Financing start-ups: some current hiccoughs

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* How do you structure funding for projects with very uncertain prospects?

* Early-stage investors not taking a long enough perspective?

* How do you manage the processes of funding more effectively?

* Grants as an alternative; but they have their strings.

* Footnote: What is the logic of some recent very fancy prices for IT start-ups (Instagram, Summly)

 

Some of those who run Accelerators have turned to the ‘convertible note – structured as a loan’ – in addition to a slug of equity (5-15%), as the best way of maintaining their interest in long odds bets; but this is leaving less room for new investors.  A number of recent ‘graduates’ from Accelerators have been appearing at Angels’ Investor Days looking for follow-on funding. Some have brought with them surprisingly high outside equity investments (up to 15%) and other commitments to third parties. The value of a business will inevitably be affected by its balance sheet; but aspiring entrepreneurs also need to be able to see their early financial commitments in terms of longer-term funding needs.

A number of Accelerator managers are concerned about helping the participants in their programmes to find follow-on funding without any interruption in their progress. The concerns here are two-fold: how do you enable Angels to have access to likely investees early enough in the development process to enable them to make a thorough evaluation of the project and the entrepreneurs; and how do you enable this process and the processes of investment (due diligence etc) to be done and dusted (ideally) by the culmination of a specific programme (eg an Accelerator)?

Angels have also expressed concern at over-valuations. At the final of recent New Business competition at Oxford’s Said Business School, I watched Philip Green, one of the judges, offer the winner £250k for a 50% stake in his business. The latter responded by saying that for that sum he might be willing to sell 2 – 3% – a gap in understanding that might have been filled if the background and the context had been better understood – by both parties. (See also Footnote below.)

Others have looked to grants (eg from the Technology Strategy Board) for early-stage funding, but sometimes find the processes of application, the conditions and the constraints such that they do not have the freedom to get on with the job or to go wherever the project dictates.

 

Footnote

A recent article in the Herald Tribune (9.4.13) wrote of five ways of valuing a start-up. If it is pre-revenue [and in IT], then how many eyeballs has it attracted; or what is the price or value of its developers [and they are in short supply here as they are in Silicon valley]. If it is up and running, suggests a Professor at Harvard Business School, how much time and effort would it take to build the product from scratch and attract those new users; or what is the potential cash flow.  And fifthly, ‘what number do we need to put on the table to convince the management and investors to part with their dream?’ The writer adds that all these calculations fall apart when a start-up receives an exorbitant amount of media coverage and exposure on social networks; and suitors can become irrational – producing prices that might just have come out of a hat!

 

 

 

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Crowdfunding Platform for Emerging Social Entrepreneurs

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A new crowdfunding initiative (in Australia) is set to help emerging social entrepreneurs quickly attract seed capital, build a supporter base and raise the profile of their social ventures internationally.        

This initiative in Australia, called Dreamstarter, is a collaboration between popular crowdfunding site StartSomeGood, the School for Social Entrepreneurs, and ING DIRECT and will reportedly work to break down traditional fundraising barriers.


In its inaugural round, Dreamstarter will give ten social ventures the opportunity to raise between A$10,000 and A$50,000 as well as receive support from ING DIRECT.

The Chief executive of The School for Social Entrepreneurs expressed excitement about the ability of the Dreamstarter campaign to fast track the development of Australia’s social entrepreneurs and their enterprises. “Dreamstarter will allow these inspirational Australian entrepreneurs to instantly tap into an international community of engaged supporters at StartSomeGood and with the backing of ING DIRECT will also open doors to further support from with their staff, clients and community,” she said. “We also hope to inspire others to get involved and realise their dreams for setting up social change initiatives in their communities.”

The first three ventures to go live on the site include a project to connect remote Aboriginal entrepreneurs to new markets via an online store (Enterprise Learning Projects), an initiative to help rural communities in Malawi to achieve greater self-sufficiency (Empower), and a campaign to publish a series of children’s books and digital apps to inspire connections through creativity (A Girl in the World).

According to one of StartSomeGood’s founders, this project is also the first time in Australia that a corporation has supported a crowdfunding platform designed specifically for social change projects. “Crowdfunding is a participatory model that democratises corporate philanthropy. The projects that will succeed are those that have a genuine mandate from the community,” StartSomeGood Australia says that all ten ventures to go live on the Dreamstarter site have been developed by its graduates.

ING DIRECT commented that it was a natural fit for the bank to support the Dreamstarter initiative. “At ING DIRECT we strongly support innovative projects that address real community needs. Being a direct bank we see great potential in leveraging the digital medium in this way.”

 

Business Learning to become more personalised

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Business Learning in Accelerators and their ilk will become increasingly personalised

Business learning provisions are increasingly migrating to online, and for very good reasons; so business learning and business development programmes will need to include learning coaches/mentors.

With the rise of the net, learning is being transformed: the President of MIT said when he spoke recently at Davos that his institution had started putting courses online a decade ago, and that MIT open coursework has accumulated 100 million individual learners, and this is increasing by one million a month. Stanford has been following suit.

A number of Accelerators give over a regular fixed time to learning – about business, usually consisting of lectures, presentations and discussions with experts, and about key topics such as IP, marketing and finance (among them Bethnal Green Ventures, Accelerator Academy, Entrepreneurfirst and the Young Foundation). Accelerator programmes, as short periods of intensive development for up to a dozen small groups of people who have ideas for innovations  (commercial, technical or social), have such an intensity that the participants focus strongly on the present needs of their developing venture. A standard syllabus (delivered in sessions of this kind) is increasingly seen as wasteful of valuable time – by those who already know or can do what they need to, and by those for whom it is not immediately relevant.

Learning from each other is another characteristic feature of co-working environments like Accelerators; and learning from each other’s learning experiences is part of that, and at least as important a source of learning as any other in this field. Every Friday, Watershed, Bristol invites its participants to meet and talk about their recent learnings; and an edited version is then put up on the intranet (http://wp.me/p3bejt-3Y).

We can expect general business learning sessions to be replaced by the Learning Coach/Mentor ( – among other specialist mentors,) who will keep in close contact with the evolving learning needs of programme participants, and perhaps on hand by Skype, helping individuals to make effective use of material that is readily available on the internet and relevant to their issues of the moment; and helping them to learn from each other’s learning. The special value of such a person is that in an Accelerator, the help that participants need is in meeting their immediate learning needs – as those change from day to day.

 

 

 

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Wayra Lab + UnLtd collaborate to develop social ventures

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Foundation for Social Entrepreneurs collaborates with major Corporate Accelerator in the development of social enterprises

One of the winners of a £10mn Cabinet Office initiative to support the next generation of social ventures, UnLtd, which has had considerable experience through its Big Venture Challenge of incubating such ventures, is collaborating with Telefonica, which has the most experience of Accelerators of any corporate in the world, to work together to start up and grow new businesses to meet social needs.

This is a six-month programme – of intensive development, plus a two-month extension period post ‘Demo Day’, starting in May, for tech start-ups that meet social needs, a programme which will be repeated three times over two years – under the Cabinet Office’s recent bid and contract.

Telefonica will almost double the space in its London Wayra Lab and then the ten selected social incubator teams will have the same regime and similar terms as in the programme of their corporate counterparts on the floor above (see http://wp.me/p3beJt-s). They receive £40k in the form of a ‘convertible note – structured as a loan’, team-working accommodation in the specially designed co-working space, and close project management and mentoring support – in return for 5-15% equity in their businesses.

According to UnLtd, the biggest challenges in this early stage work with social ventures are:

*    finding participants whose enterprises seem based on

scaleable models and have adequate routes to market to

make significant contributions to social needs (the call has

used existing channels; and the selection process is using an

application form to reduce the applicants to about 30, and

is followed by a single interview before a small panel);

*    finding investors to provide the next round of funding at

the end of the incubation period.

UnLtd’s experience with its Big Ventures Challenge has been largely confined to funding and support (no co-location/co-working); and technology ventures only made up a minority of those supported – with many small, often very local enterprises working intensively on the ground with relatively small numbers of beneficiaries.   In the pilot year, just over half of the ventures supported raised external investment but it is still too early to speculate if they will go on to scale significantly or to tackle major social needs.

The interests of investors in not-for-profit social ventures are more tightly defined than those of their commercial counterparts: there are fewer of them; and up until recently most could not benefit from the existing tax breaks. However UnLtd is discovering increasing numbers of commercial enterprises, including one or two in the Wayra programmes, that can claim to be meeting social needs, enterprises that might therefore well come under the umbrella of this scheme.

Support  – in the form of process management, learning and mentoring will no doubt be a result of the collaboration between the two: the Wayra UnLtd Academy will provide the hothouse; Telefonica will provide technology expertise. The latter is also able to provide potential access to the large number of their global customers, whilst UnLtd claims to have the largest pipeline of social entrepreneurs in the UK, as well as expertise in monitoring the social impact delivered.

As a six-month programme, in a purpose-designed Accelerator, if it can find entrepreneurs with ambition and with ground-breaking ideas, this programme could mark the way forward for Accelerators.

The RCA’s incubator wrestles with its own development

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The Royal College of Art’s Incubator wrestles with its own development

InnovationRCA, the RCA’s incubator, has ploughed a leading furrow among higher education establishments; and is contending with the issues that are raised by an incubator programme that runs in parallel to its academic programme, (which is a post-graduate programme), and that is also a part of the educational process.

The RCA’s incubator now takes in four or five new business teams each year – its sixth cohort (it started with just two per annum in 2008); and it is a two-year programme. While many start-ups involve little more than taking a recently created way of doing something and simply applying it to a new field, often with a tweak or two, the kinds of businesses that are brought to this incubator entail substantial design or engineering/IT development (the essence of the RCA) as well of course as market and business model testing. (There are other groups whose products seem to lend themselves more readily to licencing; and these are also housed alongside, but under a different regime.)

Evaluation of early-stage development processes is notoriously difficult, partly because they are all so different from one another, and partly because, as one expert observed, you cannot do so until years after (but how many?!) The statistics are that about 40% of the teams in the incubator have received ongoing funding; and just under half have developed products and are trading.

There is a bootcamp in the summer and networking events to help candidates to understand their own personal aims and objectives and to match up with appropriate team members; and the deal is that those selected for the incubator receive loans of £30-£70k, partly convertible into equity, plus compulsory support. The RCA has established a fund in order to support these businesses (it was originally supported by a substantial grant from Nesta), but needs to be able to recycle the proceeds of sales of or repayments from its businesses in order to sustain the incubator.

The incubator is housed in the recently completed Dyson Building in Battersea which can house around fifteen businesses, with flexible accommodation and meeting spaces, and excellent kitchen/eating space.

The learning programme seems to be very sophisticated, and comprehensive; and each team is assigned a pair of coaches, whom the participants meet every two weeks. Every six weeks they have a review with a larger group of mentors; and they are required to pitch their business every three months to another group of mentors. The RCA has a group of eight ‘coaches’ (mentors), plus half as many more ‘occasionals’; and would like to have a larger and more diverse range of mentors available

Teams sometimes find that one or more of their members are less wholeheartedly committed to their project than others, that other

career interests attract them more than entrepreneurialism, or that their interests in the future of the business do not co-incide with those of  potential investors. And any of these circumstances impede the progress of the business and necessitate the reforming of the team and their re-energising and redirection – often a difficult management task.

Demo Day takes place once a year with around half-a-dozen investors, mainly angels, and InnovationRCA would like to have more such potential investors; but the two-year term of the incubator and the potentially divergent interests of the participants make investing in their businesses more uncertain than some other start-ups. Moreover, the RCA needs to hold its investments under some kind of fund that would handle all the legal and contractual arrangements – which are not within its normal capabilities.

There is evidently a number of issues associated with incubators that run in parallel with academic programmes, not least when they are part of the educational process; and as a leading incubator in higher education, InnovationRCA is wrestling with these.

For descriptions of other aspects of DesignLondon’s work – especially the development of its pedagogical programme, see: http://goo.gl/Yr12c

 

Copyright 2013

John Whatmore                                                                   February, 2013

The Centre for Leadership in Creativity

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Making conferences and meetings more networkable

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Helping delegates to come away from conferences with not just five business cards but with twenty – plus some new perspectives.

If just before each session (and especially before topic break-out sessions), conference chairs can get their audiences to form informal groupings (of three or four people), to say hello to one another and why they had come, to give each other their cards (and perhaps other contact names), delegates could hope to go away with not just five business cards but with twenty or more (and most of them good names.) For a specific protocol, e-mail john.whatmore@btinternet.com