VC Disruption: How to Build a Next Generation Venture Firm?

Nicolai Wadstrom, Founder of BootstrapLabs, and I have been on a quest to build a new kind of venture investment firm in the cradle of where it all started 50+ years ago; Silicon Valley.

For background, Nicolai Wadstrom is a Swedish born serial entrepreneur that started building technology companies in his teens. He built a Hacker Academy (to mess around with Silicon Graphic machines in the 90s) before the term was considered “cool”, took one of his companies public and angel invested actively in Europe before founding BootstrapLabs in Silicon Valley five years ago. Born and educated in France, I moved to San Francisco in 1998 and spent half of my working life helping entrepreneurs finance, acquire and sell companies. The other half I ventured on the entrepreneurial side and built two tech start-ups in the mist of recessions (first in 2001 and then in 2008) that still achieved successful early exits. I joined BootstrapLabs and Nicolai over 2 years ago and together we have been strengthening and scaling the foundation of what I believe will become a blue print for venture investing in a globalizing world!

I recently read a few posts that perfectly outlined and validated the trends and model we have been refining at BootstrapLabs over the past few years. One was from Mark Suster of Upfront Ventures on “The Changing Structure of the VC Industry“, the second was by Jason Calacanis of Launch Media on “Syndicates Power“, another one was “7 Reasons why Angel Investing became serious Finance” by Christopher Mirabile of Inc. Magazine and the last one was by Brad Feld of Foundry Group on the recent launch of their FG Angels Syndicates Fund II, a fund dedicated to invest additional capital as a FG Angels Syndicate member and allow investors to passively build a diversified portfolio of 15 startups, without management fees (but carry from FG Angels syndicate itself and AngelList).

BootstrapLabs Global Venture Investing Model
To over simplify,  BootstrapLabs believes that fund managers need to invest early in exciting (technology) startups and teams, be hands-on and add value (not talking about board seats here), create double and even triple-down investment vehicles to invest above and beyond pro-rata rights into the outliers and give a right of first refusal to those that took the risk alongside you in the early days. Below is a chart that describe our model at a high level (click chart to enlarge):

 

Why Equity Pools vs Micro Funds?
In our model, the early stage investment vehicles are called Equity Pools because they literally “pull” the equity purchased with cash with the sweat equity BootstrapLabs is earning for the 12 month of hands-on/value-add work it does with all its portfolio companies. The Equity Pool invests approximately $100K per startup and creates diversified portfolio of promising tech startups for investors – at a fraction of the cost it would take them to do it on their own (if even possible) and creates leverage on each dollar invested by contributing extra sweat equity. With little to no management fees, our success is rewarded by the carry we take on the Equity Pools. What is interesting about these Equity Pools is that they are  small and can be deployed within 12-18 months. Lastly and most importantly, investors in the Equity Pools have a right of first refusal in each of the subsequent Equity Pools as well as the Special Purpose Vehicle (SPVs) – double and triple down funds – established to further fund the outliers that emerge out of said Equity Pool investments. This kind of flexible investment structure allows BootstrapLabs to iterate quickly and adapt the terms and size of these Equity Pools or Single Purpose Vehicles based on the market latest trends and conditions.

Investor Profile
As outlined in Mark Suster’s blog post, traditional LP investors in venture capital funds have struggled to keep up with the recent changes in the industry. Justifying investing in smaller or micro venture funds remains challenging, usually costs extra fees (e.g., fund-of-funds or intermediaries) and might ultimately not move the needle for them, no matter how good the returns are, if they are managing billions of dollars. Yet, these early stage investment vehicles are an exciting place for accredited investors and family offices to play, especially if they have deeper pockets and can participate in follow-on funding in the outliers. At BootstrapLabs, our Equity Pool investors have for the most part been experienced technology entrepreneurs and angels that understand the disruption and opportunity at hand, but also understand the importance of having professionally managed, diversified portfolio of technology startups if they are to increase their changes of success/positive returns over time.

To some extend, angel investing is  still in its early days and we are just starting to see standard and well accepted portfolio theories being applied to early stage investing  (e.g., FG Angel Syndicate Fund II or BootstrapLabs Equity Pools), lead by professional managers with operational experience and mostly incentivized by overall investments performance rather than total assets under management.

Another benefit of working with such investors is that it allows BootstrapLabs and the founders of its portfolio companies to tap their brains and network. Talk about capital with benefits! Ultimately the money is not the value…it is just the fuel. Good entrepreneurs and startups will always find ways to attract capital (if necessary), especially at the beginning (it usually gets harder over time as expectations need to turn to realizations), but the advise, experience, know-how, relationships and support that comes along with the cash is the true value for entrepreneurs.

One Word on Globalization
Because BootstrapLabs focuses on discovering early stage innovation globally, we spend a great deal of time thinking about how we can scale our model around the world, quickly and efficiently, stay flexible, be smart at the edges as well as at the core, and always be in a position to add value. We believe the model we have outlined above is one that can quickly be  launched and replicated in various geographic areas and, when combined with BootstrapLabs grass-root network platform and international expansion play-book, will prove to be a critical asset in being able to compete, and win, in a globalizing world.

Innovator’s Dilemma: White Canvas Please!
You often hear VCs tell entrepreneurs: “if you think fundraising for a startup is hard, try fundraising for a VC fund!” I would add, try fundraising for a first time, next generation venture fund with first time managers! But as we all know, nothing really worthwhile doing is easy and when looking back at this in a few years, we will hopefully consider the fact that neither Nicolai or I have had traditional VC experience or pre-existing relationships with traditional LPs a blessing in the sky that allowed us to focus on pure patterns and data collection, rather than inner bias or external lobby.