Welcome to the world – LaunchCapital Small Business

Approximately a year ago, LaunchCapital's financial backers asked us to take a step back from the traditional venture funding model and figure out a way to appeal to "Main Street"-type businesses.  Their theory, and we agreed, was that great entrepreneurs are not limited to the world of hi-tech and bio-science start-ups, which are more conducive to traditional VC funding.

So, after several months of collaboration with financial institutions, entrepreneurs and other service providers, along with a relentless effort by LaunchCapital director Heather Onstott, we are excited to officially unveil the LaunchCapital Small Business product to the market.

Why the need to innovate?

I give a lot of credit to our financial backers for helping us visualize the development of LaunchCapital Small Business and for pushing us to innovate around the traditional venture capital model.  As VCs, we regularly ask portfolio companies and prospective investments to continually push their models forward, innovate on their go-to-market strategy and develop that next-generation cool technology.  We demand that they try new things, take risks and constantly evaluate their success.  But, at the same time, we as investors are trapped funding the same industries the same way and hoping for better returns.  It wasn't until LaunchCapital's financial backers pushed us to think about the growing need for start-up capital for small business entrepreneurs that we began to innovate.  With the backdrop of a financial crisis and banks less able to finance early stage small businesses, LaunchCapital went to work.  In the end, we came up with a model that gets us closer to our overarching goal: empowering great entrepreneurs to do great things.

What took so long?

For it to take 12 months to get this product up and running seems like an eternity in the start-up world.  So the obvious question: what took so long?  As I look back at the original GANTT chart, I recognize that it took almost 9 months longer than anyone had anticipated.  The primary reason for our delayed launch boils down to three very important lessons that we learned about "Main Street" businesses:

  1. Main Street businesses are not interested in taking on expensive equity at the seed stage of their development
  2. Main Street entrepreneurs have little trust in venture capital
  3. Main Street entrepreneurs take on personal risks that are uniform regardless of industry or experience

The first lesson was easily resolved with some creative thinking around term sheets.  To ensure a fair market return, we balance the returns generated by interest rates, loan terms and equity grants.

The second two lessons took much longer to understand.

It was a June conversation with a senior member of a large regional bank, sparked by an introduction from our financial backers, when it all began to come together.  Lesson learned?  The personal risks associated with starting a "Main Street" business are high because the entrepreneur IS the business.   In other words, the life and personal reputation of a Main Street entrepreneur is so intertwined with the life of the business that they cannot risk bringing in capital that they do not trust.  As a result, the first thing we needed to do before we offered a term sheet (much less cut our first check!) was to build trust in the LaunchCapital Small Business brand.

Prior to this key learning, many entrepreneurs were so skeptical of the "fine print" that we had trouble moving the ball forward.

With the advice and support of our financial backer we adjusted our approach.  For the last 5 months, Heather and I have been fostering relationships with superstar entrepreneurs who are interested in starting community-based, local, Main Street businesses.  We have worked with them on everything from lease negotiations to business model development.  We have connected them to our most trusted advisers and partners - all with the desire to become a trusted source of capital.

It's working.  We now receive a majority of our deal flow from the very entrepreneurs whom we have been helping over the last few months.

What is the product?

The LCSB product is designed specifically for local start-up businesses that generate revenue within the first six months of opening.  To optimize their capital structure, we offer a small business loan up to $150k, with a small common equity ownership (less than 15%).  The debt is nonrecourse, reducing the entrepreneur's personal risk.

Much like LaunchCapital Ventures (the new name we have given our equity-based product), LCSB will be a trusted adviser in the market, financing great entrepreneurs in the most capital efficient manner.

4 Comments

  • slingster wrote: 11/07/2009 11:30 PM

    I am not a deep student of VC industry, but whoever your lps are, they seem highly prescient and visionary to me. Industry agnostic approach is the way to go if you want to make alot of $$, primarily i think because it allows one to avoid herding mentality and also enables you to be somewhat diversefied.

    I am also in the camp that beleives that localized businesses may see greater growth in the next 20 years than interantional businesses. Why? Because it is likely the international shipping industry may not be properly priced. For example, many environmental costs are not factored in; child labor costs are not factored in; Health costs are not properly factored (transoceanic transmission of viruses, diseases, etc)polution costs are not factored in, etc. These price ajdustments may swing the penduleum in favor of localalize businesses enabling them to grow into to large regionalized businesses.

    I would not be suprised if you see a better return on your local (but destined for regional) investments over the next 10 years than the S&P. Of course, I understand that your Lps likely expect the small business fund to deliver a small return but a large sroi.

    Cultural Identity's mission is somewhat the same, but our business model has local businesses lining up to work with us rather than being suspicious of us. why is for another day

    Pete

    Reply
    • elonboms wrote: 11/12/2009 11:06 AM

      Thanks Pete. We have been working hard to balance the need for returns to our LP with the need to innovate a model that had been so successful in the past. Our local investments should return better then the S&P average.

      The real question that is still outstanding is if actual alpha exists in these investments when you account for the risk of investing in seed stage companies.

      Reply
      • slingster wrote: 11/27/2009 5:02 PM

        Out of curiousity, how do you plan to liquidate your equity portion of the companies you invest in?

        IPO seems unlikely, mergers might be hard, and and the marketplace for outrght sales of small businesses seems poor (I am taking a wild guess at this). Do you plan on sticking around and profiting from income and or dividends?

        Peter

        Reply

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