Introducing SeeYourImpact - a micro-giving platform for global 501c(3)s

A few months back a friend here in Seattle asked if I'd like to help out with a new non-profit idea he'd been cooking up. My friend - Digvijay Chauhan - had worked in the U.S. for years, first at Microsoft and later as co-founder and CTO of AskMe. But he was born and raised in India, and was all-too familiar both with that country's crushing poverty, and the inefficiency and corruption that often prevented help from reaching those most in need.

Dig's idea was simple: to create a platform that allows first-world donors to make small contributions directly to those in need, and to receive direct feedback in the form of images and stories about the impact their gift had made on the recipient's life. Because of his personal connection to India the idea would be piloted there, but if successful the platform could be made available to any qualified 501c(3) that could support the model of small gifts + personal impact stories. In keeping with its focus the organization was named SeeYourImpact (http://seeyourimpact.org)

Thanks to Dig's vision and persistence, the project quickly moved from idea to reality, hugely assisted by the commitment and support of Scott Oki (another Microsoft alum and committed philanthropist). A basic software platform was wired up (using WordPress for content management and PayPal for transaction processing), and we were just planning the first phases of donor outreach when the Seattle Times got wind of the effort and put together a story that ran today profiling SeeYourImpact and another local effort with similar roots called Jolkona.

We had hoped to tie up a few more loose ends before spreading the word, but the site is live and the Times story is out there, so SeeYourImpact is officially open for business. It's a little different from most of the startups I work with, but we have the same basic needs: customers and feedback. So if you have a few dollars to spare please come by and consider making a gift. Not only will it help us test the platform, you might just change someone's life...

Frugal Mechanic continues to rock it

Just a quick update for those of you following our investment in Frugal Mechanic: Eric and Tim don't make much noise but they're quietly dominating the world of auto parts price comparison. That may not sound like a big market, but DIY auto parts is actually a $19B market in the U.S. alone, and none of the big price comparison guys has shown the stomach for the extremely messy data work required to get it right.

They have a great destination site at http://FrugalMechanic.com, but the real story is in their white label auto parts search tabs for major auto-related media properties. They just inked a new deal with High Gear Media to run micro-targeted parts search across 38 of their online properties. And this is just the latest in a string of deals covering some of the best-known brands in the business.

I'm proud of the team at Frugal and fully expect them to run the table in this vertical, and maybe knock over a few other verticals with similar characteristics once they've taken care of auto. Keep up the great work guys...

'VC is Broken', Royalty Based Finance and 'Class R' Stock

Since last fall's economic downturn, dozens of pundits of various stripes have announced the death of venture capital as an asset class. And it's true (as Paul Kedrosky and the Kauffman Foundation have convincingly argued) that the class is grossly overcapitalized and will have to shrink radically to produce the kinds of returns investors rightfully demand for the type of risk being taken.

But if you look beyond the billion-dollar funds and their challenges, the early-stage investment environment isn't just surviving, it's thriving. Checks are being written, great new companies are getting funded, and entrepreneurs are getting the cash and support they need to grow.

Perhaps most exciting, with the persistent drought in public offerings and an equally sharp slowdown in corporate M&A activity, new investment methods are emerging that better align the interests of entrepreneurs and early-stage investors around the core metrics of success for any real business: revenue and operating margins.

A few weeks back a friend shared a recent HBS paper by Clayton Christensen (among others), applying his "disruptive innovation" framework to the venture capital business. Most of the paper covered the familiar ground of overcapitalization in a context of declining costs of technological innovation. But the part that caught our attention was the description of Royalty Based Financing (RBF), with the specific example of a firm called Royalty Capital Management, created in 1992 by an investor named Arthur Fox. In its simplest form, RBF is secured lending, but rather than requiring a fixed coupon and repayment period, the lender obtains a claim on a fixed percentage of gross revenues until an agreed-upon multiple of invested capital (typically 3 - 5x) is returned. RBF investors trade steeper default, timing and rate of return risk for richer potential returns than those offered by traditional business lending.

Just today, GigaOm ran a thought piece by Brian McConnell titled "Class R (Revenue) Stock: A New Class of Investment" that essentially reprises the strategy practiced by Royalty Capital, but with a hybrid debt-equity model geared to earlier-stage bets than traditional RBF lenders would typically take on:

"Let’s say for rough numbers that a group of angels invest $500,000 for a 10 percent stake in an early-stage company and 5 percent of gross revenues with a 5X cap (total payout: $2.5 million). The company does OK and turns into a nice small business with revenues of $2-$3 million dollars a year. Happy with that, the owners decide not to sell or try to grow much bigger. The investors in this situation will be receiving $100,000-$150,000 per year (off $2-$3 million/year in revenue), which is not a bad annual return, and will get up to $2.5 million over the life of the agreement. In other words, everyone wins — the entrepreneur is rewarded for creating a viable business, and the investors do well without having to force a sale."

The innovation here lies in bringing the RBF approach to riskier, earlier-stage investing, where investors retain an equity position as an option on a future liquidity event, while receiving a portion of the expected return in the form of cash flows. And the fact is, most well-run businesses look more like the firm in this example - growing, profitable, but not a shoot-the-moon success - than like the Google and Amazon.com rocket rides that the traditional venture industry is geared around.

We haven't yet done a deal like this at Founders Co-op, but we're trying it on for size, and - at least for some of our investments - this model may wind up being a better fit than the traditional venture approach. Most of all, we love the idea of breaking the mold in our industry - early-stage investing - in the same way we hope our companies shake up the status quo in theirs.

'Fire + Motion' at AppStoreHQ

Last week Ian reminded me about Joel Spolsky's famous blog post on "Fire and Motion" - here's a key excerpt:

"When I was an Israeli paratrooper a general stopped by to give us a little speech about strategy. In infantry battles, he told us, there is only one strategy: Fire and Motion. You move towards the enemy while firing your weapon."

This pretty much sums up our strategy at AppStoreHQ. With such a small team and such a big and fast-moving opportunity, our best approach is to pick a target from one of three critical areas - Content, Distribution and Monetization - release a burst of fire in that direction, and then sprint upfield to the next piece of ground and fire again.

To date, most of our bursts of fire have been aimed at Content (app + developer info, related blog posts, enhanced search, etc.) and distribution (widgets for iPhone owners, app developers and iPhone bloggers). We figured Monetization was too far away to get a clean shot, and that our Content and Distribution battles would put us in range eventually...

...but developers kept pinging us saying: "Great site. Can I advertise my app on it?" And we got tired of saying 'no'. In the spirit of Fire + Motion, we didn't want to blow a lot of ammunition on what seemed like a distant target. So we loaded up the smallest burst of fire that we thought would (a) satisfy the developer appetite for app promotion, while (b) delivering the most relevant and least-intrusive experience to iPhone owners searching for new apps.

Ian spent about a day and a half on this, a lot of which was brain-damagey stuff having to do with PayPal and SSL. But with that small investment we now have a basic app advertising program available on AppStoreHQ. The price is cheap and the rules are simple:

• The only "Ad" format available is premium placement for an app listing - the kind of thing our users are already looking for.
• Ads appear only when visitors are browsing or searching for apps by category
• Only one ad will appear on the page at any time (in randomized rotation with no more than two others per category)
• Only published iPhone app developers can play
• You can only promote apps currently for sale in the App Store (i.e., no “teaser” ads)

If developers like this and the inventory sells through, we'll have a nice (little) revenue line and a new source of relationship capital and feedback with our developer customers. If no slots sell we'll have invested a day and a half in some market intelligence. And if the result lies somewhere in between, we'll take what we learn, move up the field and squeeze off a few more rounds in a different direction.