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I briefly discussed the topic of this blog post in my first blog post. I want to discuss more directly the business model that we evolved with Mindscape as I think it’s an exciting one that many software folk should look at adopting when they don’t have oodles of money to start with.
We formed Mindscape with 3 founders who each put $10,000 in the pot. This gave us total starting capital of $30,000 which obviously doesn’t provide much of a runway for a business. Each of the founders was fairly well- known locally for our previous work and community involvement so we were approached to undertake some services work which we gladly did to put some more money in the bank. The runway had been extended.
The next project
The next project we got involved with was Valuecruncher. Rowan Simpson, who was acting as an adviser to our business knew of an opportunity with Mark Clare to build the site and asked if we would be interested in helping build the site. We decided the least we could do is go and listen to the idea especially since we value Rowan’s input a lot and getting the opportunity to work more together was appealing. Mark gave us the sales pitch for what he wanted to create and we thought it was a cool idea.
The site was dedicated to helping find and value stocks, and give end- users the ability to do what-if style analysis that often either requires impressive Excel skills or access to some finance geek to do it for you. Ctrl + Click here to open it in a new tab to look at later and let me know your thoughts
We undertook this project in exchange for equity. At the same time, we were delivering LightSpeed 1.0 and still had the money in the bank to get through this work as well. This was our first foray into taking equity stakes and it was helpful to have people like Rowan and Mark involved who had experience with these things so it didn’t devolve into an “us vs. them” type situation. Valuecruncher has continued to evolve and it’s even been through a successful capital raising round which further taught us things that geeks wouldn’t tend to know about. I’ll be writing in the future about some of the lessons we took from these processes.
Having been through the Valuecruncher process we started reflecting on what we had achieved. There were several things that appealed to us about this type of deal:
- Taking equity means we neutralised the “us vs. them” nature that often arises from services work.
- You can invest your skill and time. Not every investment has to be money and early on you are not likely to have lots of cash to invest.
- By having these investments it was similar to investing in the products side of the business – we weren’t just after short term cash injection but hopefully building future revenue streams.
- We think we have a bit more than just technical skills to offer. I subsequently became a director of Valuecruncher and hope that I add value to the business beyond just the technical elements.
- We build stronger relationships – you can’t be in business with people and not build a cohesive bond with them. This always feels better than having them just be your “client”. The strength of our network is? much stronger.
- We like seeing where our work goes – No more building a system and then having it just disappear and only get updates when you remember to check the site. We get to keep our finger on the pulse of developments of “our baby” and see it grow, and see feedback directly.
- It teaches important business skills. While I wouldn’t say I’m an expert on any of these things and was in the hands of experts at the time, I’m comfortable now dealing with term sheets and discussing how an early stage capital raising round may progress.
Of course, there are also some downsides too. Some things to keep in mind if you’re looking at this type of deal:
- Less cash than you may otherwise get with straight services work.
- You need to be careful about taxes. You’ll likely be paying tax on cash and equity income if you’re receiving it once the business has a value (post-capital raising generally). Check your local laws.
- You’re unlikely to be able to just liquidate your shares quickly (or if you can, at a big penalty).
- Further to the previous point, you must be thinking long-term which is why you should believe in the business. If you don’t believe in it – don’t invest. There are several we have passed on because we didn’t believe in what was being attempted.
- There’s costs associated with legal and accountancy input on your involvement with the venture.
I’m sure you can think of other things that could be in the pros + cons lists and if so do please drop them in the comments for others to read.
We’ve continued to take stakes in new businesses using this approach but often with a cash/equity split rather than just pure equity. We’ve added 3 ventures following Valuecruncher and we’re always on the lookout for more opportunities. We’re even at the stage now where our experience with some of these early stage ventures is an attractive proposition in itself – beyond just the software development skills we can provide.
After 2 years of operation, we now have 5 products available and invested in 4 ventures. I’m a strong believer in this approach being very effective for people wanting to move from IT into business – you don’t even need a pile of cash to start out with.
What about losing focus?
This is a concern that I had early on and I’ve read many essays where focus is suggested as being key to business success. We always kept at least part of the company working full time on our vision of building a software products company. I do not think the approach we have taken is right for everyone.
If you’re a venture that’s backed with capital I would suggest absolutely just going full on at your goal. We didn’t have the cash floating around but didn’t want to get stuck in the services game – this felt like a happy medium. The connections and skills we’ve gained from this style of business has absolutely benefited our core business and likely will have further unforeseen benefits in the future.
Thanks for reading and please do leave a comment with some feedback. I love hearing what you think – do you agree or disagree with me? What would you like me to talk about next? And, as always – do subscribe if you enjoy my writing