goals as an investor, 2) what I'm really "providing", 3) how deep I need to provide, and 4) how I'm getting paid. If I'm getting recurring cash flow as returns instead of the promise of a portion of an M&A exit (or at least a mix of the two streams), then it could make sense to me.
  
  I know that doesn't fit the traditional VC model, but that's the point...
  reply
• 

  Ethan Bauley

  1 year ago

  This is really awesome, no time at the moment but wanted to throw in a couple initial thoughts:
  
  - Maybe M&A strategy is broken? Some might say it always has been ;-) e.g. Yahoo...a web service conglomerate? They haven't leveraged their purchases. Goog has done a better job, using acquisitions as a hiring strategy, that's good. How might larger companies leverage lifestyle businesses, in a perfect situation?
  
  - VC math v. 1987 record label math. Pretty similar (hits subsidizing the rest). A&R focused, "picking the winners" is the core competency. Basically the same w/ VC. Why not turn VC into a service for entrepreneurs...a bank that takes on high risk investments. Consulting, board management, connections...all the things that "smart money" VC's provide could be sold as a service to lifestyle entrepreneurs.
  
  - Ethan
  reply
• 

  Taylor Davidson

  1 year ago

  That's two interesting thoughts to push ideas into execution...
  
  Do larger companies need to buy lifestyle businesses? In my mind it depends on whether the lifestyle business is selling time or products. Google is perhaps the most recent and well-known example of buying companies to hire employees, but it might be one of the more successful models of M&A.... which points to how hard M&A is to execute.
  
  Perhaps larger companies can use lifestyle businesses to continue to outsource and disaggregate functions? Or simply to replace / reduce the need to hire full-time employees?
  
  Music label and VC comparison is interesting, except 1) music labels take much more control over product than VCs, and 2) music labels make money from recurring cash-flow rather than one-time exit events. Cash flow and operating models very different. Perhaps music labels are more like consumer-packaged goods companies?
  
  "VC as service" is more what I'm thinking, although the term "VC" gives the wrong idea.
  
  The only problem is in the risk / reward structure and the inherent problem in selling services to people / companies that aren't making money.
  
  Let traditional VC fund businesses that require significant capital to fund the positive revenue / no profit run-ramp, and let the "high-risk bank" fund businesses that have less risk / lower rewards.
  
  Perhaps that is just venture debt?
  
  Ultimate goal is to create an economic model that helps people create businesses. High growth / high risk / high reward businesses are not the only option, yet our entrepreneur and startup ecosystem almost dictates that as the goal.
  
  The key difference is whether the entrepreneur & investor economic model is based on recurring cash flow v. one-time exits, because the economic model creates the incentives, goals and cultural expectations.
  
  In any case, all of this is just a part of the entire economic model, just a niche. Question is over how large the niche is and will be.
  reply
• 

  Ethan Bauley

  1 year ago

  "the inherent problem in selling services to people / companies that aren't
  making money."
  
  lol
  
  This will take some hacking.
  
  You've posed many more great questions here, I'm loving this. I agree
  totally with your idea of "lifestyle businesses" just being part of the
  outsourced ecosystem. For any business worth acquiring, there's no
  incentive to sell out in the landscape I'm imagining. Also I like the
  implications for meritocracy/competition among the outsourced labor pool.
  Sooooooo much inefficiency when you're working for a large company. Maybe
  this model we're talking about is a way to achieve the effect of "employee
  ownership", but in a more distributed way.
  
  I'll have to hit on these other ideas more in a future thought, I'm out of
  time as usual!
  
  And really: all that being said, I think our first priority should be to
  dream up some new parlance for "lifestyle business", otherwise this
  conversation may never get off of taylordavidson.com ;-)
  reply
• 

  Taylor Davidson

  1 year ago

  http://www.centernetworks.com/economics-of-free
  
  "VCs invest in potentially disruptive businesses, and disruptive businesses usually need to achieve scale before they can do so. And, more often than not, disruptive businesses do not grow steadily and "earn a living" - they are high risk, high reward and that's precisely what attracts that kind of money."
  
  I guess my thought is that lifestyle businesses will almost by nature NOT be disruptive, and that in an environment of rising collaboration and entrepreneurship, the likelihood of an endeavor being disruptive goes down.
  
  But so what? There is a lot of money be made from non-disruptive businesses, and the more we can help them form, the better business and society will be for it.
  reply