The venture builder model explained

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Twenty years ago I had an idea for another startup while still at Mainspring, the second VC-backed company I founded. Mainspring was going through a major crisis and it looked like it was definitely going to give up on the model that I had started with: Microsoft Developers Network for the Internet. So I decided to found Throughline, whose mission was to make it easier for startup founders by acting as a trusted broker for all the admin stuff needed for a startup in the  1990s – finding an office space, deciding on and purchasing a phone system (!), finding a bookkeeper, and deciding what software they should use, and a bunch of other stuff that distracts founders from the two things a founder has to focus on: building stuff and selling it.

Throughline was an attractive proposition and I easily raised seed capital and then more capital from Silicon Valley Bank, the go-to bank for entrepreneurs then and now. Unfortunately I made a couple of really bad assumptions, assumptions that I failed to test out before we went to market. One, that VCs would love us because we’d help the founders of their portfolio companies focus on creating value, not on administrivia –  therefore they’d be a great customer acquisition channel for us. Turns out the VCs could care less about operating side of the business and were totally focused on growing their companies. We couldn’t convince them that Throughline would help grow the top line, only that it would shrink operating expenses and free up time for founders. The second bad assumption was that the CFOs in startups would welcome Throughline with open arms, as in those days every venture-backed startup had a CFO and it fell to the CFO to find office space, buy office furniture and phone systems, manage the IT department and all other non-revenue generating activities other than product development. Silicon Valley Bank even set up a kick off event for us with the CFOs of many of their VC-backed clients. And attendance was good and the event seemed successful. But what actually happened was that CFOs saw us as a threat: if Throughline took care of all this admin and IT stuff, why would a venture hire a CFO? They could get by with a part time bookkeeper and we would find  them a work-for-hire bookkeeper too.  So trying to sell to CFOs was a losing proposition. The third bad mistake I made was I did a poor job of researching the competitive marketplace. It turned out that there was an established business only 5 miles away from us in Watertown, started by experienced procurement managers to serve small businesses, including VC-backed startups. Bad assumptions and poor competitive analysis killed the company. But 25+ years later the “venture builder model” is taking root.

The article by Oscar Williams-Grut in Business Insider This former Google exec helped build a business that sold for $383 million after just 3 years – and he wants others to follow his model outlines how Blenheim Chalcot helps founders build companies. Their strategyand Blenheim Calcot is a VC firm, not a French wine – is to provide practical support to help businesses rather than just funding as regular venture capitalists would. Here’s how Dan Cobley, who heads up FinTech at Blenheim Chalcot, explains the venture builder model.

Cobley said: “Other entrepreneurs that are going through the more traditional route… [they spend] about a third of their time worrying about fundraising, about a third of the time worrying about the admin of the business – whether that’s the rent or R&D tax credits or recruiting – and that leaves about a third of their time to build the amazing proposition that they’ve set their minds on.

With the venture builder model what we try to do is change that equation to be about five, five, 90, so the founding team can actually move three times faster in building the thing that they’re actually focused on.

Blenheim Chalcot has large office spaces in Hammersmith, West London, and Nottingham where many of its 17 businesses base themselves It also employs staff to help its startups with legal matters, recruiting, IT, and other admin-type tasks.

“If we can provide that centrally with high quality trusted resources that know how the entrepreneurial startups work, then they can provide a real accelerator to the business,” Cobley said.

Venture builders are relatively rare in Europe and the most famous is Germany’s Rocket Internet. Cobley wants more startups and investors to think about the venture builder model, arguing that it creates a better outcome for entrepreneurs.

So  while accelerators and incubators here in the U.S. do provide a chunk of admin help to early stage startups, once they leave the nest the companies are on their own to handle all their admin tasks by themselves. Worse yet, they never learned these skills nor made the necessary connections, since the accelerator or incubator did it all for them.

In looking to raise venture capital founders need to assess the value-add of the venture firm. And VC firms are starting to provide value-add on the venture builder model, most commonly by providing expert recruiters, because recruiting top gun staff is job one for CEOs building companies. So look beyond the term sheet of your VC into how they will actually help you build the company. You really don’t want to spend about a third of the time worrying about the admin of the business – whether that’s the rent or R&D tax credits or recruiting.

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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