Kyle Redinger
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5 months ago
in How can we create a funding model for lifestyle businesses? on Taylor Davidson
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.
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.
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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...