I’ve just returned from New Orleans, where we closed our Village Capital program with the Idea Village at the end of last week. The Idea Village’s class had a cohort of 16 entrepreneurs, and last week, the entrepreneurs ranked one another to come up with four finalists. The Final Four felt the pressure as they had a week to answer concerns, revise their business model, beef up their projections, and get ready to face their peers once again.
Here’s a running diary from the finals this past Wednesday:
3:00 PM The finals started in a crowded room in the New Orleans central business district. Tim Williamson, CEO of the Idea Village, gives the entrepreneurs are given the ground rules, 10 minutes to pitch, 5 minutes Q&A, no exceptions. In my experience, with entrepreneurs, there are always exceptions–these are folks who love to break the rules. There’s a nervous tension with $100K on the line.
3:07 PM Beau Babst, a Yale graduate and New Orleans native who came back to the city to do Teach For America, starts pitching SensPack, a backpack that contains Bluetooth-enabled mobile diagnostic tools (glucometer, blood pressure meter, ECG). Beau is an interesting example of what New Orleans faces with young talent–not a “brain drain,” but a “brain turnover.” A flood of programs–Teach for America, AmeriCorps, Habitat for Humanity–are attracting top-flight young people to New Orleans in their early 20s, but most of these are leaving the city after their service is up. The city is having broad-based efforts like civic leader Leslie Jacobs’s organization “504Ward” to retain this talent, and encouraging entrepreneurially-minded young people to stay in the city. Talented entrepreneurs like Beau might leave New Orleans for other opportunities were it not for SensPack.
3:09 PM Beau starts with a picture of an elderly man, Harold, who is a current SensPack customer. Harold was diagnosed with diabetes, but because of the high cost in transportation, time, and payments to the doctor’s office, he doesn’t get the weekly glucose monitoring that he needs to prevent further sickness. With SensPack, Harold can monitor his glucose from home.
3:13 PM: Beau outlines SensPack’s applicability in emerging markets, too. With 200+ million people in India living at least 2 hours from a hospital, low-cost mobile diagnostic tools can make a tremendous difference. Beau also outlines what a surprising number of entrepreneurs in pitchfests forget to do–outline how SensPack makes money! The backpack can be sold in drugstores and at mass retail for $150 (pricey, but affordable for low-income families), as well as direct to clinics that see a chance to do home treatment for their patients.
3:15 PM: Beau makes the ask, for $50,000, with a detailed outline of how he is going to spend the money. Again, nice move! Investors want to know upfront how much you are asking for and how you are going to spend it, and Beau cuts to the chase, giving a detailed outline of his $50,000 pilot budget.
3:17 PM: TIME! Darin McAuliffe, co-founder of Turbotrip.com and NewOrleans.com, knows from experience how entrepreneurs like to break the rules. He is brutal with not letting Beau get in another word after time is called, and asks for questions.
3:19 PM: First question from one of the entrepreneurs, SK Khurana of Axon Calc, pressing Beau on the ability of SensPack to work in India. True, SK says, that the majority of Indians have mobile phones, but from SK’s experience living and working in India, many of them are not Bluetooth-enabled. How will the SensPack wor with the no-frills mobile phones in India? This question hits at the heart of why Village Capital is effective—the 16 entrepreneurs in the room are drawing from wildly diverse knowledge and personal experience as they question and evaluate the ventures. The “wisdom of the crowds” can really play out, as this 16-person group is much more diverse, arguably, than a team of analysts at a venture fund. Beau lays out a solid, three-step rollout plan in response, acknowledging SK’s criticism but arguing that emerging markets are 4-5 years away for SensPack; the company is first going direct-to-consumer, then to clinics in the US as the product becomes eligible for insurance reimbursement, and finally to emerging markets.
3:23 PM: Life City begins as the second pitch of the day. One of the great questions of venture investing is: is it better to pick a strong entrepreneur with a weak business model or a mediocre entrepreneur with a strong business model? Lizzie Shephard, the founder, is a good case for “bet on the jockey, not the horse.” According to her peers, when Lizzie began the program 12 weeks ago, no one would have expected that she would become a finalist. Her venture, LifeCity, was loosely based on using group purchasing to incentivize businesses to become more environmentally sustainable, but she didn’t have a real business model or plan. She did have experience in her subject matter, raw intelligence, and a gritty work ethic, and her peers noticed that. Today, she begins pitching a venture that, while it still has a long way to go, has come miles from the beginning.
3:26 PM: Lizzie outlines LifeCity’s basic business model—a group purchasing program that helps consumers save money at businesses that LifeCity certifies as green businesses. Businesses have the incentive to get certification; consumers have the financial incentive to purchase at environmentally sustainable businesses.
3:29 PM: Lizzie outlines EcoCafe, one of LifeCity’s certified businesses, talking through how EcoCafe’s revenues have gone up since joining the LifeCity network and outlining LifeCity’s product.
3:31 PM: Lizzie talks through how LifeCity will expand from New Orleans into five cities in the next 18 months, along with a healthy skepticism that the company will keep its current business model. This is important. In the last year, 12 enterprises have received investment through Village Capital. Since receiving investment, every single one has changed its business model. Lizzie affirms the values and core mission of Life City while being open and flexible to the details. And Darren calls TIME!
3:33 PM: Lizzie has to answer some questions about long-term financing, including whether this is a good investment for an investor. LifeCity has some impressive traction to date on customers acquired and businesses certified, but Lizzie still has a ways to go. One issue we frequently see with startups is a gap expectations between entrepreneurs and investors; profitable does not necessarily mean “investable.” Investors look for liquidity opportunities through sale of a company, entrepreneur buyback of shares, or in the rare case, IPO, but the question Lizzie is trying to answer is this—how does a low-cost, revenue-generating model get to the point where she can get a return for investors?
3:37 PM Up next is Alan Fisher, the founder of GTC NoLa. Alan is a successful entrepreneur, having built and sold New Orleans’ largest limousine company, and is turning his sights to the taxi business in New Orleans. The city has 1200 taxis, and is legendarily infamous for low quality and lack of safety—cars are often unclean, hardly any take credit cards, and most horribly, in 2010, 4 murders happened in New Orleans in taxicabs alone. The taxicab system in New Orleans is hardly a free market—the city does not have open permits, and unlike transferable “medallions” that some cities have, the permitting process for New Orleans taxicabs is heavy and opaque. Alan is looking to revolutionize the taxi system the way he transformed the limousine system in the past.
3:42 PM Alan’s pitch is compelling: drivers will be “ambassadors,” the cabs will be video-monitored, and all taxis will be able to take credit cards, and the entire fleet will be energy-efficient (biodiesel, electric, hybrid). You can tell a pitch is compelling when the audience is vigorously nodding—Alan is directly addressing a pain point that most of his audience has personally experienced, and he has some captive customers right in front of him who will pay for his service.
3:47 PM: After a compelling pitch, the questioners start, and, not surprisingly, they hammer Alan on permitting. He has applied for 300+ permits, but there’s no telling when (or if) he will get them. The permits are a major risk, and are a necessary precondition to what otherwise seems like a no-brainer business. In a city that has crumbling schools, a high murder rate, and a strong taxicab lobby, how do you get distracted, disengaged public officials to change behavior to benefit your business? Marketing, says Alan. The $50,000 investment will be used to flood the city with marketing for GTC NoLa and Alan aims to have the enthusiasm of the audience translate into the “necessary political will to get the job done.” By the end, his pitch sounds as much like a political speech as a business plan, but maybe in some circumstances, that’s necessary.
3:56 PM: The final presenter is Chonchol Gupta, founder of Rebirth Financial, which will “take your money from Wall Street to Main Street, or Bourbon Street, or Canal Street.” Rebirth is an online peer-to-peer lending platform that brokers loans from individual and organizational lenders in the aggregate to small businesses. A perfect storm has created opportunities for peer-to-peer lending platforms, which aggregate small dollar contributions from the everyday individual and use them to make larger-scale loans and investments in businesses, including Prosper, 33Needs, ProFounder, the Hoop Fund, and ReBirth. A few reasons explain the popularity of this business:
a) The initial success and publicity of Kiva, which takes grant dollars and lends them to microfinance banks in emerging markets
b) The credit crunch, which has severely limited banks’ small business lending and cut off the flow of startup capital;
c) The ability to put traditional “friends and family” rounds, which have been happening anyways, online;
d) The shift in funding models (in part because of the Internet, and in part because of the constrained resources of big-dollar donors) of political campaigns and nonprofits to an increasing reliance on small-dollar donors spilling over into the for-profit world.
3:58 PM: Nice! Rebirth, at the beginning, explains its business model (it makes money on brokering lending transactions, depending on the size of its transactions), who its customers are, how much it charges, and how it makes money. Surprisingly rare and surprisingly compelling.
4:00 PM: Nice! Rebirth outlines what it will do with the $50,000 investment: use it to cover the cost of brokering loans through Rebirth for all Idea Village entrepreneurs past, present, and future. I like this move. Rebirth is (a) building a customer pipeline with a round of vetted enterprises; (b) building goodwill in its own community—which has to contribute to how they will be ranked for the Village Capital investment; and (c) essentially spending marketing dollars on customers who are likely to take them up on the deal (and come back when they need larger amounts). Savvy move.
4:03 PM: Rebirth covers the scope of the problem. $64 billion void in small business loans. A $5.8 billion online lending industry in general. They show their end goal: as a member of the Federal Reserve says, “Rebirth is an idea to change the US finance system.”
4:07 PM: As the question-and-answer session begins, most of the entrepreneurs are grilling Rebirth on their financials. What are the fee structures? How is it split between the borrowers and the lenders? What is the legal structure of the transactions? How does the firm comply with SEC regulations? The finance-oriented entrepreneurs are particularly vocal, and they’re testing Rebirth on some of the nuts-and-bolts any investor would ask for.
4:15 PM: After Rebirth’s question-and-answer session, the entrepreneurs retreat to a private room for an open-ended discussion, entrepreneurs-only. This is the heart of the Village Capital process. Entrepreneurs are given the chance to ask any question they want, to any entrepreneur, and at the end, they are ranking other entrepreneurs on the following:
- 33% financials (How profitable is this company going to be? Are there exit opportunities?);
- 33% impact (How large can the company grow? How many people can it employ? How many customers can it reach? Does it create positive social value for its employees and its customers);
- and 33% “gut” (If it were your money, would you invest? Do you trust this entrepreneur with your money?)
The breakout session was closed-door, so I can’t give the same minute-by-minute update, but a few things stuck out:
- The overall respect the entrepreneurs gave one another. There were no “gotcha” questions, no posturing, no asking a question for question’s sake. Even when the entrepreneurs eligible for the money—and therefore competitors—asked one another a question, it was a legitimate, open-ended question meant to understand rather than make a point. Perhaps the fact that two entrepreneurs could win made this slightly less competitive, but the collegial atmosphere was remarkable.
- The balance, on any given question, of “expert knowledge” and common sense. For example, with Rebirth Financial, a finance geek-entrepreneur would ask detailed operational questions (that taught the group a lot); another entrepreneur with no financial experience would ask about the nuts-and-bolts of posting a loan and receiving capital. The concept of the “wisdom of the crowds”—a diversified pool of entrepreneurs can make a quality decision—really played out here.
- The emphasis—or preference—that entrepreneurs placed on leadership over business model. Entrepreneurs showed a healthy tolerance for uncertainty in answering questions, but were tough on one another. “How are you going to execute this? How have you done A, B, C, D, E? What would you do if X happened?” These questions were asked over and over again.
6:15 PM: The final announcement
After the entrepreneurs deliberated for about 50 minutes, they submitted their final scores to the Idea Village team, who tallied the votes and figured out the winners. As part of New Orleans Entrepreneurship Week—the Idea Village’s event that some call “Mardi Gras for entrepreneurs”—teams from Google, Cisco, Salesforce, Stanford, Tulane, and Wharton, as well as representatives from investors and foundations looking to invest in high-impact entrepreneurs. Guests from Dr. John Elstrod, chairman of Whole Foods to Senator Mary Landrieu to James Carville have been featured.
Even given those luminaries, the biggest announcement of all was who would receive the investments. New Orleans Entrepreneurship Week had three major investment challenges, and Village Capital was the last announced. Two members of the Village Capital class who didn’t go for the capital stood at the podium, reading off the winners.
In the end, SensPack and LifeCity were picked to receive investment, and the entrepreneurs felt more pressure than before. Lizzie Shepherd said, “Now it’s real—I need to deliver so I don’t let them down!” There’s no telling whether entrepreneurs can make investment decisions as well as a committee, but having worked for a professional investor and watched this crew invest, I can say that the entrepreneurs are at least as thorough, if not more so. They have more diverse perspectives and can seize on more nuanced points than an investment team can sometimes, and the strongest factor for seed-stage investments—the quality of the entrepreneur—they can know and sense from getting to know one another over 12 weeks, checking in weekly (if not moreso). This process really played out and for now, the pressure begins for Beau and Lizzie—they need to deliver!
(By Ross Baird)