It’s time for a mentorship-based seed fund in Louisiana

There’s been a lot of good news lately about entrepreneurship in Louisiana. With the renewal of the digital media tax credit and the energy around startups lately, things are just going to start taking off, right?

Well, maybe.

I still see some gaps in current eco-system that can be filled with a true mentorship-based seed fund. (In case you’re wondering, I mean a Y-Combinator / TechStars style investment program. Mentorship-based seed funds exist all over the country, I’ve compiled a listing here)

So where are the gaps? Well, here’s what I see:

  1. The “Moving Companies to Louisiana” Strategy – one of the biggest stated goals of the digital media tax credit, and a strategy I see LED & GNO Inc among others pursing is trying to lure companies to move to Louisiana with the tax credits, etc. GNO Inc put together a great deck, on what makes New Orleans so appealing. Probably the most visible impact thus far is the EA Sports testing facility in Baton Rouge. Here’s the thing: Established companies have employees. Employees have families, houses, schools located near where the company is currently based. Even though knowledge-based industries like digital media don’t have large infrastructure needs, their employees have established lives.
  2. Supporting the “Shoot for the Moon” Companies – I had a conversation with a Launch Pad member on Friday who has been through the startup process several times, and he and many others feel we don’t have the deal flow in Louisiana right now. The problem is that were not quite at the point where people are seeing the wealth creation of other successful companies, and frankly we’re just new to building a startup ecosystem. Deal flow is directly related to entrepreneurs willing to take huge risks. Entrepreneurs willing to take huge risks and “shoot for the moon” is directly related to having an ecosystem that supports risk-taking and acknowledges and accepts failure.
  3. Bridging the Gap Between Business Plan and Business - having a great idea doesn’t mean you are prepared to run a company. Most people starting a company have great subject matter expertise or talent, but may not have a fully rounded skill set in the ancillary areas of building a company. First time entrepreneurs get bogged down in this stuff: accounting, legal, personnel management.

So, how does a mentorship-based seed meet these needs and more:

  1. Move Folks when its Easy to Move – Start young. Most people entering Y Combinator are just graduating from college or in their 20’s. People are portable at this stage and many digital nomads would love nothing more try out New Orleans for a stint. We’re already seeing this with all the amazing young people coming down here post-K for Teach for America and programs like that. There is a huge difference in a person’s willingness to move based on what stage they are in their lives.
  2. Go Big - A lot of people have a “go big” idea, and given the opportunity to pursue it, even for 3-6 months will usually determine if there is something there or not. Of course, this is the riskiest stage of an idea, but most people never get the shot to really go for it. I know so many people trying to bootstrap a startup right now, but paying the bills with freelance work. The freelance work engulfs you and you never really get to go for the big idea. Often times (I am an example), people build service businesses to pay the bills, and though they may be successful, they aren’t investable and aren’t the big win that we all want to see happen. A seed fund that provides Ramen-soup money for founders to pursue an idea and get it to a prototype without having to divide their time to pay the bills really gives entrepreneurs a shot to go big. Think what would happen in Louisiana if every summer we gave 10 young startups enough funding to build out their big idea.
  3. Mentorship – these funds are called mentorship-based seed funds for a reason. They don’t just hand entrepreneurs $25k. They have a curriculum and program that teaches the skills required to run a business. Already in New Orleans we’ve created a set of entrepreneurial hubs. This is a huge start, because startups can ask each other questions, and tackle problems together. Filling this out with a true curriculum that removes the headaches of setting up your accounting, legal, etc would enable entrepreneurs to have a singular focus on building their product. We have people in this city willing to devote the time and effort, but the value of this contribution needs to be acknowledged and compensated.

What kind of investment are we talking about?

  • 10 companies selected for June – August 2010. Each company gets $25,000 to build a prototype. – $250,000
  • The administrative costs of the program are probably equivalent to the investment dollars. – $250,000

When I think about the real-world impact that a program like this would have and the allocation of economic development and grant dollars that are being spent in Louisiana on advertising, conferences, infrastructure, administrative staff, workforce development, it seems like a drop in the bucket to get a program like this off the ground and I believe it is an investment worth making.

What do you think?

Secretary Moret’s 90% Rule

Louisiana Economic Development Secretary Stephen Moret gets it.

In one fell swoop, after hours of wrangling on Monday at the Louisiana State Legistature, Moret was patched in on a crackling cell phone connection. After listening to all sides, he said that the most important thing to him for a company to qualify for the Digital Media Tax Credit is that 80%-90% of it’s revenue come from out of state.

It’s interesting and revealing to note, this has nothing to do with who does the work, where the work is done, or what the work is. Now, I’m not saying he doesn’t hold opinions about these things, and they will be codified in the bill, but his primary focus was that this work is export work.

Why?

Because, building websites and applications by Louisiana businesses for Louisiana business is going to happen anyway. It’s already happening now, people need this stuff, but it doesn’t expand the fiscal pie. So why incentivize it? On the flip side, if we can build businesses here that have clients in New York, San Francisco, London, LA then it gets interesting. Sound familiar?

Let me submit what I recognize is a controversial argument, but is in line with Moret’s 90% rule: My company, Flatsourcing, is good for the state of Louisiana.

Now, many readers know, but for those who don’t, Flatsourcing is a software development firm, based here in New Orleans, with production offices in Kazan, Russia. I just returned from a trip there last week with Peter Bodenheimer and two clients. We have a team of 21 people over there, and the business is growing.

I talked about Flatsourcing when I testified before committee at the State Senate this week. Of the six or seven of us, I was the only one asked a question, and it was clear that “shipping jobs to Russia” went over like a lead balloon. I was asked whether Flatsourcing would qualify for the Digital Media Tax Credit and I said no. I know the company would have more of an economic development impact if those 21 jobs were here in New Orleans, but for a variety of factors (too many for this post), they are not.

The economy of the 21st century is based on knowledge work, the creation of stuff that can be broken down to 1’s and 0’s and therefore done anywhere. Because of this, borders are pourus and its close to impossible to understand, much less regulate, where the work is done. The value chain is long and distributed, often globally. The most important factor of who wins this race is where the value is captured. Value capture = wealth creation = profit. If a company is based in Louisiana, and those profits are captured here, they will be taxed here and spent here. This is certainly the case in terms of Flatsourcing.

The fact that more than 90% of our revenue comes from outside Louisiana, flows into a company that is based here, is distributed here as profit, and gets spent locally very clearly economic development for the state.

When I speak to people about the stigma of outsourcing, I often bring up what the rest of the world calls it: competing. While I certainly agree that in an ideal world, all the people we employ would work in the same office here in New Orleans, this simply isn’t the way the world works anymore.

When I work with entrepreneurs who are starting businesses, one of the first questions I ask is: are you locally or globally focused? I believe you must be looking worldwide for customers.

It was refreshing to hear Moret focus on this idea of expanding the economic pie with the simple metric: does 90% of your revenue flow from out of state. We see it happening right now, right here.

Benjamin Reece with Deltree has national level clients through Deltree, has a partnership in New York that drives this business to him, and yet bases his company in New Orleans. Kyle Berner may manufacture his flip flops in Thailand, but he markets them all over the country, not simply in a local New Orleans boutique. Naked Pizza may be a local pizza shop right now, but the vision is much grander, and I know Jeff Leach won’t rest until they’ve got franchises all over the country. I am confident that all of these businesses will soon meet Secretary Moret’s 90% rule if they don’t already. These are the businesses that will expand the economic pie for Louisiana.

Turning back to Digital Media, it is unlikely that this 90% rule can be codified in the law, and that’s probably a good thing. We don’t want the state having to audit accounting statements. But it was great to see this understanding at the State level.

We’ll see how the Digital Media tax incentive works out, but I am very enthusiastic to see this high level understanding of what economic development is all about from Secretary Moret.

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