Why “Venture Funds” Launched Inside Of Agencies Seldom Work

I’ve been really perplexed by one of the hottest new trends in agency land to create in-house “venture funds” for launching new companies.  Do these things really work?  Is this really how you start companies today? &nb…

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I’ve been really perplexed by one of the hottest new trends in agency land to create in-house “venture funds” for launching new companies.  Do these things really work?  Is this really how you start companies today?   I’ve seen a number of these up-close-and-personal through my work in the M&A space.  

The concept is simple in theory.  Agency owners pony up some capital in the form of a commitment-to-fund a number of new ideas to be launched as new companies.  Employees who have those ideas can carve out some time to work on them and the hours invested are often deducted from the venture fund pool.   The idea is prototyped quickly and up and running.  Potential customers flock to the new app/idea,  VC’s get interested, agency creates liquidity event, employees who participated in the event get rich. 

I’ve had a chance to talk with several agency leaders involved with these funds and while they love the concept I haven’t seen a big case history of results. 

That is because in reality, new companies aren’t built this way.  Under this new in-house venture model, most of the time ideas do get built and do go to market.  But the customer base does not develop. The employees lose interest, and the idea peters out. 

What’s wrong with this picture? 

One would think the very talented agency people who toil on clients’ businesses making them rich and famous could create their own new businesses and become equally rich and famous.  

There is one big flaw in the model.  The flaw is in the assumption for what it takes to start a company.   The assumption that you can build a company by just having a great idea and the talent to build the idea is deeply flawed.  

Ideas don’t create companies. 

Developers don’t create companies. 

Designers don’t create companies. 

Corporate execs don’t create companies. 

Investors don’t create companies.

Entrepreneurs do. 

And successful entrepreneurs know that the only way you can create a successful company is full-on, full-energy, full-love, and full-passion for the customer you are trying to serve, solving the problem that customer has, and building the solution to that problem. All of those components are critical to any successful start-up.  Without the singular driving force of the entrepreneur, ideas cannot be born into companies. 

For many agencies who are trying to catch the VC/tech wave, this comes as an epiphany after a couple dozen false starts. The point of this is not to discourage the idea of creating a venture fund for new ideas. The venture fund concept inside a company has such enormous appeal to recruits and employees that they are worth having for those reasons alone.

The point is to set realistic expectations of what it takes to turn and idea into a scaleable company.  

As an experienced entrepreneur, I suggest re-ordering the process. Today the approach in most agencies is 1. Start a fund, 2. Build and idea, 3. Look for customers, 4. If successful, find someone to run it.  Perhaps a better order would be 1. Start with an entrepreneur,  2. Develop your customer base,  3. create the revenue-creating product, 4. If still needed, fund a venture fund.  More detail below:  

Entrepreneur Development.  

Focus first on incubating entrepreneurs vs. ideas.  The best place to start is by understanding what an entrepreneur looks like, how they think, and how they are different than corporate types. See Harvard Business Review six year study on how entrepreneurs thinkas a good starter. 

Customer Development. 

Become a student of the customer development process using todays’ new marketing tools.   Who’s the customer you are trying to serve, what is the problem you are wanting to solve, and how are you going to solve it are the most important questions most companies brush over when they start creating new apps/ideas. Read Steven Blank’s Four Steps to the Epiphany 

Idea Development.

After you understand the customer need and how you will develop them, it is important to have a framework for how you will build the idea.  I’m a huge fan of lean start-up and getting crystal clear what is your Minimum Viable Product (MVP), meaning the least you have to build in order to have a user experience that solves the problem.  There are several methodologies teams can coalesce around including XP, Waterfall (not recommended), Lean, Agile, Scrum, etc.  And there are hundreds of forums and communities under each to get support and understanding.  I’m a fan of the Scrum approach as it has daily status updates to work through the biggest barriers.   You can find great resources by going to On Startups in linked in or jump into Google’s lean start-up circle.  

If you can resist the temptation to start with funding then jumping to idea development, and instead start with entrepreneurs and customers, the chances of creating ideas that can scale to great companies go up tenfold.  

Victor Hugo got it half-right when he said, “Armies can’t stop an idea whose time has come.”   I would modify it slightly to, “Armies can’t stop an idea whose time has come with an entrepreneur.”

 

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