Welcome to the world – LaunchCapital Small Business

Approximately a year ago, LaunchCapital’s financial backers asked us to take a step back from the traditional venture funding model and figure out a way to appeal to “Main Street”-type businesses.  Their theory, and we agreed, was that great entrepreneurs are not limited to the world of hi-tech and bio-science start-ups, which are more conducive to traditional VC funding.

So, after several months of collaboration with financial institutions, entrepreneurs and other service providers, along with a relentless effort by LaunchCapital director Heather Onstott, we are excited to officially unveil the LaunchCapital Small Business product to the market.

Why the need to innovate?

I give a lot of credit to our financial backers for helping us visualize the development of LaunchCapital Small Business and for pushing us to innovate around the traditional venture capital model.  As VCs, we regularly ask portfolio companies and prospective investments to continually push their models forward, innovate on their go-to-market strategy and develop that next-generation cool technology.  We demand that they try new things, take risks and constantly evaluate their success.  But, at the same time, we as investors are trapped funding the same industries the same way and hoping for better returns.  It wasn’t until LaunchCapital’s financial backers pushed us to think about the growing need for start-up capital for small business entrepreneurs that we began to innovate.  With the backdrop of a financial crisis and banks less able to finance early stage small businesses, LaunchCapital went to work.  In the end, we came up with a model that gets us closer to our overarching goal: empowering great entrepreneurs to do great things.

What took so long?

For it to take 12 months to get this product up and running seems like an eternity in the start-up world.  So the obvious question: what took so long?  As I look back at the original GANTT chart, I recognize that it took almost 9 months longer than anyone had anticipated.  The primary reason for our delayed launch boils down to three very important lessons that we learned about “Main Street” businesses:

1. Main Street businesses are not interested in taking on expensive equity at the seed stage of their development
2. Main Street entrepreneurs have little trust in venture capital
3. Main Street entrepreneurs take on personal risks that are uniform regardless of industry or experience

The first lesson was easily resolved with some creative thinking around term sheets.  To ensure a fair market return, we balance the returns generated by interest rates, loan terms and equity grants.

The second two lessons took much longer to understand.

It was a June conversation with a senior member of a large regional bank, sparked by an introduction from our financial backers, when it all began to come together.  Lesson learned?  The personal risks associated with starting a “Main Street” business are high because the entrepreneur IS the business.   In other words, the life and personal reputation of a Main Street entrepreneur is so intertwined with the life of the business that they cannot risk bringing in capital that they do not trust.  As a result, the first thing we needed to do before we offered a term sheet (much less cut our first check!) was to build trust in the LaunchCapital Small Business brand.

Prior to this key learning, many entrepreneurs were so skeptical of the “fine print” that we had trouble moving the ball forward.

With the advice and support of our financial backer we adjusted our approach.  For the last 5 months, Heather and I have been fostering relationships with superstar entrepreneurs who are interested in starting community-based, local, Main Street businesses.  We have worked with them on everything from lease negotiations to business model development.  We have connected them to our most trusted advisers and partners – all with the desire to become a trusted source of capital.

It’s working.  We now receive a majority of our deal flow from the very entrepreneurs whom we have been helping over the last few months.

What is the product?

The LCSB product is designed specifically for local start-up businesses that generate revenue within the first six months of opening.  To optimize their capital structure, we offer a small business loan up to $150k, with a small common equity ownership (less than 15%).  The debt is nonrecourse, reducing the entrepreneur’s personal risk.

Much like LaunchCapital Ventures (the new name we have given our equity-based product), LCSB will be a trusted adviser in the market, financing great entrepreneurs in the most capital efficient manner.

 

Innovating in a Downturn

In early November 2008, I held an “all hands” meeting for all of the executives in our portfolio.  At the time, we had 12 active investments and 3 passive investments.  The message that LaunchCapital was delivering was simple and clear: the financial crisis will drastically affect your fund raising efforts.  In order to make it through the downturn, focus on two things: 1) the most important metrics to validate your business model  2) core revenue and new revenue models.

Many of our portfolio companies took this message to heart.  On the far end of the spectrum was Lawrence Coburn and Mathew Spolin, CEO and CTO of RateitAll.  This duo went as far as to have an offsite meeting in which they invited CEOs and advisers from other start-ups to talk about (among other things) varying revenue models.  The CEOs were invited to help generate ideas on how to maximize user experience, site value and revenue generation.  Following the meeting, the RateitAll team went to work implementing a number of new concepts and ideas.  Last Saturday morning, I woke up to a September update in which their monthly was up more than 85% from plan (a plan that was developed before the financial crisis hit).  This was a wonderful surprise coming from a business that is primarily an ad-based revenue model (in an environment where online advertising spend is declining month over month).

Lawrence and Mathew are the kind of entrepreneurs that LaunchCapital loves to back.  They are relentless in their pursuit for new ways to generate revenue and to get to cash flow break even.  They are not scared to take calculated risks.  And, they know exactly which metrics to focus on.

In the last 12 months, it has become easy for businesses (both start ups and established companies) to utilize the terrible macroeconomic environment as a reason for missed metrics.  However, there are always a few creative companies that are able to modify their business strategy and business model to capitalize on the changing market conditions.  The companies in our portfolio who were able to do this focused hard on driving customer traction to achieve revenue and financial stability.  Today, these companies are in a great position to maximize on an economic environment that is rebounding.  With solid metrics behind them, these companies are now signing strategic partnerships, entertaining liquidity options and drawing additional growth capital.

Ultimately, we all have learned a lot from this economic downturn.  Personally, I now have a deeper appreciation for the tenacity of entrepreneurs and have learned that the greatest innovation for many companies may not be in the product itself, but in the underlying business models that drive success: customer acquisition, revenue and costs.

How have you leveraged your existing customer base, strategic partners and/or business model to generate extra revenue streams in the down economy?

 

The Complicated Relationship of a VC Mentor

Perhaps the most important relationship within a start-up business is the adviser relationship.  Some entrepreneurs know how to leverage this relationship very well, while others believe that it is a waste of time and energy.  I believe that, if properly aligned and matched,  the mentor/adviser relationship can elevate a start-up to the next level.  From a definition standpoint, I am considering a mentor someone who is not compensated for their time/effort and an adviser as someone who is (either via equity or with payment).

Over the summer, I have had the unique opportunity to mentor a New Haven, CT based entrepreneur on her new start-up.  While I have been unofficially advising companies over the past 3 years on a one off basis, the relationship that I struck with this New Haven start-up was more formal in nature.  Weekly calls, regular in person meetings, help developing financial models, employee contracts, etc. (It is important to note that I have no financial incentive in the company and have not been paid a *consulting* fee or equity by the founder).

And, over an Indian food lunch yesterday with the start-ups founder, I began to realize that as a VC, the role of a mentor is far more complicated then strictly giving advice.  When going into the formal relationship with my NH based start-up, the most important thing that myself and the founder did was to decouple my relationship with LaunchCapital and my relationship as a founder.  The reason that we did this was to make sure that I was fully aligned with helping her grow her business and receive the best terms possible for her angel round of financing.  Obviously, if I am trying to maximize the terms for the entrepreneur, I am misaligned with LaunchCapital’s financial incentive.  Therefore, decoupling was necessary.  And, by allocating another resource to advise LaunchCapital as to whether or not to make the investment – independent of my opinions of the start-up – we were able to seamlessly due diligence.  While not the perfect solution, it certainly helped.

So, for those entrepreneurs who would like to bring a mentor or adviser into their business, I have a list of 5 necessary things to make the relationship worthwhile:

1) Align all incentives.  Make sure that the mentor/adviser is not working with a competing start-up, does not have board membership on another company that could cause a misalignment.  If the adviser is from the venture community, I would ask around to see what companies they have been actively engaging, what companies they recently funded.

2) Require regular meetings.  A lot of entrepreneurs that I talk with have great advisers and mentors to lean on, but talk with them so infrequently that they are not successful at leveraging their expertise and connections.  To maximize the time and relationships that you have, I would schedule bi-weekly calls and monthly in-person meetings with all of you mentors and advisers.  And, if a mentor/adviser is not willing to meet that often, then it should be seen as an indicator of how helpful they will be in driving your business forward.

3) Don’t offer equity or payment until the adviser says something.  The start-up ecosystem is such that people are willing to do a lot of work and mentoring without compensation.  Before you are willing to give up that valuable equity award, make sure that you work towards a non-payment agreement first.

4) Identify your needs from this person before you develop the relationship.  Most mentor/adviser relationships fail because the entrepreneur hasn’t identified what the needs are from the person with whom they are talking to (it is also pretty frustrating to be on the other side when this happens).  Advisers and mentors can be valuable in more ways then just making introductions.  Many times, these people have built teams, businesses, made sales pitches, etc.  Use them for everything that you have not done before.

5) Have an end goal.  For any informal relationship to work, I believe that their needs to be an end goal that everyone is working towards.  It could be anything from raising the angel round to successfully selling your product to a strategic customer.  Regardless of what the end goal is for you, make sure that you have decided on final outcome that you want to see from the mentor/adviser relationship.  And, once this final outcome is achieved, celebrate and move on.  There is often a feeling that these relationships should last for ever.  In my opinion, that is not necessary.

 

LaunchCapital’s New Website and Blog

On September 1st, LaunchCapital celebrated the 15th month since we made our first investment in a seed stage start up.  Since our first investment in a small web development company based in San Francisco – NorthxSouth, we have been busy.  We’ve invested in 27 companies across 10 unique industries, we are launching LaunchCapital SB (official launch coming soon), we’ve built our outsourced team to 30+ people, and we’ve struck relationships up with 15 universities around the country.  We took a unique approach to starting LaunchCapital, but one in which we tell many of our portfolio companies to do: stay nimble, adjust to changing market conditions and listen to your customers’ needs.  And, by doing this, we have seen both subtle and drastic changes in everything from our strategy t0 the types of companies we invest in.

With the launch of our new website, we want to show our customers (those entrepreneurs who are out there blazing new paths with innovative approaches to old problems) that we have been listening to them throughout the months and are continually trying to provide them with the best service that we can.

Our new website is comprised of three different elements: 1) Actual site itself  2) Blog  3) LC Community all of which we hope will help entrepreneurs gain better access to information and to us.

The first two features are relatively obvious: to provide clear and concise information for entrepreneurs looking to understand more about LaunchCapital and seed stage venture.  The directors of LaunchCapital (Bill McCullen, Heather Onstott, Konstantine Drakonakis and myself) will each blog about topics that are relevant to the seed stage community.  And, in an effort to provide entrepreneurs with broad information and content, we will also invite portfolio company executives and service providers who may have great ideas on fundraising and the seed stage environment to contribute to post to our blog.

The third feature, LC Community, was contrived through discussions that we had with entrepreneurs in trying to determine what their biggest pain points were.  Throughout these discussions a few key themes began to emerge.  Most importantly, we began to realize that most entrepreneurs need three things that they find difficult to get: 1) connections  2) advice/mentorship  3) companionship/feeling of community.

By leveraging the forum technology that our portfolio company Lefora has developed, LC Community strives to create easy place for entrepreneurs, service providers and VCs to interact.  In essence, we want to create a place that feels professional enough for business relationships to develop, but friendly enough for collaboration to take place.  Whether it be discovering a new product or tool that may help and existing business, to networking with a lawyer who can help with your next fund raise, we hope to create a community and environment where entrepreneurs and service providers feel comfortable enough to ask those nagging questions which we all sometimes have (the one’s where you feel embarrassed to ask, but really need to know an answer to).

It is important to note that LC Community will have an open format, so discussions will be user generated and only lightly monitored by LaunchCapital.  And, of course, we will chime in when we feel that we have the expertise to accurately answer questions.

Well, that’s all for now.  Enjoy the new site and look out for upcoming blog posts.

~Elon