RightSide Capital Announces New Seed Fund; Will Make 100-200 Investments Per Year

Mon, 22 Feb 2010 00:12:38 -0500

RightSide Capital Announces New Seed Fund; Will Make 100-200 Investments Per Year:

Rafer sez:
RSCM is going to be an interesting expirment, but it doesn’t address the primary problem — small businesses in mature industries are debt-funded not equity-funded. Exploiting disruption requires the analysis and removal of extraneous assumptions. The assumption this community can’t let go of is debt=bad||equity=good. Silicon Valley is going to take so long to let go of its equity ethic that we’re going to help other regions catch up quicker than they otherwise would.

When you go big, we go home

Tue, 17 Nov 2009 14:52:00 -0500

I’m part of crew assembling to fund Lifestyle Businesses with in-kind coding services. We’re electing to talk about it now due to a panel I’m on tonight at Web2. A few will make the changes necessary to scale beyond Lifestyle, some will throw off cash, and some will fail. We don’t have all the details worked out yet, but here’s the outline — just in time for my slot on Larry Chiang’s panel Tuesday evening at Web2 Expo.

The MyBlogLog tech founders — Steve, John, and Todd — are now out of Yahoo! and active at Cloudspace, their 12yo coding shop. Other than the those three, the rest of the gang is in Orlando. They’ve got ~10 agile pairs down there cranking away on contract, producing code for cool services like Awe.sm, StatusOverload, thingfo, Gnip, and more. Not surprisingly, they often get asked to code for equity instead of cash. Todd particularly wants to say yes but our group knows that doing so too easily leads to three scenarios:

Bad owning a pile of worthless stock in early stage deals that never happened.
Worse owning early stage stock in a phenomenal startup but not making any money because all the returns are derived from pro rata participation in later rounds.
Terrible making money solely via later pro rata participation as described in Worse, and therefore being an accomplice in crushing the Common, knocking down the Series A, and firing the Founder.

To make coding for stock both a founder-friendly and economic proposition, Cloudspace needs a tight set of startup selection, organizational development, and financial practices. They asked me to help create those practices not only because I’m picky, but also because Todd and I completely disagree on solo Product Founders. He’s got a fetish for them, and I’ve got a phobia. By Product Founder, I’m referring to one of the three startup exec archetypes that we believe are part-and-parcel of financial success. To scale a ‘net business that is likely to make real money for the founders and early employees, a startup team needs three discrete, authoritative, specialized executives before it gets funded: Product, Tech, and Commercial. Even when an individual is capable of doing more than one of those jobs, a scaling startup requires that they specialize.

We call a startup without a complete team a Lifestyle Business, hence Lifestyle Capital. We expect to get involved before the full team is in place, which is before these startups have a hope of scaling. There are many successful exceptions to our full-team-before-funding criteria, but we do not like the Bad, Worse and Terrible probabilities in that situation and do not want to participate. If we do your coding and you decide to raise money before we think you should, no problem. However, we need to be paid back in cash on closing. We’ll still love you, but we are not willing to own one single share of your stock.

If you meet all of our picky conditions (details below), then you have a good shot of scaling and owning your stock would thrill us. If you generate enough revenue to pay us back and own 100% of your startup again, we’ll be even happier.

We are all cloud services startup people, and Lifestyle Capital is intended to be a repeatable, near cookie-cutter services offering. It’s completely unclear if repeatability at that level is possible, but it’s the only way we’re willing to try it. Like any good cloud offering, our goal from here is to make the service cheaper, more modular, and stickier.

The v1 service offer and pricing, which is targeted at teams which include a Product-capable founder (or a solo Product Founder) follows. We’ll evolve versions for Commercial or Tech founders if we get traction with this service. The features of Lifestyle Capital v1 will look a lot like:

Incorporation and detailed service specification (optional);
Eight weeks of pair sprints to get the first rev of the service live;
Another half-dozen pair sprints over four months to handle user feedback; and
One year of sysadmin and maintenance.

In return for the work above, payment will take the form of a ~$175,000 five-year convertible note whose main points are:

10% annual interest, compounded monthly;
Fully amortizing monthly payments starting no later than Month 13;
No prepayment penalty if note prepaid out of cash flow;
Any fundraising triggers immediate repayment of the full balance plus a 25% prepayment penalty, if all of the conversion conditions (below) have not been met. We need to create some kind of friends-and-family exemption to this clause but don’t have the details worked out.
Conversion into the Preferred Series A under certain very picky conditions, which are the full team as defined above, ramen profitability, three consecutive monthly note payments, a revenue growth rate that we haven’t settled on yet, and post-financing board composition of two Common seats, the Preferred lead, and optionally a Lifestyle seat; and
$1,000,000 pre-money conversion ceiling.

We are perfectly aware that the prepayment and conversion conditions are an impediment to raising capital. That’s our design criteria. First-time founders can do well following paths other than Lifestyle’s, but those aren’t paths on which we wish to code for stock.

If you have a project and a perspective that fits, please drop a note to todd@lifestylecap.com.

@rafer

Ross Kimbarovsky’s 5 Tips for Bootstrapping Your Startup...

Sat, 10 Oct 2009 10:00:00 -0400

Ross Kimbarovsky’s 5 Tips for Bootstrapping Your Startup or Small Business

"I think the industry places too much of a premium on raising venture capital — and it has..."

Fri, 09 Oct 2009 17:01:45 -0400

“I think the industry places too much of a premium on raising venture capital — and it has become the default operating assumption for every entrepreneur. Entrepreneurs can create great businesses — and have great outcomes — without raising meaningful outside capital.”

- Josh Koppelman — http://redeye.firstround.com/2009/07/we-need-a-new-name-for-this.html