Investment funds let startup founders profit from each others’ success
Invest in startups–and share the wealth when (and if) they hit it big. That’s a creative approach some early-stage investment funds and business incubators are experimenting with these days.
The latest is First Round Capital, which has an exchange fund for entrepreneurial founders. Entrepreneurs can get a stake in a pool of all participating portfolio companies if they agree to forgo a percentage of stock in their own startup. From the perspective of the entrepreneur, it reduces the chance that, if their own venture fails, they have nothing to show for their efforts. For First Round Capital, it also gives entrepreneurs a reason to want other fellow investments to succeed–and, perhaps to offer one another some help. Managing director Josh Kopelman was quoted in TechCrunch as saying that could be anything from sharing interview techniques and technical management strategies to sales leads.
The program shares some similarities to a four-month equity exchange program called the Founder Institute, which launched last summer. In reality, the Institute is more of a quasi- venture accelerator-business incubator, through which startup founders, some of whom haven’t yet left their days jobs, get access to mentors and workshops; those who attend long-distance can participate online. There’s also the usual opportunity to present to potential investors at the end of the program.
But, the equity exchange part of the deal is the following: The Institute takes 3.5% of each company. Technically, that is done through warrants, which become part of a bonus pool shared with startups, as well as mentors. The idea here, again, is that founders share in each others’ success. And, as a result, they’re more likely to collaborate–ensuring further success.
You scratch my back, I scratch yours, and we both come away with a startup that works.
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It’s all good in theory. It’s all buncha bullshit in reality. Ben there, done this. It’s a total farce.
Leonkelly–Well, I would very much like to hear about your experience, privately, if that’s better.
Here’s how the game is played:
1. Tax laws allow the rich to “avoid probate” by bequeathing huge amounts of money to trusts.
2. Trusts grow to into financial juggernauts.
3. Slick not-for-profit consultants teach not-for-profit start-up leaders how to write grants.
4. Trusts fund the not-for-profits.
5. The not-for-profits write glowing reports about job creating, job retention, and job loss prevention.
6. Trusts maintain their tax exemption based on all the good they have done.
7. Descendants of the deceased who originally funded the trust get to keep cushy jobs running the trusts.
8. Not-for-profit consultant are retained to assure the continual flow of “of soft money.
9. Press releases are issued sing the praises of the accomplishments of the not-for-profits.
10. Little time and energy is actually devoted to the mission of the organization, because it it directed to continual funding.
Nothing of any substance or even remotely close to the amount of money devoured is accomplished. Like so many institutions in America: It is a rigged game that keeps elite living like nobility. Theresa Heinz is one good example. Look at what she does for a living. It’s all bull shit.
Leonkelly-You may be right. I believe what I was writing about is a different situation: This is a for-profit investment fund, allowing the for-profit companies in its investment portfolio to get a stake in a pool of those portfolio companies. It is a way to encourage cooperation among disparate businesses receiving funding.
On another note–The primary focus of this blog is for-profit social ventures. One of the reasons these companies do not choose to become a non-profit is to avoid the need for continual fund-raising.
Good Point. my bad. Is this project a success or a great idea?