So Brad and I got asked to do an interview about Lightbank on Fox News the other day, and it naturally created a lot of questions from people who either (a) didn’t know what we were up to with Lightbank or (b) knew exactly what we were up to but didn’t really care enough to pay attention when we launched and now have thoughts on the topic. The exercise of having people actually focus on our fund has made us realize that we probably haven’t done the best job of explaining exactly why Lightbank is different from other such funds, and why 2 guys with collectively 2 wives, 5 kids, 8 companies, and a partridge in a pear tree, would decide to start a fund in the first place.
The answer is pretty simple, I think. We’re drawn to creating things that don’t exist, but should, and nothing like Lightbank exists. Now people might market themselves like Lightbank. They might say that they not only provide capital but also provide operational support, but I think they’re largely full of dog poo. Some will tell you they give you operational support – but not like us. We’ll actually put someone on your team. We’ll actually meet with you on a regular basis. We’ll actually take responsibility. You can even move your office into our building. We don’t invest in a lot of companies, because every investment we make is not only our money, but our time. Operational support to us means doing actual work, not just dispensing advice.
The VC business model is not designed for this support. By its very nature, if you start a fund, the only way you make money is to deploy capital, try and earn a return, raise more capital, deploy more capital, try and earn a return, and do it all over again until the pile of capital you allocate gets really big, and the fees you earn on that capital allow you to buy a big house in the Hamptons. The economics of virtually every VC fund are the same – you earn 2% of the total size of the fund in annual fees and you earn what’s called a “carried interest” of 20% of the profits of the fund after the investors are paid back. As you can see, the primary incentive in running a fund is to get bigger because bigger equals more fees and more carried interest. You want to be the “biggerest” you can possibly be.
At Lightbank, we don’t earn fees and we don’t earn a carried interest. Not 20%, not 10%, not 1%. Since the majority of the money we invest is typically ours, we don’t need to. The way we make money is take common stock in the companies we invest in at an early stage in exchange for our time and expertise. Sometimes the companies we invest in were created by us, and sometimes the ideas come from other brilliant entrepreneurs that beat us to the punch. Either way, once we get involved, we become far more like another partner in the business than an investor. Lightbank is different from VCs, Angels, and Incubators because we are actually in it with you – simply put, we make sure we understand your business well enough on an ongoing basis so that our experience is actually useful to you.
Over the last 10 years, we have developed a methodology for starting and growing successful businesses. For our first businesses, either Brad and I were at the helm, intimately involved in every detail of the company, responsible for the big plays as well as the big mistakes. As we became more tuned in to the things that we’re really good at, we realized that we could provide those services for not one, but two companies at a time, then three, then four. We learned how to partner with talented entrepreneurs to efficiently deploy our operational skills and experience across a number of companies at once. After five successful businesses, we were ready to scale the model – and that’s why we created LightBank.
I know what you’re probably thinking, “Ya, ya, so you made a bunch of money already and now you’re going on and on about how you’re not as much of a pig as the rest of the world, but beyond your nobility, why should I give you a piece of my company and let you invest in my dream?” Again, the answer is pretty simple. If you let us invest, the likelihood you will succeed goes up by a factor of 7,146%.
How? Because we know stuff you don’t know, and that stuff can only be learned through the misery of execution, and by having us involved in your business, you get to avoid all of that misery. You get to bypass all of the lessons and mistakes that inevitably come from building and launching a technology company, and move much quicker and much more efficiently toward success. In other words, you hedge the overwhelming likelihood that despite the fact that you are a genius and your idea is revolutionary, you are still statistically likely to fail. We believe that while a great idea, raw intelligence, and passion all contribute to the success of a business, there’s no substitute for experience. Ask any entrepreneur and they’ll tell you how a huge failure shaped them into the bad ass they are today. That failure usually stems from stupid stuff like not knowing when to hire a recruiter or how to manage a budget or when to worry about competition – things that you don’t know the answer to, but we do.
Why? Because building a business is all about solving problems and answering questions, like:
How do I put together a cap table? When do I hire a recruiter? What’s the best way to structure a sales force? How much should I charge for my service? Am I moving too fast or taking too long? How do I deal with tax issues? How do I protect my intellectual property? Where do I find top technology talent? What’s the best way to fund our business? How do we manage competition?
These are only 10 of the 10,000 questions you’ll need to answer as an entrepreneur. Do you know the answers? We do.