Fools, family and friendly funding

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In 2005, I was approached by a group of local entrepreneurs seeking advice on launching a small web-based startup. My advice was straightforward - develop your product, align your target demographic, and hit the ground running.

 

by Harley Finkelstein

The advice seemed simple enough until it came to the question of financing and mentorship.

In hindsight, I was somewhat fortunate when I launched my first company. I had a small number of angel investors who were willing to take a chance on me. But even more important than the capital they provided, I was able to build myself an informal board of advisers who met a few times a month to discuss business progress. This was my introduction to the concept of "friendly money."

Six months later, the same group that initially approached me for advice explained they were unable to secure even the smallest microfinancing, even though their beta product had received rave reviews and was ready to take to market. They explained that they met with half a dozen bank managers, a few local finance shops, and had even held meetings with a Montreal-based venture capitalist and a government startup program, but in all cases felt the funders didn't fully understand their vision nor appreciate their passion.

I was introduced to Paul Lem and Sam Zaid in 2006, two like-minded entrepreneurs. Our initial meeting quickly led to a conversation about our frustration about how many amazing startups in Ottawa were ignored by conventional funding sources.

We agreed that the concept of 'friendly money' was almost non-existent in this town, and that this trend had trickled down from the onerous terms imposed by the mighty VC shops, such as overreaching restrictive covenants and harsh equity splits that often cut out the founder.

With this conversation in mind, a few months later my business partner and I launched a seed financing firm, and Sam and Paul launched Succession Ventures. Our mandate was simple: invest in great people and business will come. We've always believed that as long as we fund smart talent and provide strong support, our startups will succeed. We have no standard term sheets, no generic equity formula, and the most important aspect of the investment package is our support and guidance, never our seed money.

Paul and Sam had their own thoughts about how to change the startup funding game - identify young talent and provide them with a succession-backed business model. Paul and Sam knew that if they could find ambitious young entrepreneurs looking to build a startup, they could literally launch them forward, accelerating their progression through a vetted support network and a solid business plan. Succession-backed entrepreneurs receive a salary from day one, allowing that individual to afford living expenses and be properly focused on the project at hand.

Moreover, even if the startup is the brainstorm of Sam, Paul, or a succession affiliate, the entrepreneur receives a founder's equity stake in the company.

As much as the succession boys and I would like to pretend that we came up with this hybrid seed funding/incubator-like/venture shop concept, we are hardly the pioneers. For years, U.S.-based high-tech companies have set up internal incubators to allow like-minded people to work on new projects loosely tied into to the parent company's business.

Google has Gadget Ventures, Facebook has the fbFUND, but my personal favorite is Paul Graham's YCombinator, a California-based incubator focused on bringing hackers together to build really cool products and applications.

Although most of these examples play in a much earlier phase in the life of a startup than a VC, there is an emerging contemporary theme that entrepreneurs are no longer willing to accept ruthless funding terms, regardless of who it is, and that 'friendly money' is often the best way to fund your startup.

Harley Finkelstein is a entrepreneur who started his first company at the age of 17, and has founded a number of businesses including Innoventure Capital, a seed financing firm. 

 

Organizations: Succession Ventures, Google

Geographic location: Ottawa, U.S.

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