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Over the past couple years I’ve had the chance to talk with several entrepreneurs that are interested in setting up a tech incubator. At the Atlanta Tech Village, we don’t call it an incubator because there’s no equity component. One of the tech incubator discussion topics was around entrance requirements, especially in a B2B context, with a goal of more transparency for applicants.

Here are a few ideas around entrance requirements for a seed-stage B2B tech incubator:

• Aligned Core Values – Entrepreneurs, employees, investors, and everyone else that’s deeply involved need to have aligned core values.
• 10 Paying Customers – Nothing happens until something is sold, and signing up paying customers, even if the revenue is small, is incredibly valuable.
• 3 Reference Customers – Customers that are raving fans, and happy to act as a reference, are critically important.
• Pain-Killer (not vitamin) – While this can be subjective early on, once customers are using the product, it becomes clear if it’s a must-have vs a nice-to-have.
• Clear Path to Scale – Every startup starts small, but the goal is for it to get large, very large, which necessitates a huge addressable market,

Similar to investor requirements, a seed-stage B2B tech incubator would have its own requirements. Regardless, an incubator would do well to publish what it looks for in resident startups and establish guidelines.

What else? What are some other possible entrance requirements for a seed-stage B2B tech incubator?

After yesterday’s post on Venture Firm Managing Partner Economics, I received a number of good comments and thoughts. Parker Conrad, founder/CEO of Zenefits, offered up that the economics for a VC change dramatically when managing multiple funds simultaneously. So true.

Here’s how the economics might look with multiple funds under management:

• Fund 1, with $100 million of capital, performs well (3x cash on cash), and Managing Partners make an average $2 million per year over seven years (most is back-loaded)
• Fund 2, with $150 million of capital, closes four years into Fund 1 (able to raise it quickly because of progress to date), performs well, and Managing Partners make roughly $3 million per year over seven years, but the first three years overlap with Fund 1, so during those years, the Managing Partners make $5 million per year
• Fund 3, with $200 million of capital, closes four years into Fund 2 (able to raise it quickly because of progress to date), performs well, and Managing Partners make roughly $4 million per year over seven years, but the first three years overlap with Fund 2, so during those years the Managing Partners make $7 million per year

Of course, this is all theoretical and is presented in a manner that makes the venture model look smooth and consistent (it isn’t). More complexities to the model include the fact that most venture firms don’t do well (see the Kaufman Report’s PDF – h/t @jalex2003), some have a hurdle rate before the VCs earn a piece of the profits (e.g. a hurdle rate of 8% requires the investors to get that return first – h/t @stephenfleming), and VCs have to invest their own money into the fund (e.g. invest 1-2% of the fund’s capital such that it takes several years of management fees just to get back to breakeven – h/t @lance). The venture business, and corresponding economics, are more complicated than expected.

What else? What are some more thoughts on the economics of the venture business?

Recently I was talking with an entrepreneur about his goals and aspirations. He offered up something I don’t hear too often: once he sells his company he wants to become a venture capitalist. We dug into it more, especially the economics, and analyzed how it might work out.

Here’s an example scenario of a venture firm with a $100 million fund and three managing partners:

• 2% management fee and 20% carry (profits) such that the firm has $2 million/year to operate for the first 5-7 years and then a much smaller amount after that
• $400,000/year salary for each partner and another $800,000/year for associates, office space, legal, accounting, etc.
• Fund goal to produce 3x cash on cash in seven years, so invest $100 million and generate $300 million from those investments net of management fees (say $10 million)
• Each partner gets 6% carry with the remaining 2% going to associates, venture partners, advisors, etc.
• With $300 million from exits, less the initial capital invested ($100 million), the firm gets 20% of the remaining $200 million, which is $40 million. The partners would then each earn $12 million (6% out of the 20%).

So, assuming the fund does well and everyone is happy, the VC earns $12 million over seven years plus a couple million more in salary. The money starts to get much larger when the VCs raise subsequent funds that are larger in size and/or land a once-in-a-generation investment like Google or Facebook.

The economics of a managing partner at a venture firm are straightforward, if not well understood by people outside the industry. As for the entrepreneur in the conversation, he’d make for a great VC.

What else? What are some other thoughts on the economics of a partner at a venture firm?

Recently I met with one of the angel investor groups in town to catch up on the startup community and the Atlanta Tech Village. One of the questions posed was “how can we become more top-of-mind for entrepreneurs in the community?” Easy, I said, the best form of marketing is education. Meaning, go out and help educate entrepreneurs, which in turn will result in more mindshare and more deal flow.

Here are a few ideas for angel investor groups in the startup community:

• Develop a program to help entrepreneurs learn the basics of building a business (e.g. run an event every Wednesday night for eight weeks like the Kauffman FastTrac program)
• Start a monthly breakfast series that’s open to the public for entrepreneurs to learn about the fundraising process as well as ask questions (e.g. the BCVP Entrepreneurs’ Breakfast program)
• Provide clear expectations around the desired types of investments, stage of business, level of traction, etc. so that entrepreneurs can quickly ascertain if they are a good fit
• Host an investor summit once a year where CEOs of portfolio companies present updates on their businesses and invite a small group of entrepreneurs to attend along with the members

Angel investor groups are an important part of the startup ecosystem. Groups that help educate entrepreneurs through events and mentorship will also see the best investment opportunities.

What else? What are some other ideas for angel investor groups in the startup community?

Earlier today I was talking with a startup executive that’s worked for several successful CEOs. Towards the end of the conversation I asked how he would characterize the CEOs and their styles. Easy, he said, there are the product CEOs and the sales CEOs.

Here’s a simple generalization of the product and sales CEO in a startup:

• Product CEOs – They love the thrill of inventing new things and new ways to help customers while generally spending most of their time with the R&D team. Often, they have an engineering or analytical degree.
• Sales CEOs – They love the thrill of closing a new customer and figuring out how to win more deals while generally spending most of their time with the sales team (see the SaaStr post on Hyperaggressiveness). Often, they were a sales executive before becoming a startup CEO.

The next time you meet with a startup CEO, see if you can figure out if they’re generally product focused or sales focused. Most fall into one of these two buckets.

What else? What are some more thoughts on product or sales focused startup CEOs?