Week 1 summary

As promised, I will be reporting all developments both good and bad at LiquidCap.

Slightly more than a week passed since I launched the idea and the following has been 'achieved':

• Few blog posts
• Twitter account with a handful of interested people and a 200+ people who are following me so I follow them back
• Decision: we will build the Minimum Value Proposition of LiquidCap as a fist step
• Proposal: Daniel Haran, a real Rails guru and wannabe chocolatier has offered to spec the MVP for LiquidCap
• Partnership Scheme: Daniel gave me an excellent and intuitive idea for talent-funding compensation, I will blog about this later
• A one-line description: "marketplace for sweat capital" coined by my other Ruby guru, James Golick
  
• Lots of encouragement and informal offers of support both from entrepreneurs and talent

At this stage the concept is still purposely left vague so we can build as feed-back and ideas come in.

Our plans for the coming weeks are:

1. Enlist a few ideas and talent the old fashioned way (email, blog, twitter, etc)
2. Build and extremely simple interface interface (an MVP) to achive the above
3. Solicit more feedback from yo
4. Answer some fundamental questions about legal, compensation, etc
5. Look for the following partners for LiquidCap:

• Web Design
• Social Media Marketing
• Programming (Rails please)
• Legal advisor
  
• Startup guru

Twitter: the most powerful capitalist weapon

Now that I hopefully grabbed your attention, let me summarize what I would like to say:

• Capitalism promise is that the free market is an excellent algorithm to optimize resource allocation.
  
• Resources are exchanged by parties to improve their percieved well being.
  
• Friction in the market causes lack of liquidity and reduces the efficiency of the market.
  
• Lack of trust and asymetrical information is a major source of friction.
  
• Twitter provides a method to establish a trust level with people we never met.
  

Adam Smith was fond of using a village analogy to demonstrate how markets work.  The butcher and the baker will happily exchange bread and meat for their mutual benefit.

What happens when the butcher is in Lima and the baker in Warsaw?

Apart from the problems of rotting meat and stale bread, an additional headache is how can they trust each other:

• Legal system is different and costly to use
  
• No personal contacts to vouch for them 
  
• Transactions take time and are harder to verify
  
• No direct contact to read body language

If they were in the village, the butcher would ask his neighbours and he would get a trust index for the baker, he would visit the baker's shop and see that it is really there, he will look the baker in he eye and know how trustworthy he is, and finally he can resort to the police or his buddies to teach the baker a lesson if he cheated him.

These luxuries are not available to our Lima butcher.

Until now, this kind of business transaction was mostly carried by large institutions at great expense:

• Run credit report
  
• Hire international lawyers
  
• Open letters of credits, bills of landing, etc
  
• A few number of capitalists act as if they were in a village as they know each other
  

The advent of blogs, social media and other new tools is quickly changing this formulae.  However nothing is as powerful as Twitter in creating a global trust system.

Twitter, by providing a public timeline of all its conversations that can be uniformally accessed and searched is the equivalent of a private chat with the village barber of every village in the world.

On Twitter a quick search will yield all past complaints about an individual.  This can be easily searched and with a little hashing (adding simple tags to trust conversations) can be aggregated to give us a quick feel of how trustworthy our counterpart is.

This mechanism acts both as reduction in information assymetry and an enforcement mechanism: we will be very motivated to give a good service since our universal reputation is on the line.

Those who invest in their reputation from an early age will reap great rewards and those who deviate will be quickly rejected from the market.  

Micro transactions can then occur with self-regulation (I know it a dirty word these days), and global capitalism will be able to operate in very similar ways to what Adam Smith envisioned.

 

Chickens Vs Butterflies: can we talent-fund a butterfly?

YXHD has an interesting post about Chickens Vs Butterflies: Raising Venture Capital in a Down Economy

He classifies companies as either:

- Chicken that can be raised organically (he intended no pun) through sweat capital and bootstrapping
- Butterflies that start as an ugly worm and need a lot of R&D to turn into a real product

Clearly chicken are the typical talent-funded companies where a few partners work together to get the venture operational.

Can we talent-fund a butterfly?

I think that although it is much harder, by growing talent funding from the small group of close partners who build a project to a full community of potential partners who through small contributions create the full project, it is possible.

There remains of course some capital expenditures that have to be incurred. But in certain knowledge heavy domains even butterflies can be talent-funded.

A keyhole into the startup garage

Brant Cooper gives us the activities week by week, of an early stage start-up.

"Week 1 Tasks:

• Document Business Hypotheses - market segment, customers, pain, acquisition methods, etc.
• Identify 100 potential users to interview.
• Identify 50 potential partners to interview.
• Create interview process and objectives.
• Create MRD based on “vision.”
• Identify key metrics for proving model.
• Prepare blog launch using company domain"

Lean Start-up: Part 1 « Market By Numbers - Brant Cooper

I like the focus on identifying customers and talking to them as the first activity. I wish I had done this in the past.

As an added bonus, buzzword of the week: Freemium model.

Y Combinator: very early startup VC

Y Combinator: What We Do: "We make small investments (rarely more than $20,000) in return for small stakes in the companies we fund (usually 2-10%)."

They have a great funding/incubation/mentoring concept that is exactly what is required for very early startups.

What is the minimum viable product?

Venture Hacks discuss the concept of MVP ( minimum viable product) this is a great way to go about starting a venture:

- Define the minimum set of features that will allow early adopters to adopt the product early
- Rely on the imagination of early adopter to fill in the balnks and see the benefits
- Send it out, and see how the market responds

This made me think about the MVP of LiquidCapitalism.

The offer of LiquidCapitalism is:

- Allow entrepreneurs to find talent-funding to their venture.
- Allow talent to go in and review ventures to invest in

The MVP for LiquidCapitalism is:

A home page where ventures can register their idea and talent to view a list of ideas

We will create this and get back to you.

Heroic entrepreneurs | The Economist

A special report on entrepreneurship: Heroic entrepreneurs | Global heroes | The Economist: "Entrepreneurship also flourishes in clusters. A third of American venture capital flows into two places, Silicon Valley and Boston, and two-thirds into just six places, New York, Los Angeles, San Diego and Austin as well as the Valley and Boston. This is partly because entrepreneurship in such places is a way of life—coffee houses in Silicon Valley are full of young people loudly talking about their business plans—and partly because the infrastructure is already in place, which radically reduces the cost of starting a business."

The article is very interesting, but what struck me most is the importance of being in a "entrepreneurship cluster". What we need is to create a virtual entrepreneurship hub, so that entrepreneurs and talent can converse, compete, share and learn from each other. Ning?

99designs » Leading Designer Marketplace for Logo Designs and More…

99designs.com

Is a great example of a marketplace bringing talent and ventures together in a fun and highly rewarding way for both.

If you want to design a logo, business card, web site, etc, you simply create a contest, set a prize and let the 30,681 (as of today) registered artists have a go at it.

Tax benefit of talent-funding - Candians only please

As a side benefit to participating in a new venture as a talent capitalist, there are tax incentives.

In Canada you can make up to 750k$ (lifetime limit) in capital gains TAX FREE if the following conditions apply:

- You invested in a small business
- Business is based in Canada
- You have kept the shares for 24 months or more
- A bunch of other accounting conditions to which most start-ups comply

In other words if you have 5% of a venture and the company sells for 1M$ 2 years after you got the shares. Your 50K$ is tax free.

Certain conditions apply.

See: TaxTips.ca - Small Business - Capital gains deduction

When the idea is too small for VCs

Robert Ochtel writes a great articel about which companies are good VC targets:
Venture Capital – It’s Not “Welfare” for Start-up Companies

Hi conclusions are great and most of them apply to any venture of any size. Mainly:

1) Look at the business from the investor point of view and not from the founders prespective
2) Acquire customers early and often
3) Focus on clients rather than technologies or processes

He makes another point that some companies that will reach a plateau of say 5M$ revenue after 5 years are great lifestyle companies for their founders and not a good venture capital investment.

One of the main reason is that executing a deal is a costly endeavour both from the due diligence and legal and maintenance perspective.

We believe that small injections of talent-funds do not require as much overhead, because of a number of reasons:

1) Investment is less, so the risk of making a mistake is less
2) The talent will discover a lot about the realities of the business while working and can pull back early
3) Since multiple poeple are investing small amounts wisdom of crowd mechanisms will evolve as opposed to big bang approch of traditional VCs.

Call us at liquidcapitalism at google dot com.

Traditional Venture Capital is shrinking. Who will fund the new idea?

TechPulse 360 reports that the number of VC firms is rapidly shrinking:

Venture Capital Industry To Shrink Further, Sonsini Predicts

Combine this with a general lack of credit in the market and higher unemployment.

In other words traditional capital is lacking or refusing to participate in the economy. Talent is being wasted as old companies are losing market share and new ones are not being funded.

Clearly this is a great time to think about talent-funding, both from the venture and talent owner point of view.

Call us at liquidcapitalism at gmail dot com :)

Everybody is a capitalist

When Adam Smith wrote the Wealth of Nations in 1776, the industrial revolution had just started. He described a world where butcher, baker and brewer were the engines of production. Individuals were in control of their destiny to a large extent as they had liberated themselves from the feudal control over their livelihood, and have not yet experienced the concentration of means of production at the height of the industrial revolution.

Of course this where Karl Marx comes in. In 1867 Das Kapital is published and it describes a much different world where the worker is back to serf-status and the industrialist controls all the means of production.

Our world today is a mixture of both realities, but as we move more and more to become knowledge societies (at least in the west), workers have again a lot of control over the means of production.

In other words workers are becoming capitalists; in a much deeper way than them having an investment in a fund or a house.

Workers are capitalists because they own the most valuable asset in the modern economy: their talent, ideas, and drive to create.

The employee/firm relation is an arrangement that has worked well in the past, as workers rent their talent for a fixed price. The outcome is that workers do not share in the upside of venture success but are protected from the downside.

A new arrangement is growing stronger with time and that is the consultant/firm relation where the rent is for very short periods of time, thus allowing the firm to get the appropriate talent required at the right time.

The drawback of the consultant/firm relation is that the worker is basically at the opposite end of the firm, basically his interests are to charge the highest price for the least work, and to expand his tenure as much as possible. The firm of course has the opposite interest.

We feel that the worker should look at his talent-capital like a capitalist. He should rent some to provide a security net that allows him to operate without major harm to himself and his family. He should also invest some in higher risk ventures where he is joining in the upside and downside.

The new advances in technology and the demand for knowledge workers creates a new environment where it is possible for workers to invest their talent at a lesser risk than previously:

• They can join multiple ventures and thus mitigate his risk
• They can select from a large variety of ventures to choose the ones they believe in and that have the appropriate risk level
• They can combine a full-time or part-time paid work with talent-investment
• The modern knowledge workers are much more savvy than before and are capable of making smart risk decisions

In summary, even if we want to have to keep our day jobs in many cases, we should all invest a portion of our talent capital like capitalists and not like 19th century miners.

Liquid Mechanics

I will describe briefly how we foresee the creation of a talent-funded firm in practical terms.

Step 1 - Idea

If you have an idea you can simply submit it to us, we will sign a non-disclosure agreement like any venture firm.

Step 2 - Define needs

You will then decide what are the talents and funds you need to take your venture to the next step.

Step 3 - Talent hunting

If somebody likes your idea and has the right credentials they can request more info. You will then revue his profile and decide if you want to share details of your venture with them.

Step 4- Cut the deal

If there is an agreement between what they have to deliver in work and how much you are ready to give them in equity, they become equity holders and start working on the venture.

Step 3 - Execution

As the work is done the equity is given to the workers. The schedule of the equity/work exchange will be agreed by the two parties to avoid any disappointments and to allow for exit strategies at any point.

We will help you create agreements that are simple, functional and protect as much as possible all parties.

Back to Step 1 - More ideas

Now that you finished this phase of your venture, you will need a different set of talents and fresh funds to move to the next step.

Become a Liquid Capitalist

Liquid Capitalism itself will be a talent-funded company.

We are looking for the following talent:

• Graphic and web designer
  
• Software developer ideally with Ruby on Rails expertise
  
• Finance wiz, with experience in funding early start-up
  
• Legal expert with knowledge in intellectual property rights and corporate law
  

If you like the concept and you want to be an early founder of this venture, please send us.

All the work will be conducted online and will be on-demand on a part time basis.

Launching a new venture fund

Karl Marx and Adam Smith had a few beers down the local pub. The outcome?

They started Liquid Capitalism!

Liquid Capitalism is a venture capital firm that is founded around the following principles:

1. Capitalism is about creating ventures that generate value to society
2. Ideas, talent and smart execution are what makes ventures successful
3. We are all capitalists as we own our talent, motivation and desire to work
4. We should be allowed to invest our talent capital and reap the rewards (or losses)
5. Talent capital should have equal footing with money capital
6. A small group of talented partners will beat an army of hired employees

Liquid Capitalism wants to build and profit from this future by creating a new model for venture investment.

1. Replace the firm-employee relation with an idea-talent relation
   
2. Create a marketplace where talent and ideas can interact
3. Replace large portions of money investment with talent investment
4. Allow ventures to have a just-in-time talent pool
5. Provide opportunity for any person to invest their talent in ideas they believe in

The idea is of course at least as old as Adam Smith, but what was a utopia in the past is now a reality because of the technological and societal progress.

Liquid Capitalism wants to be at the forefront of this new wave of ventures.

If you want to be part of Liquid Capitalism, or if you think this is just a load of drivel, join the conversation on this blog.