9. A Regenerative VC Alternative - Lisbon 2022

so yeah um first of all um I want to say like my or express my deep appreciation for this event because I was in New York um presenting our approach to fundraising um with a more regenerative model um and funding the commons was really instrumental for a further Improvement to the model itself that actually made it possible for us to raise money with it um and my special appreciation here goes also to Michael zarum who was mentioned by Kelsey several times in the call before and the talk before because he was like his insights were key to these Evolutions so I'm a co-founder of a company uh where we develop a tool called MX and our goal was to figure out a way to raise funding for this software um with a more regenerative model that allows us to reduce profit maximization incentives while at the same time making it more attractive to VC's and generally the classic investment Market of angels VCS or stock markets and so what I'm doing here is I'm sharing how we approach this and hopefully it's useful to some of you um specifically if you're seed or early stage company with medium to high Capital needs and you want to avoid taking VC money for reasons like hey you don't want to have the growth pressure that this type of investment uh imposes on your company you might not as a company be a good fit for the expectations of having an exit in later stages or you just don't like to go down that route where uh profit maximization is uh on top of your agenda for a long time to come by the way the notes are still not here just saying so uh quick question to you and you can shout out now what do you think this curve represents just shout it out in the room as loud as you want thank all right um it has something to do with growth yes one last try all right I'm going to go ahead so this is the natural growth of a healthy organism it's how it grows in its ecosystem and it's also the natural growth of literally any service or company on the planet no no matter how big they will become even be moths like Facebook and Google will have the natural growth limit but now the question comes what is this again you can shout anything you can probably already guess where this is going famous hoey STI yes also true yes very much all right so this is the growth curve of cancer and essentially it's an organism that will continue to grow until it kills its host and it's also the growth expectations that our current economic incentives impose on companies and if we're now looking at the difference between those curves this is roughly um like expressing the pressure that a company feels uh to extract because at some point it will just naturally need to grow Beyond its own natural growth limit um as the incentives for growth continue to be put on the company's um yeah uh economic dve D and so this means with that a company also has little to no uh economic freedom for regenerative Behavior like for example internalizing its own externalities or spending money on the commons because ultimately what it means is every dollar that a company spends on any of those things will directly impact the bottom line of investors and so ultimately everyone will over time maximize for like like maximizing your own profits so what we need though is companies where the profit expectations are much more aligned with their natural growth limits but what we also need is companies that um have the capacity to grow big and fast especially because the reality is they need to be competing on a market where a lot of their competitors will not follow these principles at all and also a certain level of growth is like if we're realistic is necessary in order to have the impact that we need to have in order to regenerate uh the massive amounts of Damages that are have already occurred in our systems so we need kind of a mix between a way for a company to be regenerative but still being interesting for the type of VC Investments that they need to get that money because that's oftentimes unfortunately uh one of the only sources where you can get say1 to $50 million of Investments so if we want to have companies with more economic freedom for regenerative Behavior we need to have economic models that both can promise High returns but that also ask a key question which is how much is enough and so a really quick context um for what we build and how that all fits into uh this model essentially we're developing a knowledge management software and in our line of work the externalities that are created are unlike if you for example have a table where the externality is created in the Amazon where the the for the range Forest is cut down to provide uh like virgin trees Etc um in the Knowledge Management space the externalities the extraction that companies do when they profit maximize um affects directly users through for example things like lock-ins or uh extractive business models like ads Etc um but on the other hand a company like us needs to have quite high like Capital injections over its lifetime and those those resources it most likely gets only from VC type Investments and so for us it was important to figure out a way how can an investment model still be interesting for VCS Etc but have the capacity to not put the pressure on us to extract um at infinum essentially and a way forward that we found is a performance-based cap on stakeholder returns and that means essentially that there is a limit on how a com a limit on how much investors can extract from a company uh while at the same time rewarding outside success so it might still be the case that our company um has a um 50x return for investors over a 10-year life cycle but after that there is nothing more that an investor can extract so the pressure for for them to extract and like for us to extract from our users will seize uh after that timeline and what it also means is that suddenly the a company will get more and more economic freedom to do the right thing which means it has suddenly Capital that is extra that it cannot be claimed by individual investors team members or general stakeholders that then can be used for things like accounting the externalities that the company produces while operating um paying workers better for example uh or what I'm particularly excited about is becoming funders and backers for impact certificates and hypers hypers certs because there the inherent problem is that um many of the things that we want to put into impact certificates don't have a direct economic value that we can map towards so it's very hard to actually get the money into the system that uh then translates the impact into real world economic gain for the people who produce um the impact in the first place and if if you are interested in reading more about this there's a couple of people here in the pl community and also in the wider Community do amazing work and have written out a lot of stuff about it here are three names David Kevin nooki and alabora um I leave it up for a quick second if you want to take I saw someone wanted to take a photo good cool yeah so that all sounds really Rosy and cool and I like it but um there's a couple hurdles and in particular uh a cap inherently breaks ABC's math and that is because a venture capitalist invests in 10 companies one goes 100x the rest die and that's how they return their fund so if you say well if my company will be successful but it will be capped then you inherently break the risk return calculation so that needs to be solved somehow and the second problem is that um the the model itself needs to be as compatible as possible with the way the current legal structure around investing works but also the way the current sensemaking operations work for for investors so how do they invest how do they think about valuation how do they think about their returns Etc so the first question um that like Loops into the second hurdle so I start with that one um is how do we implement the cap and essentially what we do is we implement it with redeemable equity and we do this because um investors think in equity um previous implementations of C return structures often used debt instruments but those are not really compatible with the way like most investors think and what redeemable Equity does is essentially uh giving our company the right and responsibility to buy back its own shares at a specific time in the future and that means also that until that time in the future arrives those investors that invested early have kind of an uncapped return but afterwards where the risk also subsides a lot because company might already be fully operational makes a couple hundred million dollars per year in Revenue the the risk is just so much lower that an UNCA return going forward is actually not even reasonable from a risk perspective anymore and what's also really beautiful about this by having a r a redeemable Equity structure where the company ultimately needs to pay back its investors over a longer period of time we can also think about designing our own incentive structure so how we actually want to value that company and we can think about many different like flavors and that is really contextual to the company itself too and here's just an example uh to illustrate that um what I mean with that essentially thinking about the company valuation could be 20% of the market cap currently um t plus 3x are Revenue plus 2X are profit and we multiply all of that by how much ecologic iCal sustainability we have provided or how much Social sustainability we have provided so we can already from the beginning map out where the companies going and what we want to reward ourselves with by nature of how the payout um and the value of the company uh is determined and then we think about okay how how does a company eventually redeem its own Equity it's also a really big question because ultimately there's no Market necessarily anymore that will pay for the current investors's return how it is now right this like uh the latest fool Theory where you essentially have just one more person that is the next one will pay for this in this case the latest or the last fool is the company itself and so there could be for example by going through company profits it could be through Venture debt that at some point when a company makes enough Revenue to actually have a high valuation to also say hey we can recapitalize through debt that we can get from Banks um or from private Equity Funds Etc that then make sure that the initial investors are paid out earlier and another one that I'm personally also really excited about is something like a bailout to community so this is the kind of bailout that I would love to see much more like instead of big banks that have the economy the whole time actually thinking about how can we have companies that that do good and that are operating with these models how can we make sure that they in the shortest amount of time are without pressure to ex direct and that could be for example com um government governmental organizations nonprofit organizations um or philanthropic funds going and saying like Hey we're backing the B the buyout of or the payback so that the company doesn't need to actually um pay as much back to its investors meaning there's less pressure for the company to actually continue maybe on a semi extractive path and it also is an interesting way of thinking about retroactive Public Funding because you can really tie this the the the retroactive Public Funding process to a specific Milestone or a success metric that the company um achieves and through that like feed into this bailout to community and what's also really nice about this approach is that you can if you want to get started with something like that you can just start with a classic safe agreement um if you're familiar with this it's a y combinator has developed This legal agreement a couple years back that will make it really easy for um early stage companies to raise funding from investors because they don't need to deal with the question of how much is a company valued at a time when this is a very difficult question to answer and so we actually raised just with a safe and we can continue raising with a safe until we we do uh implement the redeemable Equity structures so this means you don't need to reinvent any new legal deals you just use what's already there you don't have extra costs for running with this model and with the save is also really important you buy yourself a lot of time because the safe agreement inherently gives no voting rights to investors which is really important in a situation where you want to yourself still figure out how do we value the company how do we do the Redemption how how are we setting up that legal structure that is in that is a bit more complex than the classic Equity agreement and you don't give investors the power to interfere in that process uh from a from a legal point of view so but still we have the problem that the cap inherently breaks the math and to the question for us in this in this context was how can we figure out a way to significantly reduce the risk for an investor so that a cap becomes again a bit more acceptable and if you look at this like poorly designed chart uh it would situate itself probably a bit more between a loan between a loan and a VC investment tilting or a loan or a bar Bond and tilting towards the risk return uh of a VC investment but uh with significantly lower risk but also with lower upside um potential and so that also means that this investment structure like I mentioned in the beginning might not be the fit for someone who wants to build the next Facebook but it might be a good fit for someone that wants to build the next figma or the even the next Twitter which is not the huge size of Facebook but it's a company that needs its 50 maybe even hundred million dollars in in investment over its life cycle that might be doable uh or smaller like up to like 5 million or something like that but not like hugely Capital intensive businesses which actually most of the businesses inherently are or want to be but are forced to go in another growth trajectory just because they took VC money in the first place so if you look at the um some of the risk uh factors that we can address with this model that current VCS have is one when they invest in a company they're usually locked in for a long time so you're locked in for S to 10 years until an exit happens and that means there's a lot of uncertainty you have no ability to go out and say I save my my initial investment or even maybe some small profitability there is just generally a high risk um of of the the company not succeeding and then there's in particularly also a high failure rate um on 10year time cycle I mentioned before like one company is exceeding the rest die so about 8% 8 to 10% of companies that are VC funded survive the 10year mark what we going to do in order to reduce that risk is we're going to use a tool called Fair Min I'm not sure if you're familiar with it um it essentially is not necessarily um limited to Fairman but what Fairman provides as a functionality that is really useful to us is that allows us to um tokenize these safe agreements and this means we can sell tradable shares in our company from day one um and this means we can on board our entire community of investors and users to start investing in a company with a direct legal tie to Future Equity of the company and what that does uh to those three different um risk factors is essentially one because their tradable shares you give a investor liquidity immediately this means if they want to exit they have a chance this doesn't mean they can obviously with the if the company does really poorly they will probably find less buyers for it but they could if the companies actually doing reasonably well say for example the company might be on track to say a 15x return on a on a 10-year time cycle or even more uh then someone might sell their shares at year two or three three for a 3X return and so this means if you can make on a three-year cycle a 300% return and you have then um like break it down to what the yearly returns are you get roughly say 100% return per year which is much much more than a VC currently calculates when they're looking at their average return rate which is usually between 25 to 50% per year per company averaged out over the entire portfolio I'm not saying that these numbers will happen but it's it gives you a sense of like if you have early liquidity that really buffers out a lot of the um need for a long-term High upside the second uh risk reduction factor with this is if you have an early Community Buy in in a product in particular the chances that this this one is very big signals for the investors hey there's actually people backing a product not just by being customers but actually by being investors that want to stay in the long term and um you have also um just generally because you have a lot of people backing a project they will be advocates for the project they will be advocates for the product so the chances that this company and this product Will Survive over mid and long term is also much higher and lastly the survival rate is also higher with those companies so a company that right now uh is forced to make profits like an SMB for example um has about a 4X higher survival rate than NC company over 10e life cycle and if we're looking at companies that are purpose oriented like like these kind of cap return funding structures uh they have a 6X higher survival rate on the 10-year time cycle and the reason for that is because they have a higher employee retention they have a higher purpose alignment so people actually go in with a lot more juice uh than they are when they work for like at some point a no-name company or like not no name but like um increasingly soulless company uh as it grows and um in the specific case of this structure uh it's because again those companies need to make profit if we're not be if we're not profitable if we're not able to repay our own um redeemable Equity ultimately no one of us will make more money than our own salary so we're all forced to make it a profitable company which means we need to the chances that we're dying if we're a profitable company having implemented services that people use on a daily basis is also just much much lower so give a quick recap of the road map here um how these like uh Domino Stones can fall we start raising with a safe it's maybe a bit small on this one if you can see it we start raising with a safe to then uh basically get our company to a state where uh we have um a solid amount of Revenue um and a solid user base that then allows us to raise in a more Community Based round through the Fage race where we can include um for example already um impact VCS that are less interested in these super high returns and the Fairman race also allows us to basically back the the first the most risky part of the investment timeline where we need maybe two to three million but those are backed by users who actually want to want the company as a product to succeed which means they are much less hungry for like high upsides and uh impact VCS also we which then allows us to gain a lot more traction and then include VCS like classic VCS um in probably series a rounds and we also recognize that in the first two stages classic VCS will still not be interested because ultimately VC's um fiduciary responsibility is to maximize the out of the assets they have that's their legal responsibility in front of their LPS so they will only go in if they can see strong traction and actually oh yeah if we make for example um uh what's what's it called yeah so so the the Evergreen fund of um what's that uh USV Ventures they expect their series a fund they expect like a two to 3x return on an investment over a 10e Time cycle so this means we already reduced the expected returns at that point uh from a potential 100x return to a 2 to 3x return and so this means this is a much more viable point for them to enter an investment and the last step is then the equity Redemption although that's right now not really clear when exactly that happens and this is also part of this ongoing research that we're going to have in the next two years or so is to actually figure out how is the exact Redemption process going to work um how we're going to Value the company um and um like how can we make that case and legal structures for that fair Min race uh really solid and luckily we got also 50,000 EUR Grand from the EU uh for doing that research so all the legal uh all the legal research around it all the tax research around it uh and open sourcing all of the contracts and uh of the legal agreements that we develop in the process so um yeah that's for everyone to use obviously um if you're interested in like being up to date with those with that research you can follow me on Twitter that's probably the the place where I start posting the most there also will um add uh once we have a Blog where we actually like properly post or and publish all of these uh the research output you will know there for the um at first essentially and wait is that the last slide oh no here and here you see uh it's a bit uh low um my Twitter handle is at blackforest boy with an i at the end uh or you can find me uh you can just write me an email at oi mx. Garden oi yeah hit me up if you're interested to both be up to date but also if you're really interested in having the like joining the conversation and the dialogue to figure out how we value companies in a more sustainable way yeah thank you so much um I would open it now for Q q&as if anyone have has questions and yeah thanks for being here I think the microphone is coming to you really small question um who are you raising with on the on the very first saves uh actually uh protolabs was one of our bigger investors in this round and a couple of angels okay so not really like big VCS more like Partners people that are going to participate in your growth yes exactly so that's Al also the stage in which we're in right now is to First raise from a very aligned group of angels and organizations partner organizations and then going to a community that is our user base and then going to like more like at either impact VCS and then later on like classic VCS awesome thanks I'm wondering if you've given much consideration to the regenerative nature of the Investments as well and um I've spent a bit of time thinking about this and uh when I when I say Regen it's a little bit like how different startups have formed their own Mafia post exit and that has basically created entire ecosystems that have allowed um organizations and individuals to be funded um do you think there's maybe a mechanism for this model to actually support more of the individuals rather than the organizations so in in my personal like value systems or value system I I would like to um Le like this this economic freedom for regeneration because individual individuals cannot infinitely claim profits it's also much more um optimized for a win-win scenario so ultimately if this becomes a really big and successful company I'd rather be in a system where there's 200 people that are all multi-millionaires instead of one billionaire in the system or like two three founders that are becoming billionaires and through that become a much more distributed Mafia essentially uh of people that um hopefully are more aligned and have the capacity in the capital to collaborate on a much wider scale than now like if we think about PayPal Mafia where five people obviously created a huge ecosystem around it with like huge impact in the world but it was eventually just five people who who made the most cash out of it sure I I I think the question is where is the trade-off um in the end if you if you say it if this is a billion dollar company at some point I don't know like uh if the company has then um a some $200 million fund yeah and that $200 million fund is um coordinated with a bigger group of people for regenerative purposes it's just the opportunities there because that fund cannot be claimed by individuals anymore so it has more freedom to be ch Chen for oh we can do lots of other things now without lowering the expected returns of the stakeholders anymore and that that is that is what that should do I don't know what the the actual implementation or the actual regenerative functions will vary from company to company but ultimately the key word for me is always economic freedom to make these decisions so I don't have a concrete answer how we want to do it either yeah yeah no I understand and the other aspect that I've been exploring is within the Investments how do you actually support the entire ecosystem as well so you might be funding one or two projects but even the failures of projects create great insight for um other projects to to emerge out of the ashes of them in many instances as well so um how can we be making Investments That Again support an entire ecosystem rather than putting a bet on one horse um a valid question probably bit out of scope of that particular structure uh what a question that came up in these conversations often is like how can investment structures uh address entire classes of tools or classes of like uh services like for example you invest in a personal Knowledge Management space where there's many companies that benefit from it that may operate uh with these models or similar um and have a kind of a um a resource sharing economy internal going that regenerates its own Commons as they go uh I I think I think it's a a very interesting and in Innovative idea to to cap uh returns um you know of course uh what you I mean I I suppose what you you don't really want to cap returns so much as prevent the thing growing into a monster um later on and uh you know this often seems to happen you as you say there's a pressure to extract and make more profit uh one of the reasons um as far as I can see that the things do kind of grow into monsters when prop uh companies get very big and profitable they start to get sort of monopolistic power and um you know they sort of everything they do is try hold on to their power then they become incredibly profitable because they can Crush their competitors uh and one famous example no doubt you've heard about this is probably like kind of archetypal archetypal example was which was uh Standard Oil in the in the early 20th century there were there were were broken up into into you know albeit extremely Giant O oil companies I think there was about four kind of Exxon and uh you know several others so I was just wondering if you know that that there are other um techniques uh or approaches you might have explored to to stop this uh monstrous growth other than uh capping returns perhaps uh a company being um automatically broken up uh once it uh passes a certain uh amount of returns perhaps could could prevent this sort of monopolistic uh you know metastasis into this sort of you know kind of world uh spanning octopus I mean I was just wondering if there's other other uh uh mechanisms that you have considered um I mean besides looking at what's already there like for example things like breaking up companies um or figuring out how to have regulatory tax uh burden on companies that uh become super big um the the problem with those I see always is like it's a cat and mouse game because as soon as the individual person's incentives are I can maximize they will find ways around it all the time and so that was the rationale behind this and also thinking about well how can we still make it kind of compatible with the uh the slot machine gamey nature of capitalism by saying at least the cap is a performance oriented which means the first 10 years of investors kind of get an uncap return but then afterwards where the risk is just so much lower it just is it should not happen anymore and so up up to that point you've gotten probably pretty rich at that point uh to to justify the risk that you've taken and then it's probably also fine um I see what you needs to be a mechanism that's that's maximally hard to sort of game or do something else or yes yeah or it could be a time limit I suppose there's another way but then yeah some companies take longer to become profitable than others so yes and it needs to be adaptable like for example we're that's why we have now these two years of work ahead of us to figure out what's our first Formula before we do that public launch with The Fair Race we want to have that formula so we know what's suitable as a formula for our company that we can reasonably provide those profits but also reasonably pay them back because if we make that formula to get us like massive returns and then it takes us 40 years to pay back then we have 40 Years of still the pressure to extract right so it's like how do we how do we get ease the pressure as much as possible um as the company grows older I say that's interesting thank you cool thank you so [Applause] much