Mentor-driven enterprise aims to plug holes in venture cap model

Every week Techvibes will be republishing an article from Business in Vancouver newspaper.

This article was originally published in issue #1024 - June 9 - 15, 2009.

Last July, Danny Robinson added his voice to the growing debate about what’s wrong and what’s right with the venture capital-driven business model by proclaiming in a blog post that, “Venture capital is broken, let’s fix it!”

Robinson has since concluded that venture capital still plays a large role in supporting and expanding the technology community, but isn’t ideal for all startups.

“Venture capital doesn’t work for digital media companies anymore,” said Robinson from the lounge of Bootup Labs Inc., a company he founded with fellow entrepreneur Boris Mann.

By digital media companies Robinson means businesses that digitally distribute products or content in the consumer Internet, mobile and casual gaming sectors.

Bootup, a hybrid startup accelerator and seed fund, opened its doors last January after closing a $300,000 seed round last December.

The company is financing and helping to develop five digital media startups, all of which are located in Bootup’s 5,000-square-foot Gastown space.

Robinson noted that while a lot of technology companies require many years and many millions in capital to develop, digital media companies don’t.

Today, the savviest of entrepreneurs can build a website or application using a handful of cash and a small support team.

If a digital startup can generate some revenue or gain traction with a certain audience, it can be looking at exit opportunities within two years.

But in founding Bootup, Robinson and Mann recognized that digital media startups still need some capital and support to prove themselves.

Most angel investors want to see some tangible traction before investing in a company, while venture capitalists look to invest millions in later-stage companies.

“In that first few minutes of a company’s life, there is no support,” said Robinson.

Bootup’s founders were inspired by Colorado’s TechStars, one of the most successful of a number of mentorship-driven investment funds for seed stage companies.

Others include Y Combinator and LaunchBox Digital, and all were founded on the idea of filling an investment gap that leaves the earliest-stage startups with little financing and support mechanisms.

Mann calls it no man’s land.

Companies that join Bootup are given a $150,000 line of credit in exchange for a 5% to 15% equity stake.

Bootup is paid $50,000 from the line of credit to cover eight months of Mann’s and Robinson’s salaries, rent, day-to-day expenses, financial and accounting tasks, corporate legal expenses and web hosting.

Robinson said the structure works because, unlike venture capitalists, Bootup doesn’t collect management fees from the investment fund.

Investors are ensured that 100% of their equity goes directly to their investments.

As well, the fund’s shares are issued under B.C.’s Venture Capital Corporation program, providing investors with a 30% refundable tax credit.

Mann and Robinson, who use their previous experience to support and mentor each company, are building a 25-member network of CEOs, business leaders and experienced entrepreneurs to provide further mentoring.

AdHack Media Inc. and Letsgofordinner.com joined Bootup last January.

OverInteractive Media Inc., Layerboom and 8.514 Media set up shop in the Bootup space last month.

“It’s a very fast cycle that you can get into with digital media,” said Robinson. “That’s why we’ve designed our program to be a very small amount of money and eight months maximum.”

After eight months, a company leaves Bootup having developed to the point where it can either have a go of it alone or confidently pitch angel investors and venture capitalists for larger investments.

“We think we can make a number of these companies very successful,” said Mann. “If they’re successful, the fund is successful and, ultimately, we are successful.”

Robinson and Mann concede that they couldn’t have started Bootup without having successfully developed and sold their own companies. But they think the credibility, confidence and connections that come with being successful entrepreneurs are more important than their financial comfort.

Bootup has $2 million in commitments from venture capitalists and high-net worth angel investors from B.C. and the Silicon Valley – Robinson’s old stomping grounds – toward a $5 million fund.

It’s also looking for a new space and envisions creating a public-private complex that’s up to 36,000 square feet.

It would include the Bootup workspace, workstations and meeting rooms that are available to the public and a public café.

“There’s a lot that can be done here to help entrepreneurs get their company off the ground,” said Robinson.