Start-ups are Fun and Exciting
We all know how the typical startup story begins. The founder, stricken by an entrepreneurial seizure, decides that he or she has a brilliant new business concept that simply must be launched right away, despite some obvious hurdles. No management team? No problem! Friends will work for “free” (for sweat equity) even if they aren’t the perfect candidates for the roles that need to be filled. No capital? Again, no problem! Draw some seed money from Credit Card Venture Capital Fund, and before the cash runs out investors will surely come out of the woodwork to fund the company.
…But, Something is Broken
We all know how this story ends, too. More than 80% of these companies crash on the rocks, usually for very avoidable reasons. Investors’ monies are sunk with them. Cash starvation, founder feuds, investor cram-downs, draining litigation, and a nearly-certain general economic meltdown every six to ten years all add up to – putting it kindly – some very long odds against success.
As battle-hardened serial entrepreneurs and experienced angel investors we’ve been asking ourselves for a while now, “how can the startup model be improved?” In addition to product innovation what is needed now is some real innovation in how startups are built, funded and managed to success.
Perhaps There is a Better Way
At Venture Mechanics we’ve deconstructed the standard approach to launching high-tech startup companies and re-invented it in a way that more faithfully aligns the interests of management and investors, eliminating many of the downstream issues that can prematurely kill or hobble promising startups.
For example, we reversed the launch sequence by first bringing in the investors to develop the business plan, and only after it is fully vetted do we bring in the management team to run the company. We have found that putting the horse before the cart in this way removes common deal-busting barriers such as valuation negotiations, compensation structures and board composition to name but a few.
A new venture will typically start with an idea from a germinator who has a brilliant business concept but knows that she does not possess all the talents, capital or resources to launch a company on her own. We then assemble a comprehensive team of seasoned operators – many of whom are also angel investors themselves – to develop the strategic business plan. Only after we have a plan that’s become compelling as a result of thoughtful honing and analysis do we finalize the founding management team, advisory board and directors. We do this based on the skills sets required to execute the final approved strategic plan, rather than who just happened to be surrounding the founder and was willing to work for sweat equity when the business idea was hatched. Again, putting horse before the cart.
When we officially launch a portfolio company the strongest possible management team has been recruited knowing there is a well-developed and carefully thought out business plan, a support network is available and functioning and the funding for the company will be in place from the day we start working. Because plan, team, infrastructure and funding all arrive simultaneously, risk is lower for everyone, less time is spent on extraneous activities like fundraising, and everyone’s stake in the company is equally likely to be valuable.
We’re All In It Together
We want everyone involved in our companies to have tightly aligned interests. It is our aim to have only one class of ownership in which everyone participates whether they are the germinator with a good idea, an early stage manager, a later stage executive or an investor, first stage or follow-on. Our goal is that along the way and at the end we all march together, leaving no contributor behind and sharing fairly in the ultimate rewards.
Companies to Keep
Most Venture Mechanics companies are structured as LLCs to allow tax efficient distribution of profits to the stakeholders. We are building businesses capable of supporting themselves and generating income that go to benefit those who helped create the success – without waiting for five or ten years hoping for that huge exit event to make money. Unless there’s a strategic reason to sell a business, or the board of directors receives an offer too good to refuse, we intend to hold onto our companies for as long as they continue to generate healthy returns to the stakeholders.
See our Investment Thesis to learn more about the kinds of businesses that Venture Mechanics is interested in launching.
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