Investors should consider the seeding of multiple, concurrent ventures in order to take advantage of the confluence of technology and talent in their cities. Traditionally overlooked regions such as the Nashville, Memphis, or Little Rock area have a serious opportunity to seed new ventures.
How do you successfully seed multiple ventures concurrently? Work on pre-seed stage technology ventures simultaneously and rapidly incubate them. A few modest successes would have a tremendous impact and provide necessary returns to investors.
Phantom Works Method
The organization will be targeted towards businesses that meet the following criteria:
a. Can be developed, launched and operated (at least initially) by a small team of highly capable, actively involved founders.
b. Initial start-up expenditures less than $200K and likely less than that.
c. Can be ramped up and brought to market quickly.
Stages of Incubation
Stage 1: Proof of Concept
If approved, the business team will receive a $10,000 promissory note. The funds will be used to establish the project’s viability within 4-6 weeks through refinement of the business plan, creation of a technology roadmap and the design and development of a product prototype. This first round will be structured as debt to ensure the team’s active participation in the incubation process. If the project fails to pass this stage, but the team exhibits active, good faith participation (including the project postmortem), the debt will be forgiven.
Stage 2: Viability Assessment
The business plan, technology roadmap and prototype are presented to a review board for assessment. The board will review the proof of concept and ultimately decide whether or not to fund the project to the next stage.
Stage 3: Development
i. Product development will proceed in quarterly funding iterations. At the beginning of each quarter, the team will receive a round of funding in exchange for a minor portion of equity, in accordance with a pre-determined funding schedule.
ii. Phantom Works will provide shared office space and resources for member companies.
iii. Every 14 days, the team will be required to provide a regular status update, including:
1. Live demonstration of new product development
2. Roadmap review and estimates for the next status update
3. The teams will be assessed for success, setbacks, and overcoming challenges in a timely manner.
Stage 4: Launch or Scrub
i. Launch: Within a predetermined timeframe (ideally 3-6 months), the product should be released and get to dollar one. Once launched, revenue milestones will be tracked and managed accordingly.
ii. Scrub: If the team is unable to successfully launch, the board will decide to scrub the project. In this event, all active members of the business team and associated mentors will be required to participate in a post-mortem activity (as required by the terms of the initial loan and subsequent funding rounds). The purpose of the postmortem will be to identify factors that contributed to the project’s failure and use the information learned to mitigate risk to future teams. Furthermore, it is designed to help the teams reform and start again on a new startup as possible, quickly.
Reason for Method
The process is designed for the startups to fail fast, and build strong experienced startup teams that can be serial entrepreneurs. Unlike traditional investment banking and venture capital models, the goal is to quickly incubate lots of businesses with an expectation to get several successes. Rather than pour large sums of money into a handful of businesses in the hopes that one will be a billion-dollar lottery ticket, this model is designed to spawn many, successful businesses that can have an adequate market impact to attract either acquirers or venture investors.