So first, the new dirty word in the world of venture investing is…INCUBATOR.
We learned this from a meeting with a law firm who had setup 24 of these over the internet bubble years and saw EACH ONE OF THEM FAIL. In general, what happened was that they built out way too big infrastructures and hired too many people, which caused their downfall when expenses got too high and not enough money came back in.
So now there is bad taste in investors’ mouths regarding incubators and their failure to bring returns on their investment.
We had started calling our little project an incubator, but now we’re looking for another name.
But we found out that this was still important to discuss, in the context of structures for venture funding.
INCUBATOR MODEL:
People give you money, you build out huge infrastructure to house entrepreneurs and the theory is you share resources from office space to CPAs to internet access to etc. and something good will come out of it.
Apparently, even though there are no existing incubators left alive, the activity is still being quietly pursued within many venture firms, under the guise of such things like Entrepreneurs-in-Residence (EIRs).
So the other models to discuss are:
SERIAL LLC MODEL:
You setup an LLC which is the vehicle through which funds flow, and this LLC is owns an interest in the target business. You are a member and a manager of this LLC, and the investor(s) are other members but not managers. The managers collect a fee for directing and managing the funds, and typically participate in the upside of successful ventures.
BLIND POOL MODEL:
This is the traditional venture capitalist model. You collect funds, and have no specific business to invest in but you have the ability to go looking.
HUNTING LICENSE MODEL:
Another variation, this one generally doesn’t give you any funds to start with but investors basically hire you to go looking for businesses for them. You get paid expenses and salary and start prospecting. You also get commitment upfront from the investors that they will participate in businesses you deem worthy. But the investors here do not put money into any vehicle upfront.
Interesting to hear the structures being used for this kind of work. Lots to learn still over the next few months….