November 30, 2014

Hack Capital

Over the last 3 years I have slowly adopted an ideology that I have began to refer to as “Hack Capital”. It’s a reflection of how as a software engineer and entrepreneur I feel the current landscape of venture capitalist, accelerators, incubators, and activators compromise a vast landscape of options for first time founders who are looking to get help starting up, but are missing the mark at the cost of founders.

If you asked me how to start a successful business in 5 words I would answer…

build something that has value

That is about as simple as it gets in my mind. The important word there is “value”, which in some circles is synonymous with “capital”. Most people associate value and capital to money which is reinforced in the startup ecosystem by all of the romanticing and tech crunchers who equate getting a big cheque from a prestigious VC as the catalyst for your success.

If you were to ask a successful founder what the catalyst was, I’m willing to bet they would definitely feel great appreciation for such a milestone as a funding event, but I would hope that they would refer to an earlier spark of sustained creativity as the real reason they made it to that funding event in the first place.

Many people think of capital as money, but if we agree that capital is synonymous with value, then we should also agree that value can be built.

Therefore it is my opinion that the most important capital an early stage company has is what they can build. Very often early stage companies do not have money, but they do have creativity, a computer and an ability to solve hard problems which is value that can then be traded for money.

Whether it be a customer, an acquisition or a equity investment, when someone gives you money it is because you built value and they want to own a piece of that value. I’ve spent a lot of time looking at the different models that exist to support founders and the one thing that seems relatively obvious to me is that they all exist primarily to secure a piece of value as early as possible in exchange for their support or money. As a symptom of this, I believe that very few are getting it right.

In most cases these supporters push founders to pitch for huge amounts of money before any value has been built. This isn’t by mistake. Many of them will do whatever they can to secure an option in your value as early as possible, just in case you succeed.

You see, it’s a numbers game to them. They win in one of two ways. They either secure a small option across many ventures that have a low chance of generating value, or they secure a large option in the ones that have a relatively high chance.

Knowing that, it would be obvious that these so called supporters are going to look to engage you before you’ve built enough capital to generate counter leverage. This is how they can lock down the maximum share of your value, before you realize it.

If you focus on anything other then increasing your Hack Capital in the early stages of your business you are doing yourself a disservice because the only value you have is what you create.

Suggestions for how to generate the maximum value?

Here are a few things I’ve learned.

Don’t raise money until you make money.

This isn’t the same as bootstrapping your business. Bootstrapping is like blowing on coals to get a bonfire. The supporters I mention above seem to me like they are the same as pouring gas on a stack of wood and hoping for fire. The best approach I’ve seen is to stack a huge pile of wood, get some flames, then add gas.

Everyone should hack

I think the best situation for a young start up is when the entire founding team can contribute to the value being built. Not that business development and sales people don’t offer value, but I truthfully feel they are the gas that you pour on the fire. First the fire wood is collected, the ground work is laid and the spark is started. An engineer can fan the flame to ensure it will scale, and then you add gas. In the early days, having anyone who can’t write code, design or act as a subject matter expert is going to be a huge waste of resources and likely a distraction.

Find advisors, not investors

Having good advisors to help you build something that is future proof is not only a great way to solidify your product but it is also a great gateway to investors, when you need them. Find entrepreneurial people who have experience in your space and may invest in the future. Don’t take money from people early on who can’t provide value beyond money. Early on, the money isn’t what is important, creating value is, apply this rule to the people who advise you as well.

Never leverage strategics too early

This is the kiss of death for value creation. The second you take money or partner with a large strategic you are in their pocket and your entire purpose will start to shift towards their priorities whether you like it or not. They will not be concerned with how you generate the maximum capital overall, they will be motivated by their own priorities and in many cases that means securing the option to buy you so that their competitors cannot engage you. Avoid avoid avoid avoid. Building value means keeping your options open.

Remember, the first 6-12 months of your company are the hardest, the most important, and usually the most fun. Focus on your Hack Capital, build as much value as you can, solve hard problems and you will win.

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