idea - 2 : incubator v2

this is not so much of a new idea. Just a thought on doing the seed funding and start up management better. What does a start up require? Money, concretization of idea, recruitment support and infrastructure at low cost.
Is there a way of creating an incubator (over and above the b-school or IIT ones) which is professionally run by a light administration and which helps start-ups build businesses.

This incubator can take either the form of the sourcing mechanism for one large VC or a general place run by third party which is not into funding businesses itself. Considering VC firms tend to prefer lean organizations, the latter seems more likely. The business model is to get money from the funded startups, get fees from them for using the infrastructure, taking equity into them for the support.

If such an incubator is stationed in an Andheri business centre with 5000 sq ft place it will cost Rs. 5 lakh per month to run. Then there is some admin staff which is paid Rs. 10 lakh a year between the 3-4 of them (secy-cum-receptionist, general office infra manager, office boys etc). On top of all this there is a team of 2-3 in-house principals who oversee the entire work. They are paid cash salaries of 20 lakh a year and given equity into the firms supported by them (or in main firm; whichever).

These principals are very well networked people. They bring in advisors on part time or favor basis from time to time for the start-ups. They themselves have consulting, VC background and hence add value in their own regard as well.

In house the place can support nearly 8-10 early start-ups (3-4 people teams). If the start-ups pay a fee of Rs. 50,000 a month, the rent can be recovered from this. In addition, they will pay in equity between 2 to 5% till the first round of funding. Assume 1 of 10 start-ups succeeds and is valued at 100 Cr in year 3, it will generate Rs. 2 - 5 Cr for the first year effort. On an annual basis, this can become a Rs. 5 Cr income enterprise from year 3 onwards. Subsequently, it can start advising and supporting more than 10 start-ups beyond its own base. With each principal, 10 more start ups can be handled. thus Each principal has a revenue potential of 2-5 Cr in steady state. Not bad for a professional of that qualification and experience.

idea-1

my favorite theme regarding micro-finance has always been connecting the vast pool of risk capital in the financial markets with the huge needs of funding the millions of small and micro enterprises. Something of the VC fund equivalent for the field of microfinance. It does not work in the same manner as a regular vc fund. That would be tough to imagine.
What we need instead is a mechanism which evaluates the feasibility of proposed micro enterprises effectively and a related mechanism which ensures payback on time and at low collection cost. Once these are in place, the missing link is availability of capital. This is easy to to get once the loan obligations from the micro enterprises are packaged into a manner similar to the mortgage backed securities. This of course assumes existence of a third mechanism which does the job of packaging the loans and selling them. But any NBFC can do this fairly easily.
The NBFC sells the concept and gets the capital. The distribution mechanisms evaluate and fund enterprises as well as get money back. This need not even happen in under the same roof in terms of a company. There can be an NBFC doing the job of simply funding a variety of microcredit companies. It has the job of aggregation and ensuring source of funds.

A Market For Ideas

Can ideas be treated as assets which can be bought and sold? Why not? If an idea can have tangible impact on something real and lead to savings or additional revenue or a whole new profitable business, it can be valued. What is open to valuation is also open to buying and selling.

But why the question? I am asking that because I think just as capital has found a way to flow seamlessly from those who have it to those who need it the most and can make the best use of it, ideas if given a proper platform can move freely from those who generate it to those who have some use for them.

This may not have been so crucial in the past. Of course lot of ideas were generated in-house by those who needed them. Also it looked unlikely that someone on the outside of a group (company, organization, government etc) can indeed provide an idea valuable enough to be paid for as also do it before someone from within does it. There is added complication of the politics of the entire modality of taking an idea from without and applying it within a given context where established interests might oppose it with tooth and nail. Let’s face it – even great ideas generated internally within companies find it hard to be translated into reality for want of adequate support. How can an idea purchased outside have a chance?

Fair points all. My thought comes from a different angle. I was speculating if the new business value chain can be further deconstructed. As of now, the presence of venture capitalists and angel investors makes sure that those with ideas get sufficient funds to make it into a business. I was wondering if we can go a step forward and take the idea from a third source. I have often met people who want to start something of their own but don’t have a clear idea what. I have also met lot of other people (myself included) who have quite a few interesting ideas which unfortunately can’t be taken to conclusion because either lack of risk appetite or simply the leverage to make it happen (e.g. improved power plant for example) or a general lack of interest in the allied logistical activities of taking an idea to fruition.

The assumption is that there is a group of people who is interested in being on their own. There is another group of people who is interested in generating ideas and expounding on them. Also, the former don’t always have a great idea to start with. And above all, the latter do not always want to take the idea from blueprint to bluechip. How would it work? The to-be entrepreneur contacts the ideas market for potential candidates. She is showcased some ideas (to the extent can be done without divulging the entire idea). She chooses a few candidates that fit the bill. There are investors already aligned with the ideas or are shown the business plan after expounding on the idea. If the investors like it, they fund the business and the idea generator is paid in cash or in stock of the company or a combination. She can be involved in the early stage development of the idea as well.

There is of course an obvious variant. This is where a large company replaces the VC and the entrepreneur. The large company looks at an idea in its domain or one it is keen on entering. It allocates the responsibility of taking it through to an entrepreneurial employee within the company (or one recruited for the purpose). It gives her a budget and asks her to make a plan in collaboration with the idea generator. Payment can be either stock or cash or both. Though in all likelihood in this case it would be cash. If so, the idea generator can go shopping about subject to certain rules.

This decouples the modern enterprise further amongst the source of idea, entrepreneurship and capital. The entrepreneur is someone who likes a certain mode of working and takes pleasure in the all-or-nothing fortune of the business whereas the capital owner want to make a big buck for the risks undertaken. There is still space for the idea generator who has a bright idea but not either the willingness or the wherewithal or both to take it forward. I am making a fine distinction between the entrepreneur and the idea generator. That is from my personal experience. I have indeed come across individuals who do not mind the risk of entrepreneurship on account of several factors e.g. high employability even in case of failure of business, high enough savings to last a while without job, willingness to try out something adventurous for the right reward, quest for a more challenging career. But not all of these are people who have a very convincing or solid idea. Often enough I have heard of people who are waiting for the right idea. I have also come across our batchmates who started a specific business after contemplating on several different ones and having taken at least one other business to an investor as well. They in fact quit their jobs without having finalized what to start.

On the other hand, I have also met some people (this list is admittedly smaller) who keep coming up with interesting ideas regularly. Myself and my business partner Akhilesh have been writing, discussing ideas on and off without any intention to start up with one of them. We did indeed start up with two more partners on one specific idea/set of ideas. But the point remains that even before we were thinking along the lines of starting up (to be precise from IIMA days itself) we have been talking of ideas which can be profitable businesses. We were quite clear that we would not be keen on taking the idea to fruition ourselves. But we could have definitely invested more time and energy for the appropriate remuneration and ability to exit after the idea is handed over to the entrepreneur or company.

The other source of ideas is the previous generation experts in various fields. They keep coming across interesting business ideas explicitly or implicitly all the time. They themselves rarely have the enthusiasm, risk appetite or even risk taking ability to start up on their own. They informally pass on the thoughts to someone else who might be interested.

A centralized marketplace for ideas would bring together idea generators and potential users from across the country (and even the globe) who would have otherwise never met each other. Once this marketplace become vibrant enough for the start up businesses, the other not so willing participants can join the fray. There is no need to restrict the ideas exchange for only the start up ventures. Ideas can be smaller as well. And ideas also do not need to originate in thin air and then try to locate the buyer. The buyers can indicates what kind of ideas they are looking for and thus give a direction to the generators. To be fair, this latter thing does happen informally in certain settings. People have used this marketing gimmick at a very preliminary stage to get people excited about a certain movie (“name your movie yourself” or “draw the plot of the serial” etc). But these efforts were mostly marketing stunts. A genuine request for ideas (RFP of sorts) has not become the accepted practice yet.

And as expected, this would happen probably after the easier territory of start-up ideas is conquered. In the much evolved stage, I can imagine a steady pool of requests for ideas which are dealt with by various idea generators – young and old alike across the globe. On the other hand, there will be a pool of free-style ideas of various types on offer. These would include start up ideas, cost cutting ideas for businesses and governments, ideas that some local businesses have gotten right and do not mind sharing for a price with a far-away similar business which is very unlikely to be competition. So if I am a small business owner, I can go online to the ideas exchange and check under the head of office stationary and find out some sort of an organization technique that reduces waste. That is on offer for Rs. 500 and I buy it. Next day, I come up with something interesting myself in the domain of multiplayer gaming. I put up a rough picture of the idea for sale and get an RFP from Ensemble Studios. Some large company is looking to launch a new drink product and looking for the appropriate packaging idea for the same. It floats an RFP for the same and a few young enthusiasts reply with their versions – of which one the company likes.

How useful would it be? Internet can certainly enable the coming together, RFP process, general pooling with limited disclosure. The larger question is how comfortable would the prospective entrepreneurs be in taking someone else’s idea and pushing it to the next level? How comfortable would businesses be in asking for ideas from without when they are paying good money to their employees who are supposed to be doing that? The bigger question is whether the free flow of ideas is warranted at this stage and if so, are we attitudinally prepared for it?

Swapnil
Wadala
19 August 2007

Introduction

Ideas exchange is a concept i have been carrying in my mind for a while now. The general idea is to bring together the creators of ideas and the potential users of them as also bring together diverse groups to brainstorm ideas with or without a well defined final user. The process can eventually involve commercially viable selling of ideas as well. In addition, there can be an attempt to solve some burning issues through discussion.

Global Ideas Exchange is not a discussion board. It does not promote opinion sharing. It is not looking to promote discussion on issues being right or wrong. GiDeX is about action oriented thoughts and ideas. It also includes futuristic ideas with no feasible action possible in the present. However, the spirit is one of exploration and not one of judgment.

What will happen to ideas. People will come and post ideas. Others will comment on how good or bad the idea is (in terms of its feasibility, not morality). Some ideas may have commercial value for potential buyers. In that case, the originator may sell the idea to the buyer. If there are multiple buyers, there can be bidding.

What is the end purpose?
1. To promote more ideas amongst those who are fond of creating them and evaluating them
2. To bring together the creators and potential users of the ideas. If possible in a commercially viable manner
3. To catalog the general thinking of our times in terms of the ideas we have thought of. Maybe for study during a later time!

Happy ideating!