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Issue 22

Startup-ing without money: Startcelerate investment model

Tudor Bîrlea
Co-founder@ This is Not a Storm
OTHERS

We all know it: startups have become a hot trend, especially in the last 7-8 years, with success stories which amaze us and give us a proper rush. If you are into tech, Silicon Valley is undoubltely a benchmark and a promised land for the entrepreneurs from anywere. And for good reasons. Cloning, more or less, the same model, places like London, Tel Aviv, Berlin, Tallin or even Paris have started to become more and more prominent as European epicentres for founding and developing startups. In a typically Transylvanian pacing, Cluj seems to follow the same model.

The Silicon Valley model

With all its swinging innovation, the tech entrepreneurship ecosystem has at its centre a rather liniar and hardly challenged framework. There is a whole company dancing around a common, flaming hope: to create something (a product or a business) as quickly as possible in such a way that an exit would get everyone involved - everyone took the considerable risk of sponsoring such a venture - a good return on investment. The typical cast from such a variety show would include: the founders, investors at various levels (from Angel to VC), incubators and accelerators, and a whole range of service providers, from hosting to legal.

The usual flow in such a framework is equally liniar, even though many would want it scalable: the investors throw some money at some startups thus allowing the founders to test some of their hypotheses (may it be for building a demo, for product upgrades, or getting some traction), then the startups rush for a growth race to gather some validation data so that they could go for a next funding round and experiment some more in finding - as Steve Blank elegantly said it - a scalable and profitable business model. Once a round is done, the second starts rather quickly, till the startup has rather toughed the holy ground of a successful exit or gets lost in the zero-money-in-the-bank neverland. The basic ecuation of risk is perfectly compensated by the formula of value here: the earlier the external resources enter a startup, the bigger the coresponding value (in terms of equity equivalent) is. Such a mechanism works smoothly at the top of the spectrum (where a bunch of startups bring major benefits to a handful of daring investors and funds), but is practically bankrupt for the rest (the grand majority of startups are either slowly dying by under-funding or hit hard bottom on their way to find a working business model).

Even so, for this model to work, two conditions have to be accomplished: 1) enough venture capital, available as early as possible, and 2) a significant number of entrepreneurs eager to take up the risk of plunging into the deep end.

The European Model: A limping clone of Silicon Valley

In all its major lines, the European startups ecosystems implemented the same structure and components, with two major exceptions: venture capital is at a significantly lower level in Europe and, even more important, the risk tolerance that underlines any investment decision is completely different. Let"s dig into this a bit.

The fundamental difference between the European investors in startups and their West Coast couter-parts is that the former will get some money out of their pockets only if the development stage of the startup is not that early and its validation data is rather plenty. These investors, with few exceptions, don"t risk seed money for launching a demo or testing the founders" guesses. They expect that the founders would have swallowed all that intial risk and done that already. Many of these inverstors have an even healthier habit: they take their wallets out only if there is hard proof that the startup has got a clear ROI formula and even a sheduled date for break-even in their calendars.

These settings, wise and sound as they would seem from a risk perspective, make little sense when applied to the startup world and they rather work like road blocks than anything else in this race.

And here comes Startcelerate, as a new framework for speeding up the early development of startups, based on a flexible investment model that matches together a few resource areas that haven"t been coupled systematically till now.

Startcelerate: forget about money and get your development resources directly

Seven months ago, when we began working at this project, we started from the following idea: how about connecting the startups in need of development directly with strong software companies that had development resources, in such a way that they would collaborate and launch faster some products to test in the market. This way, the software companies will use resources that they don"t fully use (and have already paid for) in creating an investment portfolio and aquire a wild card to get out of the typical scalling issues any such company has.

In such a partnership-investment structure, the risk is rather low for the software companies, while for the founders the opportunities they get are way above the incurring costs in those early stages.

Startcelerate solutions

Startcelerate is set up as a platform for alternative investments in startups, where software companies (initially) can use their internal resources to provide solutions for startups in exchange of equity. From their side, this means that startups can access directly a whole range of development resources, in such a way that all the usual issues from the classical fundaraising process can be avoided. As far as an invested resource can be translated in money value, it can become an equity round.

To overcome the shortcomings from the current investment models, Startcelerate has a few solutions:

  • Since you still have already paid for resources, why not make a proper investment with them? The whole talent crisis and implicit war on talent in Romanian IT&C, a company has rarely a 100% occupancy rate for its resources. And when it has it, it is probably sold at the smallest possible price. Which really raises an eyebrow regarding the opportunity costs. With Startcelerate, any development resorce can be turned into an investment; indeed, a risky, teeth-crunching investment as far as accountants are concerned, but on a scalable ROI model, compared to the purely liniar revenue model these companies work with now.
  • Investors can make informed decisions. Startcelerate will allow you to search, analyse and compare startups based on a formalised profile and according to a series of relevant metrics tied up to the type of startup and its phase of development. The decision-making process for investing gets a new and essential area of specific and actionable data.
  • Step-by-step and agile investments. To mitigate risk, the invested resources can be scheduled in small batches tied to some pre-established milestones, where an accomplished objective fires up the next investment. Practically, the startup founders establish an objective, the tactics to get there and the necessary resources for getting there, while the entire progress will be recorded within the startup account on the platform.
  • Effective and flexible investment contracts. On the legal side, Startcelerate proposes an agile and effective contracting flow, using a series of security-type contracts, customisable stright away within the platform. Such contracts will give the initial investors the options to buy shares in a future equity round, at a pre-established price.

Why Cluj might have an edge with Startcelerate model

With its technology infrastructure (both those a few dozens software companies and the academic environment that provides fresh talent every year) and its relevant outsourcing history, Cluj seems to have a head start in the Startcelerate framework.

The local software companies could use Startcelerate either as an investment tool or as a way into an innovation area that is many times difficult to cultivate inside a company whose main focus is to sell development hours to its clients. A more prominent startup local community comes to add up another positive mark here. These are the main reasons for choosing to launch Startcelerate - a London-based investment startup otherwise - in Cluj, in a pilot event in the second part of May 2014. This event will bring together local software companies and Romanian startup founders in an intensive pitch-and-develop 3 days event. For more details, visit www.startcelerate.com.

Sponsors

  • comply advantage
  • ntt data
  • 3PillarGlobal
  • Betfair
  • Telenav
  • Accenture
  • Siemens
  • Bosch
  • FlowTraders
  • MHP
  • Connatix
  • UIPatj
  • MetroSystems
  • Globant
  • Colors in projects