sub-ventures

  • VC “Superfund” Stats

    Here is an interesting post that links to a bunch of other interesting posts.  It covers the emergence of VC “superfunds” that have been put together – and the performance numbers they’re now reliant on.

    It turns out the huge funds haven’t performed all that well over the past 10 years and argues it may be time to downsize some of them to get back in line with how VCs operated in the past.

    I thought that was interesting given the discussion on here to do with sub-ventures.  Maybe what we call a sub-venture now is really a decent-sized VC deal a dozen years ago.

  • Sub-Ventures (Part I): Execution Risks

    Here’s the theory at its most basic.  The fewer people involved in the project, the lower the initial execution risk.  Yesterday was 09/09/09, so let’s use nines to discover execution risks.  If there is one founder of a sub-venture, and that founder operates at .9, or 90% efficacy, then the chance of that founder succeeding in the tasks set before him/her is 90%.  When we add another person at 90% efficacy, we lower the chances of success to 81%, or .9 times .9.  As we get more and more people involved, the chances of all tasks being completed goes down precipitously.

    Is this proven in practice? I have no idea! Of course, there are chances of everyone operating at 100%…or even “giving it 110%” in some dreamland where coding software in the middle of the night changes the realities of mathematics.

    The trick is to get the work done with the fewest number of people, and that’s where the magic of the internet comes into play.  It used to be that a huge team would have to work night and day to create an online venture that had a complete web site and content management system.  Now, there are open source tools such as Drupal, that are free and dependable for creating massively scalable social networks and sites without even having an engineer on staff.  If you want to go even easier than that, you could try Ning, where you just add the content and start driving the traffic.

    For my next venture, Rebound Dating, I paid just $29 per month for the software I’m currently using, and I’ll upgrade soon to a package that is much more robust for just $1,000.  Building software like that 10 years ago would have cost at least $20,000.  And it works!

    For other parts of the business, there are also very easy ways (no brainers really) for getting up and running.  Need traffic? Go to Google Adwords, set up an account, and you’ve got traffic flowing to your site within hours.  No creative staff or advertising agency needed.

    Need to monetize that traffic? Google’s got your back on that one, too, with Google Adsense.  Other ad networks are available, and there are affiliate programs and other ways to monetize content, as well.  That eliminates the need for a sales staff who may or may not be able to convince advertisers to spend money on your site.

    If a young company can have just one or two people doing all the work, then the chances of your idea coming to fruition is significantly higher than it used to be.   My formula is this: figure out what you’re best at and make sure you’re spending the most time on that activity.  Outsource the rest.  Now, there’s a good chance your outsourced tasks are going to actually work and cost you next to nothing.  That’s one of the advantages of the sub-venture model.  We’ll move on to the next one soon!

  • Sub-Ventures (Introduction)

    A lot of software/online venture activity these days is going “small time”. Instead of investing millions in startups, some venture firms are placing multiple small bets with small teams.  Sub-ventures, which we’ll discuss soon more in depth after setting the tone here, differ slightly from the small bets placed by venture capital firms, and they differ greatly from the traditional model for venture capital.

    I participated in the first Startup Weekend, in Boulder, CO, where the idea was that you could gather together a group of about 100 people from different specialties, work really hard for a weekend, and come out Sunday night with a fully formed company.  That first one failed, but the idea caught fire, and there have now been dozens of them.  The success rate is tagged at about 20% – success here meaning still operational – which isn’t too bad considering most of the people attending the events are employed full time elsewhere.

    Another idea out of Boulder is Techstars, which I nearly participated in but got edged out in the final round.  This idea took 10 small teams and gave them a few thousand dollars per founder to get a fundable company together over the course of a summer.  Three of the funded companies have been sold to date – Brightkite, SocialThing and Intense Debate, and several more have gone on to receive venture backing.  While Techstars teams receive top-notch mentoring and a contact base to die for, the total initial investment is only up to $18,000.  Assuming the companies sold for well over $500,000 and most only had two very young founders, that’s a pretty good ROI.

    Contrast these successful ideas to the “typical” venture backed model we saw 10 years ago.  Most ventures then required investments of several million dollars, hiring at least 10 people, and developing a product from scratch with much more limited software tools.

    Now, software tools for rapidly prototyping and getting to full deployment are readily available.  Languages and platforms have advanced so much that putting together an application can be done well and quickly with far more limited resources.  The power of the Internet makes it possible for these quickly developed applications to be viewed and used by millions of rabid fans hungry for the next big (or fun or funny) thing.

    And this brings us to an idea I’m pursuing now called “sub-ventures”, which are a hybrid of the super-small and super-sized venture capital models we are seeing out there.  I see four main differences from the super-sized model and one critical difference from the super-small ventures.

    Here are the points we’ll cover:

    1. Execution Risks.
    2. Capital Requirements.
    3. Open Source vs. Proprietary Software.
    4. Exit Strategy.

    In subsequent posts, I’ll go through these differences and we’ll see where we might learn something about creating ventures with low risks and high returns based on the model.  I’m putting together at least one of these right now, and others will follow…so stay tuned.