One of the big questions for your startup is this: “How will I finance it?” If you assume that your only option is the VC path, think again, especially if you’re a female founder. The chances are very low that you will meet the criteria of VCs even when you have a very strong business. Are there alternatives? Yes. One alternative is an investor such as Ian Lucey.
In his fireside chat with Sharn Kandola, co-director of Startup Grind Toronto at the Brightlane co-working space, Lucey endeared himself to me and every other founder in the room frustrated by old-school VC.
“We’re told the startup community is 22-year-old kids in hoodies,” said Lucey. “And yet when I look around the audience, the vast majority of people are people in their 30s, 40s, and 50s leaving well-paid jobs to go start a company.
“All these people (are) going around these incubators looking for a CTO. You’re expecting somebody to come work for your company in the middle of the second industrial revolution, where the hardest skillset to find on the planet is a really good quality CTO or senior developer. And you expect them to work for free on your startup. We thought ‘this is just illogical.”
The Lucey Fund’s investment thesis is the opposite of the model popularized in Silicon Valley and imitated all over the world.
Skills: 96% of Lucey Fund founders can’t code.
Gender: while the number of VC-backed companies headed by female founders is “in single figures” 63% of Lucey Fund-backed companies are lead by female founders.
Age: most are over 30. Founders “want control over their lives and we offer a lot of that,” says Lucey
Solo flyers: 58% of the companies Lucey Fund invests in has a single founder.
To give you an idea of whether this sort of founder might be you, consider one of the folks Lucey backed. A radiographer. By day, he took X-rays at a hospital.
One day says Lucey “a nurse came in, picked up the X-ray, took a picture of it (with her smartphone) and sent that to the doctor. The guy goes, "that’s illegal!" And the nurse’s response is "the whole hospital does it.’”
This practice does indeed violate pretty much every known rule of patient privacy. The radiographer saw a way to make this accelerated flow of information work securely. Patients and doctors win. The catch?
“That guy had seven children under the age of 11,” says Lucey. “We were going ‘if he hits that many targets he’d be great at sales.’”
After apologizing for the off-color joke, Lucey noted that the founder “was a year looking for a CTO” without success. If you’ve been hunting for a technical co-founder you know what this is like. In the Lucey Fund approach, it supplied a CTO, and helped the radiographer build the tech.
“Once we built the tech we helped him with sales, attended a lot of his early sales meetings. And then we lined up a lot of investors as well,” says Lucey. “They’re the (kind of) companies we do. A lot of it is tech, sales and financing.”
It’s important to understand the potential of your business to scale. VCs need you to grow to a massive scale and your business may not be suited to that. If that is the case, you don’t want to waste time with a VC.
To illustrate the idea of an appropriately sized business, Lucey told the story of the golfing Scottish accountants.
“It’s a company none of you have heard of called Drumohr Software. They are based in St. Andrews in Scotland, you know, the home of golf. Two brothers -- one guy was a programmer and the other was an accountant. They built a piece of software to calculate tax in Britain in 1986-87, and they managed to sell it to 10 percents of the accountants in Britain.
“That was their only marketing. And for 10 years they held 10 percent of the market. They turned over about $2 million (Canadian) a year. Their only costs were about $15,000 to $20,000 in CDs and about the same to heat the shed that they worked out of.”
When feckless customers called in with support questions, they’d answer the phone in person and say “’that’s actually in the manual’ and hang up on them. Their customers loved them, thought they were hilarious.
“They sold that business for about US $14 million the day the first brother hit 60. I look at that and what I see is an appropriate-sized company. They played golf every day at 4 o’clock.
“If they followed the TechCrunch Generation, they’d have raised $40 million. They’d have had to go into at least 30 to 40 countries. They’d have had to have sold that business for between two and three hundred million in order to have gotten the same amount of cash into their own pockets.
“And statistically the odds are that at least one of the two of them was going to be fired halfway along the way.
“We’re all about the 'delay' as long as you can and figure out what’s the appropriate size.”
Many investors won’t touch hardware, including Lucey. That’s a challenge for you, if like me, you’re focused on a hardware startup. There are alternatives.
And one way Lucey really helps is by showing that there is another way to do business and another way to be a VC. This knowledge sharpens up the focus on who and what you need to look for in a business, and how you can get ready for a VC like Lucey.