The Electronic Micro Venture

Like probably a large amount of one man geek entrepreneurs I am constantly tinkering on a large amount of smaller projects and a few larger ones. Some of these ventures need time, promotion, investment, coding and other things. So it’s always a balancing act. Currently I’m guessing for many people these kinds of micro projects.

However what happens when you have a really good idea. It won’t make you a millionaire, but it would be cool and would hopefully bring a bit of cashflow your way. Now lets say you haven’t got the technical skils yourself to do pull it off or the money to invest in say paying for hosting fees etc. while it’s taking off. What happens now? I am guessing that 9 out of 10 of these kind of micro ventures don’t get past the planning phase, because of time and lack of some sort of skill.

The Corporation

Corporations were invented as a manner of making it easier to raise capital for such things as colonizing Virginia and building factories in Lancashire. It did this by protecting the investors against the founders or promoters of the companies. How did they do this?

• Limited liability - Which is the most well known function. If you buy shares in a company you are never liable for more than what you paid for the shares. This to protect you against the director of the company doing something stupid.
• Legal Person - In the eyes of a law a company is the same as a person. It can sign contracts, perform business transactions and get sued. To maintain this status it must keep everything legally seperate from the owners or managers. The company has it’s own bank accounts, that are strictly used for company business and not for personal. Any major decissions must be recorded as minutes so that share holders and the public can always see exactly who is liable for what and when.
• Company Register - Each jurisdiction through the world has some sort of equivalent of a companies registry. Here theoretically you can search and find out information about the company, thus allowing a buyer beware kind of situation for anyone doing business with them.
• Minimum Capitalization - Most civil law countries require some level of minimal paid up share capital. This also was intended to provide some security to it’s investors that it is properly funded. You might argue however that raising $20,000 before you can even startup is more of a liability for the budding entrepreneur than the protection it gives for it’s would be investors.

Granted now a days many of the above items don’t really protect investors or trading partners as much as they were intended too. But the ideas are good and good companies still follow those practices. Later on when governments realized that these instruments could still scam investors out of money, they started setting up securities regulation and institutions such as the SEC in the US.

The economics of fund raising for a corporation

The Corporation traditionally receives funding from outside investors. That was the whole idea of the limited liability corporation in the first place. For small businesses much of this funding come from friends and family. Larger corporations often attempt to start out with Angel Investors and VC’s.

The Due Dilligence barrier

For a VC to invest in a startup they have to perform due dilligence. This is the process of analyzing the business plan and the ideas behind it. This can be a very large job and is a source of much of the cost incurred by the VC. As the due dilligence is roughly the same regardless of the investment, thus the trend for the VC’s is logically to restrict the process for larger investments.

I believe that this due dilligence process is fundamentally one of the largest barriers to bringing VC type capital to micro ventures. However it is also one that can be solved, but to do so we have to return to some of the basics of business as well as really break the business down to it’s most basic parts.

Creating a simple transparent atomic venture

I propose that we break a business down to it’s fundamental parts and eliminate any part that can’t be made fully transparent. For example the business model should be super simple. For example I am starting a new venture to host NeuClear assets. My business model is very simple. I charge a small fee per transaction to my clients. With this I can transparently calculate my costs and provide realtime statistics to my investors on how much business I am doing. I had originally planned on doing various support contracts as well for local banks here in Panama who will be using NeuClear and want to host their own servers. I’ve decided that while I will still offer support contracts, it is sufficiently different from the the core business of my hosting company that it shouldn’t be a part of it.

H3. 6 simple rules

I’ve worked out some simple rules to help identify a business that can be used to model transparent micro ventures. These rules are somewhat inspired by The Cluetrain Manifesto, The Agile Manifesto and Joi Ito’s essay Emergent Democracy :

1. Focus on one and only one clearly defined economic activity.

You need to be able to model and audit this in real time. Create another entity for each related activity. If you need to group them together create a new parent entity, whose only focus is as a kind of mutual fund investing in it’s child entities. This also distributes it’s profits that it receives from it’s holdings direct to it’s share holders.

The revenue model should be very easy to understand. Model it out and create an online revenue calculator. This will help share holders understand and focus on the business at hand.

2. Distribute revenue early and often.

Depending on the exact revenue model, distribute in realtime or on a weekly basis. If deemed necessary keep a limited reserve in the venture, but distribute everything else to the share holders. This helps the transparency and motivates all parties to focus on 1.

3. Attempt to eliminate the burn rate.

If at all possible reduce all fixed costs. I’m not just saying what the GAAP says are fixed costs. The idea that consultants fees and monthly hosting fees are dynamic expenses are a left over from the industrial era. Any fixed costs need to be funded by you or an investor. So keep them small and transparent. Each one should be justified publically. If at all possible eliminate the burn entirely by offering shares to a stakeholder responsible for managing one particular function (see 6.)

4. Pay stakeholders with shares, not salary.

Salaries, wages and consulting fees are NOT transparent nor do they make sense in a massively networked world. Pay developers, staff and suppliers with shares. Due to rule 2. they will start receiving funds quickly. This focuses all parties on Rule. 1.

5. Keep a flat democratic command structure.

Representative democracty is NOT transparent. We are all on the internet now, there is no longer a need nor excuse for the traditional 3 layer structure of (officers, directors and shareholders). Utilize Blogs, Wiki’s, Discussion Forums and email to maximum ability.

6. Fund capital costs seperately from the fixed costs.

The traditional lump sum funding method is not transparent. If there are any major capital costs outline each one them when seeking funding. As an example in my hosting company we have the following capital costs:

• Server hosting
• Completed Transaction Processing Server customized for the hosting business.

For me the two of them are worth each say 25% of the company. Now an investor might want to offer $20,000 so I could buy the servers and pay for hosting until the venture is profitable. However I would receive the same value if a hosting company offered to handle the physical server hosting on an ongoing basis in return for 25 of the shares. The same thing is true for the software development. Traditionally the vc would pay a large lump sum to handle all the developers salaries. Offering 25 of the company to whoever solves the problem is better. Maybe a guy with big pockets could hire a team of developers in Hydrabad to do it or maybe a guy in Hydrabad or Talinn decides to bid for it himself.

If you do end up with a burn rate. Fund it as a kind of reverse option. Investor B. guarantees a maximum of $500pm for 12 months. When the venture needs it to cover it’s burn, it calls the monthly option.

Networked Economic Units

I’ve been thinking a lot lately about applying NeuClear’s concept of Networked Economic Units or NEU to doing this. The idea of small non incorporated electronic entities was the original idea behind NeuClear and gave it the “Neu” in NeuClear.

One of the original ideas we had for this was to allow owners of informal micro businesses to have some of the same benefits of a traditional corporation, without the costs involved.

The Networked Economic Unit was designed to have many of the same properties as a corporation, but under a much more limited level. Legally speaking a NEU is but a figment of your imagination. However once you imagine it (Create it) it works safely within the NeuClear universe. If you want to you could structure one as a formal corporation in some jurisdiction to do this. However if you are the only owner at the moment, there is no need.

The NEU has the following properties:

• It is self contained
• Maintains it’s own financial books
• It’s cheap (free if you do it your self or very low cost if you use a service provider)
• Create at will. No need to wait for governments, lawyers etc.
• Can create sign messages within the NeuClear universe, thus allowing it to perform business and sign contracts.
• Can theoretically be anonymous
• Can be fully transparent (everything that it does can be recorded and published if authorized by you)

Restrictions:

• The NEU can’t oficially do business outside the NEU world. IE. You can’t open a bank account for a NEU (but you could have an ecurrency account as long as it uses NeuClear).
• You personally are liable for all the debts and actions of the NEU. It is just a front for you or your corporation.
• It can only be controlled by one person.

Then the more I thought about it the more I realized that this could be used not just for helping informal businesses in the third world, but also for many of the smaller semi informal microventures that exist.

How the Networked Economic Unit works

Basically a NEU is nothing more than a NeuClear Account. You can create as many of these accounts as you want to. We recommend one for each specific narrow purpose you might need. There really are no restrictions on how many you create as long as you do it on your own PC.

What needs to be done?

A bunch of small independent services need to be created. Each one could be run by it’s own NEU:

• Hosting service for Votable Networked Economic Units. This server will sign on behalf of the NEU when the majority of it’s shareholders has voted to accept an action.
• Public portfolio server. This allows transparency by opening the books on a realtime basis of a NEU. This could be open to all or just to the share holders.
• Public NEU Community Server. This service would function allow each NEU to have a wiki, a blog and various other tools that are usefull for maintaining a NEU. This will in a sense be a living breathing constantly changing business plan.

We estimate the Portfolio server to be available in September. The votable hosting service should be available by October. With those we have a functioning network. Most of these will be based primarily on open source software released as part of the NeuClear project, so we hope there will be some competition as well.

The Proof is in the Pudding

As an experiment I will be creating various ventures myself over the next few months using these same above principals. This is also likely to be a living document. I will make changes as I go on. If anyone is interested in creating their own experiments or joining me for some of mine, let me know.