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Sunday, 28 April 2013 22:00

Rick DeVos has failed. (And he wants you to try it, too.)

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Start Garden founder Rick DeVos says he’s pleased with the $15 million venture fund’s progress in its first year. The fund invested $2.3 million in 106 deals as of press time, but none of those ideas funded at the earliest $5,000 level have become sustainable businesses yet, although a couple are “somewhat close,” he said. Start Garden founder Rick DeVos says he’s pleased with the $15 million venture fund’s progress in its first year. The fund invested $2.3 million in 106 deals as of press time, but none of those ideas funded at the earliest $5,000 level have become sustainable businesses yet, although a couple are “somewhat close,” he said. PHOTO: KATY BATDORFF

Ask Rick DeVos about failing as an entrepreneur and he’ll tell you he’s done it myriad ways.

But it’s those failures and ultimately the lessons he’s learned from them that have shaped the evolution of his entrepreneurial ventures in West Michigan.

Reflecting on the first year for his $15 million seed venture fund Start Garden, DeVos reckoned those valuable lessons from failure have helped shape and evolve his ideas and have made him a better entrepreneur.

By offering investment and mentoring to fledgling entrepreneurs, he hopes to encourage more people to try new ideas and to move beyond the all too common fear of failure.

“It is totally toxic to have this mindset that failure means you were a bad person or that you should not be trusted with anything else,” he said. “But there’s obviously different ways to fail. You can fail and burn a lot of bridges, or you can fail and learn and use the opportunity to make the next thing even better. It’s all about trying things and moving forward.

“Failure without learning is less valuable than failure that is turned into learning. There has to be a mindfulness about it.”

[Related story: How to win at Start Garden]

DeVos’ growth as an entrepreneur started with his first for-profit venture, Spout.com, an online social networking website for movie fans. While Spout had “interesting and differentiated content,” it didn’t stand out from the existing players in the market.

From his struggles to build Spout’s concept, DeVos said he learned the role that market differentiation plays in an idea’s success. The company was later acquired by Washington, D.C.-based SnagFilms.

“We could never quite figure that out,” he said of differentiating Spout. “From learning that getting and keeping people’s attention is extremely hard and for some things extremely expensive … that definitely informed our thinking around ArtPrize. It was, ‘Let’s do something completely unlike any art event. Everything that we would have spent on marketing, let’s put it into the prize pot and let the word of mouth carry it. Let the architecture of the event be so completely different so people sit up and pay attention to it.’ Obviously, it worked.”

When he started the pre-seed venture accelerator Momentum in 2009, DeVos said he wanted to support the launch of technology firms in West Michigan. The idea involved $20,000 investments in small teams working on short timeframes to launch new technology ventures.

The problem: The singular focus on web technology was too limiting in a region that doesn’t have a strong base in that industry, DeVos said. Momentum also struggled to get entrepreneurs to step forward and fill slots in the program because it had a rigid calendar that didn’t necessarily fit candidates’ schedules, he said.

“Having everything in batch process and not being in a town or an ecosystem that works on an academic calendar … and in general, trying to do that in a place that did not have an active venture ecosystem, just didn’t work,” DeVos said. “We figured that we needed to have more resources and that we needed to invest in a way to drive the creation of that ecosystem.”

Those shortcomings in the Momentum model caused DeVos to pivot. He created 5x5 Night to test the concept of a socially driven platform for people to share ideas. At each event, five participants had five minutes to pitch their ideas to a panel of five judges for the change to win a $5,000 grant.

While some in the community criticized the event’s celebrity judging method that was short on judges with business experience, DeVos said the program was strictly intended as “a philanthropic/prototype experimental exercise.”

“We were thrilled with how that worked, with how that drove how much the community participated,” he said, noting the experiment “gave validation to this idea of making seed investments.”

Armed with the lessons from Momentum and the proof of concept experiment from 5x5 Night, DeVos created Start Garden, which prioritized making more investments in many ideas in the hope that a few ideas or entrepreneurs would be able to standout.

“Just by moving to a more rolling engagement like we do with our $5,000 investments (at Start Garden) hugely opens the playing field to people,” he said. “We’ve definitely had validation that we’re better off at the very earliest stages, getting resources in hands of entrepreneurs and watching what they do with them rather than a lot of time and consternation around traditional due diligence. In the earliest stages, due diligence is an exercise in collective fiction writing. You can only make guesstimates and a set of experiments. That’s why we do the $5,000 investments and push people to do an experiment.”

As of press time, Start Garden had invested $2.3 million in 106 business ideas. The success of those investments is hard to measure, DeVos admits.

Years from now, he hopes to point to a series of successful exits that will earn his investors a return, but he also is blunt in acknowledging that more than half of the companies that receive the initial $5,000 will likely fail.

“Part of the reason that we’re investing in this way is to build that tolerance (for failure) – both for ourselves and to demonstrate that tolerance to the broader culture that it is OK that these earliest checks don’t work out,” he said.

Venture capitalists typically expect 40 percent of their investments to fail, another 40 percent will generate moderate returns, and at most 20 percent of the investments will produce high returns, according to the National Venture Capital Association.

John Taylor, head of research at NVCA, said “funding one or two very successful companies” should be considered a good outcome for an organization like Start Garden.

“You’re seeding these things and you don’t know what’s going to succeed,” Taylor said. “But you just need one in 100 or two in 100 to go on to the next phase.”

DeVos said none of the earliest $5,000 investments have led to the creation of a sustainable business, but a couple are “somewhat close.”

In the shorter term, he points to the traction gained by several companies that received the initial investments and to Start Garden’s ability to work with other funds, such as Grand Angels, as evidence the ideas are making progress.

Grand Angels member invested $750,000 along with $500,000 from Start Garden in Grand Rapids-based tech firm Blue Medora LLC, a joint venture of tech entrepreneur Nathan Owen and the web development firm Atomic Object LLC.

“I think Start Garden plays a critical role in the continuum of capital in Michigan,” said Jody Vanderwel, president of Grand Angels. “I like their tech expertise, I like the fact that they have different connections than we do and that they will go in at the seed stage and give a company a change to further mature and develop.”

David Brophy, director of the Office for the Study of Private Equity Finance at the University of Michigan’s Ross School of Business, agrees.

“I applaud the availability of seed capital,” Brophy said. “We still need sources of funds to get us across the chasm, the gap between early stage seed money and professional money.”

Beyond just providing investment capital, Start Garden also offers memberships for entrepreneurs to access coaching and mentoring and to attend training programs at its space in the Trade Center at 50 Louis Street in downtown Grand Rapids. To date, Start Garden has signed up 180 members to pay either $100 per quarter or $300 per year in exchange for access to programming held in the space.

As the organization works to perfect its model and to get a better handle on who and what kind of ideas it wants to invest in, Start Garden remains fully behind the public voting model and its expectations that the selection process and updates will continue to evolve.

“We try to start from a place of trying to totally embrace our ignorance,” he said.

While DeVos said he’s been pleased with the evolution of Start Garden, he readily admits that he and his team still have a lot to learn.

For a start, they might turn their efforts to people who’ve already been through the Start Garden program. Feedback was mixed from a sampling of recipients of the initial $5,000 investment contacted by MiBiz for this report.

While all the recipients said they appreciated the funding and what they were able to do with it to accelerate their ideas – to the extent that $5,000 could help do that – some reported the mentorship component of Start Garden didn’t live up to expectations.

“The most I got from them was: ‘Here’s $5,000,’” said Cory Richardson, founder of Gent, a male genital deodorant product. He used the money to improve the product’s formulation and to optimize his website. “In the contract they said they would be there to provide any resources and any contract help and so on and so forth. They didn’t.”

Still, Richardson said he’d consider working with Start Garden in the future because it gave him hope and a reason to push forward with his idea. He said he’s even been invited to audition for the reality show “Shark Tank.”

Start Garden was not a good fit for high-end bag designer and manufacturer Teamwork Bags, said Chad Morton, the company’s business development and project manager. Even though it was already a startup business, Teamwork was recruited to apply to the program, and it used the funds to help address scalability issues and to add inventory to its website.

However, the company took issue with the contract for the $5,000, which doesn’t require repayment but does give Start Garden a guaranteed position to invest in further fundraising rounds. At the $5,000 level, Start Garden does not take an ownership position in the company.

“Bottom line: They’re venture capitalists,” Morton said. “You might have a business that might pay you a hundred thousand dollars per year and you might make really good money. However, it’s not going to make millions of dollars per year, which is really what venture capitalists are looking for.”

It’s one thing to help seed a culture of entrepreneurship in the region, but at the end of the day, Start Garden is looking for the company that will make it money at an exit, Morton said. He’d like to see the group do a better job of communicating that to the community.

“For Start Garden, if your business or idea is not going to throw millions of dollars in cash, it’s not a good fit for them,” Morton said.

And going through Start Garden does not provide a company with free money or a guarantee of success. As Kurt Stauffer of coffee subscription service Regular Coffee described it, some fellow participants “thought it would be a magic carpet ride. We didn’t have those expectations.”

“In five years, they will have a portfolio of companies,” Stauffer said. “I think what they are doing is awesome. We’re looking for a way to include them in our future plans.”

Like it or not, new companies are still competing for the $5,000 and a shot at additional funding. While the initial rush of submissions has tapered off, Start Garden still receives 20 to 40 new ideas each week. That’s an acceptable number, DeVos said.

As the Start Garden team still struggles with whether to bet on the entrepreneur or the idea – the classic jockey or the horse metaphor for investing – DeVos said much of the success of an idea rests on the entrepreneur.

“(A) good idea is just an ante to get into the game,” he said. “Ultimately, the difference between a great entrepreneur with an OK idea and a poor entrepreneur and an unbelievable idea is that the great entrepreneur is going to win. It’s that hustle and that hunger.”

Even with that drive to succeed, not every great entrepreneur succeeds all the time. And that’s acceptable as long as he or she keeps trying, said DeVos.

“(Start Garden) is in a lot of ways a perfect project (for me),” he said, noting he enjoys the constant flow of new companies and new ideas. “There’s always interesting things to work on. I’m continuing to think about how to make this whole thing work better – What’s next? Does it scale? All these sorts of questions.”

MiBiz Reporter Nick Manes contributed to this report.

 

Read 10004 times Last modified on Monday, 29 April 2013 15:33
Joe Boomgaard

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jboomgaard@mibiz.com

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