“The dress is for sale. I’m not.” Diana, Indecent Proposal (source: IMDB)
I got an interesting thread from Hacker News this week. The title: “Proposition HN: I will pay $8000 for you to build your side-project/MVP“. The premise is simple, here’s the original post:
Investors/Incubators over-estimate their ability to pick good ideas/startups.
An MVP built by a lone, but talented techie is almost as likely to turn into something ‘successful’ as a startup on angellist that has: 4 founders, 9 advisors, 13 press releases, 600 followers, etc
Most freelancers will not build and/or follow-through with their ideas, because they perceive their opportunity cost to be too high.
HackerNews has a decent number of talented freelancers with good ideas.
Based on these premises, I present The Proposition [Version 1.0]:
I’ll pay you $5000 to build the MVP of that idea you’ve been kicking around in your head for the last year. Once you’re done (ideally within 2 months), you can go back to earning your full potential. At this point, I’ll take over and spend an additional $3000 to acquire enough users/customers for us to evaluate the project’s likelihood of success. We split the resulting company 50-50, as equal co-founders.“
The person who submitted the proposal decided to stay anonymous under the username Hmexx, but provided a contact email and a started a blog detailing his plan going forward (gathering proposals and interviewing applicants in 3 weeks). This novel approach attracted 373 comments and an interesting post from Chris Yeh, which I encourage you to read if you have time.
Putting the accuracy of the premises aside (freelancers don’t act on their own ideas and so on), the “HN Proposition” triggered a lively discussion amongst startup friends in London. At the heart of this co-founder “indecent proposal,” is the co-founder relationship and the value of an idea.
The co-founder relationship is critical in the long term, way after the MVP. There are many considerations for choosing a co-founder for a startup, and writing a relatively small cheque is not necessarily it. What happens in the future is more important, and having a 50/50 partnership with someone who isn’t involved in the startup’s day-to-day will hinder its chances of raising future funding. Don’t get me wrong – a 50/50 split between two genuine co-founders, working side-by-side could work out great, but in this case “buying” 50% of the startup’s equity for $8,000 is essentially buying at a significant discount. Let’s run some simple benchmark numbers. Ycombinator, for example, will invest between $14,000-$20,000 per team for 6-8% of equity. That gives startups who accept the Ycombinator terms, an implied valuation of $150,000-$250,000. The HN proposal gives an implied valuation of $16,000. That’s quite a gap! Hmexx packaged it brilliantly, but the developer who accepts his offer could be easily fooled into giving up a huge chunk of his ownership.
On the alternative investment side, people brought up the Germany-based HckFwd, an investment vehicle for developers founded by Lars Hinrichs, founder of Xing. Developers (the program is intended for technical cofounders only) who pass the careful filtering process (see their “Blueprint” pdf) receive the HckFwd Offer, which includes a year of salary (up tp €191,000 for 3 co-founders for 30% of the equity – 27% for HckFwd and 3% reserved for advisors), office space, legal and accounting advice and mentorship from a network of entrepreneurs to build their MVP and get traction. If the startup requires additional funding (ideally), HckFwd makes the necessary introductions.
This promotional video for HckFwd says it all:
The veteran of this ‘startup factory’ model in the valley is Idealab, Bill Gross’s California-based “startup factory.” Started in 1996, Idealab has formed and operated more than 75 companies, the most successful of the bunch being Overture, which sold to Yahoo for $1.6 billion in 2003 and the likes of eToys, NetZero, CitySearch and others. Apart from this “services and capabilities” document, there’s no statement on the terms for investment, though sources told me it’s about 50% equity for a small investment, office space, legal and accounting services (including patents).
More recent Startup”Labs” such as ChurnLabs (started March 2011 according to this TC post) and Milk, Kevin Rose’s lab following his departure from Digg, seem to have attracted attention but failed to create a hit and eventually closed down.
In conclusion, it seems that while the cost of creating a startup has significantly declined, and the barriers to entry enable literally almost anyone to start a technology startup, there’s no substitute for the passion, focus and attention of the founding team and it’s unlikely to be artificially produced in a “Lab” environment or by simply providing a small amount of capital. Success is more likely to come from the sweat equity co-founders earn, the evolvement of ideas over a period of time and the magic element of serendipity, which increases by being part of an active startup community. Ultimately, the results are up to developers – would you accept the HN Proposition to build that idea you’ve been dreaming about?