Sunday, May 15, 2005

Micro VC

I was reading an interesting article in EE Times by MIT Professor Neil Gershenfeld. He talks about his new book "Fab - The Coming Revolution on Your Desktop — from Personal Computers to Personal Fabrication" and giving classes to students who wanted to learn to use the digitally controlled tools in his lab. He found that he was spending a lot of time training students who had no intrinsic interest in material fabrication. What were they interested in?

I was spending a lot of time training students to use them all. So I started a class, "How to Make Almost Anything," which was just that — it was how to use the tools to make almost anything. But I was completely swamped with nontechnical students, who were desperate to take the class — not for research, not as a business model, but just because they had stuff they wanted to make.
So they had things they wanted to make. He then goes on to talk about what a world were you can make whatever you want will be like.
The passionate response led me to wonder what would happen if the rest of the world gets access to this. So we started setting up, with National Science Foundation support, field Fab Labs, where the idea was to approximate both what was on campus at MIT and where we are going to be 20 years from now, but using tools available today. And [the program] exploded all around the world in both developed and, most interestingly, developing countries. We found the same response in the field as we found at MIT.

These labs were not meant to be all that useful — this was supposed to be a warmup experiment — but at this point we have labs in India, above the Arctic Circle in Norway, in Ghana, Costa Rica, inner-city Boston.

This summer, we are going to South Africa, and we have demands to take these all over the world — more than we can handle.
Now all this has immense social and economic implications. Prof. Gershenfeld goes on to talk about the meaning of what he has learned about man the maker. Read the article to find out his views. What I found most interesting is what he thinks it means for the venture capital world.
The thing I think will emerge that doesn't exist yet is micro VC. Personal fabrication leads to the opportunity for high-tech innovation, but on the scale of tens of thousands — not tens of millions — of dollars. You'll need some of the skills of a good venture capitalist, but with the fanout of a microfinance network.
I have been having exactly this problem with some projects I'm interested in. The market is there. The product is mid level tech. Not bleeding edge. The rewards are there but it may or may not be the basis for a brand and a business. Start up costs are modest; a few tens of thousands at most to first sale. Investment to full profitability a few more tens of thousands. Three to four months to full profitability. One year to cash out - 100% return on investment - if successful.

Now this is obviously not the kind of deal that the current VC set up is designed to handle. Typically they want to invest millions. Operate for three to five years and cash out - if successful - with a doubling every year of operation.

So the question is how do you make these small deals profitable? Worth the effort of the VC guys. Obviously a lot of rethinking will need to be done on the subject.

A good place to start would be to study how Grameen banks handle their micro finance ventures.

I would be more than happy to work with anyone who is interested in thinking through what is required and making it happen.


Spiney Widgmo said...

VC's need a means to regain their investment. This implies there needs to be a financial system for selling the value created by these small scale ventures. In traditional VC funding, the goal is a publis stock issue. However, I believe there are restrictions on company scale that prevent listing very small firms. I think this is the log jam for funding small companies with moderate scale.

M. Simon said...

What about profit distributions sometimes called dividends.

Anonymous said...

The problem with dividends is that they are too slow.

Many companies IPO when they are barely (or not yet) profitable. The IPO basically allows the VCs to cash out -- they use the sale of a significant portion of the company to recoup their initial investment and turn a profit. Any dividends or capital gains from the portion that they keep is just gravy.

New investors have come in at 10-20 bucks a share in hopes of a gradual long term gain, and some of the risk of failure has now been offloaded onto them from the VCs.

At 5 years old, a company might be marginal profitable and ready to IPO. The VCs can make a profit and move on to other ventures. If they had to depend on dividends alone, it might take another 15 years and a lot more of their companies would fail before the VCs had broken even.

On the other hand, there is another option which is just as good as an IPO that is available to smaller companies -- being purchased by a larger company. The downside of this is that the VCs are much less in control of the timetable.

I think the real obstacle to micro-VC is economies of scale. Good VCs do an enormous amount of due diligence before investing in a startup. They know the market and any potential rivals inside and outside, they've studied the trends in the sector and the overall economy, and they've torn apart the business plan piece by piece.

A micro-VC company has to do 10 $500,000 deals for every one $5 million deal, assuming the expected return is the same. But the amount of effort put into each of these micro deals is probably only marginally less than for a normal sized deal. The only way this could make sense is if the expected return from these micro deals was far, far higher (probably unrealistically high).

M. Simon said...


I think micro VC would be for opportunities that could be profitable in 3 to 6 months. One year max.

And yes. As currently structured VC is very labor intensive. It is structured to take on projects that run 3 to 5 years. What I propose is a system that would be 5X to 10X as nimble.

Obviously what is required is a different way of organizing VC from what we have now. Which I hope was the point I made.

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