The designer as investor

Posted by Fred Oliveira on November 30, 2010 | Comments (18)

I’m a big proponent of design as a differentiating factor in startup success. So is 500 startups, the fund lead by Dave McClure I’m a mentor for. So today I was working on a few things and thought about a combination of the venture capital model and design[1] agency work – and tweeted about it.

@f: thinking about a model where a design company would always work for startup equity. trying to make this model work.

The tweet sparked a bit of a debate, so I have decided to clear things up a bit by writing a post with fleshed out thoughts. Basically I have been wondering whether it is possible to extend the venture capital MO to other industries, namely design. That is, to have design companies or agencies invest into companies by providing their skills in exchange for equity (instead of the typical cash deal). I will also add that I don’t intend (as I said on Quora) to put this model to practice – at least not now. This serves as a thought experiment.

A few pitfalls in this “design as investor” model are fairly obvious:

  • Companies need cash flow and designers (and design-focused companies) are no exception. So there would be a bit of a chicken/egg problem as most people (particularly exceptional people) don’t necessarily want to work exclusively for equity in the ideas of others. Some people have suggested cash+equity deals (that are somewhat common).
  • Most startups fail. This means the designer/agency would find themselves working for a large number of startups in hopes that one of them gets a good exit to get a return on the investment.
  • Lets face it, picking winners is far from trivial, or we’d all be (successful) investors. Working for equity means due diligence – to a level most designers (and agencies) wouldn’t be comfortable with. This industry is used to being a bit more nimble – designer comes in, does the work, gets out (read my footnote number [2]).

There are, then, big reasons why this idea of the VC model applied to design should fail. However, something tells me we haven’t seen the end of this topic. A group of great designers with a clear sense of (what works and doesn’t on) the market, who are not afraid to take risks might just make a killing by creating a platform/process where they can invest their work serially into companies. I can promise you this: I’ll be thinking about this quite a bit (and report back on my findings).

Footnotes:

[1]: In my posts, whenever I talk about design I’m talking about design with a lowercase d or the whole spectrum of design including (but not limited to) design thinking, graphic design, interaction design and product design. People who still believe design is the “visual layer” on top of products and services need to reframe their thinking.

[2]: This is wrong, if you didn’t get it immediately. If a startup doesn’t show at least good signs of taking design and design thinking into consideration up from the idea stage, I would say it’s doomed to fail. Sadly, not only entrepreneurs are to blame here for ignoring design from the get-go. The design industry itself needs to step up its game – the meaning of the word designer is changing rapidly (I wrote about this before).

[3]: Be sure to also check out this post by Troy Busot, spurred by my first tweet on this subject. Troy presents a model on which this idea might work if the design (or design team) was to pair up with sales too.

Comments on this post

[...] This post was mentioned on Twitter by Dave McClure, Helen Walters, Crystal Beasley, Fred Oliveira, William Peng and others. William Peng said: RT @f: just posted about my Designer as Investor hypothesis. Here: http://bit.ly/designvc – would love your thoughts. /cc @davemcclure @ … [...]

First – thanks for taking the time to read and link to my post. Your original idea scratched an old itch in me. I have always had dreams of having a great agency but have decided on the product route instead (hence Athlinks) for the reasons that I wrote about. Hopefully, one will be a means to the other end.

But to your second point about most startups failing – I really believe that your model would (or at least could) mitigate that risk in the startups that you’re helping. Meaning that with some design resources and sales/marketing help, you would certainly increase the possibility of success.

- Troy (@troybusot)

fyi, I am a UX Architect by profession and Cofounder of a start up, Atrack (atrackapp.com).

This isn’t a bad idea and isn’t limited to UX. I don’t think having a company that only does work for equity is sustainable, for the same reasons you’ve pointed out. I think startups, especially pre-funded, need to seek out individuals who are willing to exchange work for equity. I currently have 2 engineers and 1 UX person working part time at my start up for equity.

Finding folks who have a day job and offering them the chance to work on something exciting can be very appealing. Here are some ground rules and expectations that I’ve set with my guys before they joined…

-The project has to be exciting to them. If it isn’t they will loose interest and leave you when they feel like.
-They can’t be strapped for cash because I have no money to give them. <– very important
-They have to have free time. This is a hard one and only time will tell if they truly have the time to commit.
-Their significant other has to be onboard with their decision. If their wife walks in at 1am and and ask "Are you getting paid for this?" and they say "no" she has to be ok with that. (unhappy wives = unproductive husbands)
-They have to like the team that's already on the project
-They have to be willing to vest (I did a 1 year vest period with a 3 month cliff vs the traditional 4 year…after all I hope to be funded soon and hire full time folks, so 4 year vesting is basically screwing them if they don't come on full time)
-They have to view the stocks as icing on the cake. I never promise success, in fact i point out the fact that most businesses fail so do not do this to become rich. However, by my actions I prove to them that I am fully vested in the company and willing do anything to make the company succeed.
-You have to treat these guys with respect and as part of the core team, (which they are) they are not disposable. Most of the folks who agree to do this type of work are the intelligent-want-to-do-their-own-thing type if people but haven't gotten around to doing it for whatever reason. They want to contribute more than just code or UX.

-Stephen
@stevoyoung

I did a similar kind of deal on my last project and it was not successful for either party. The design/dev firm took equity that we needed to use in order to raise capital. That left us under-capitalized, decreasing our odds of success. Also, it raised questions on our cap table since this is not a typical (familiar) arrangement. That raised eyebrows in all future funding meetings. Ultimately we looked at the hours (and quality) of work invested relative to our valuation and realized that we had made a terrible deal. We significantly over paid. In the future I would rather raise cash and spend that money on design than find myself married to a design firm for the long haul.

Academically this is a great idea. Practice is a different story.

–Lael (@laels)

http://about.me/lael

Interesting. What about a 25% paid deal (covers marginal cost + employment taxes) with 75% equity (on some fair valuation pre-design effort) which is backed by a VC? The VC should now how to value Startups and should be able to understand the value of good design

A mix-model with cash+equity could really work.
And I think you could apply your model to other areas, like Marketing and PR. Most startups (specially in Portugal) don’t know how sell themselves, because they can’t afford paying to a marketing / PR agency.

We did a part cash part equity deal a few times at my former design and advertising agency.

The other variation on this that is starting to occur is defered payment deals where part of the payment is dependent on reaching certain targets. This can be in the form of a set sum or a royalty but it is something that the ad industry and their clients are looking at closely as a way (for the agencies) to maintain the level of remuneration they are used to as budgets are increasingly subdivided, and (for the clients) to make agencies more accountable.

As someone who has worked on both agency and client side, I welcome it. Designers need to put themselves closer to the fortunes of their clients if they want to be taken seriously as contributors to business success.

I really like the idea, though I’m unsure of its viability.

What would be the minimum viable number of companies in wich you would have to do design work?
For how much equity?
How do other investors feel about having said service provider running for an exit to cashin on its investment?

The idea sounds good. I for one would go as far as considering it in a product startup. But I unsure about the cost of the team given the likely high number of seeds you would have to plant.

Design, in that sense is not complete when the PSD is delivered. That increases your cost, as unlike simple $ you are part of the team (specially if other investors are on board).

Looking forward to the progress of this, as the idea itself is quite Interesting.

We’ve been using a model of cash + equity for a while now to great results. We usually give a substantial income for some equity, as we rather become emotionally invested in the project and also enjoy the dividends on the value we create for our customers. I don’t think a pure equity deal could work, since as you suggested you still need to cashflow to keep the business going.

We started doing this a few months back; having survived the recession we found that a) good ideas come from smart people and good ideas foster thought on other projects. As a company focused on mainly digital we were part design part PR. While many remember the worthless options they worked for in the past some are smart enough to know that amidst the bad projects are some hidden gems. A model where you have most customers paying retail and one per month you take equity in is a great model. With some added working capital it is a model that we could grow (growth causes more growth..)

It’s a great model but perhaps best suited for our type of digital agency versus freelancers who otherwise need at least some pay on most projects.

We are just starting the model so only time will tell

Equity is expensive. And its long term capital.

As a startup I wouldnt be interested in paying something with equity that has large potential returns, I’d be paying more than the job is worth (and I’m not saying its not worthy). Even if I had to get a bank loan (possible, given the small amounts involved), I’d still be paying an interest rate much much lower than the rate involved with equity.

Also I wouldnt want to tie capital that should be used for long term stuff to pay for something that is a one time short term job (at least until a redesign comes up; still, its not ongoing work).

Aditionally I wouldnt be interested in getting an aditional shareholder with all the added work/troubles that it usually entails.

And finally, all of the above might risk or at least complicate any future investment by a VC company.

– MV

I’m a big advocators of designers as co-founders as opposed to ‘investors’. Hacker + designer = higher chance of sucess IMO.

MV: You should read footnotes 1 and 2. You seem stuck to the idea of design as “visual output”.

This is 2010. The designer you want isn’t the guy that just knows photoshop and delivers .psd files (or the html-illuminated designer that delivers html+css). The designer you need is different. He’s the guy that knows how to approach customers, figures out what they want (drawing from anthropology and ethnography), how to collect and analyze statistics, comes up with success metrics (drawing from real marketing, not bullshit marketing), design the right experience to meet business goals (ux and ui design). I am definitely talking about design with measurable, long term, possibly crucial results. The design that makes, or breaks a company.

[...] originally posted the definition below as a comment to my post on the designer as investor. In the last few years I’ve been trying to convey how I see design with a lowercase [...]

I think you made a good point in the “Due dillignece” thing.
So let’s start the idea with a “Design Due Dilligence” of the startup then let’s transfrom the Fit Gap analysis in a open proposal for the designers.

So the service would be That: a Free Design Due Dillignece for StartUp.
Could That be the Minimal Viable Product : )

(cross-posted from Quora)

I think the biggest challenge would be to make the concept of “equity” a quantifiable thing. There are too many startups out there with NO monetization path and/or financial viability. If the concept of “equity” becomes quantifiable (even considering the “risk factor”), I think a lot more designers would be willing to invest.

I still don’t know what some investors see in a lot of companies they pour money into… Tax evasion? Benefits? Influence? Power? Most designers don’t go for that. They rather be part of something useful. And they’ll be pouring HOURS into it, not “just” CASH. And you can’t have more hours than anything else, but you can have more money than anyone else. For an investor, pouring $1M is significant, but if he’s making $10M/year from other sources, losing $1M is bad but not dramatic. If you’re a designer and poured $1M worth of your time, regardless of how much you have in your bank account, you won’t get that TIME back…

Again, possible, but a lot of things will have to change in the “startup system” for that to be attractive to designers. I know I’d love to do it… :)

>This is 2010. The designer you want isn’t the guy that just knows photoshop and delivers .psd >files (or the html-illuminated designer that delivers html+css). The designer you need is >different.
>

Yes, and information architecture, etc. Its still a designer.

>He’s the guy that knows how to approach customers,
>

Thats a marketing/management responsibility.

> figures out what they want (drawing from anthropology and ethnography),
>

Oh please…

>how to collect and analyze statistics,
>

Thats a marketing responsibility. I seriously doubt the capabilities of doing
analysis on statistical data.

>comes up with success metrics (drawing from real marketing, not bullshit marketing),
>

Success metrics are a management responsibility, not a designer responsibiliy.
Again, I seriously doubt the wisdom of a designer providing a set of success
metrics for the business.

>design the right experience to meet business goals (ux and ui design).
>

OK. Its a designer job.

>I am definitely talking about design with measurable, long term, possibly crucial results. The >design that makes, or breaks a company.
>

Great. Its still a designer’s job.

The intention to mistify and enthrone the designers job is similar to
doing the same with ninja/guru/master techies: stupid. And in the case
of techies there’s some amount of justification. There’s no justification
in the designer’s case. Its an important job, but you’re crazy if you think
that its so important that it deserves equity. Like someone said previously,
if its that important and deserves equity, the designer’s job should be a
fulltime longterm job, not a onetime hit from some freelancer or company.
As such the designer should be a founder, permanent member of the team
and thus have equity.

— MV

The idea looks controversial and that’s a good start and I will try to narrow the Expert Contribution you are proposing to extract the juice of your proposal.

Your idea of design from Etnography to Success Metrics is appealing and anyone would like to sign for it, because if you have the right Sucess Metrics, the rest is a child game. You just have to build it.

A start up is, in my opinion, nothing else but a constant Success Metric quest. And these Success Metrics change quickly so I wouldn’t worry too much to have the right ones when I start. But I would pay to know if My Success Metrics are well integrated in my design.

This would be more Design Validation or something similar than actually DOING the design. This would be more something like introducing a way of doing/understanding Design in the Start Up than doing it.

I think that this aproach would fit better for start up. This would be like a Design Angel rather than a Design Investor.
I wouldn’t mind to give some share for real honest outside advice rather than incorporating more mistakes.

This comes back to the notion of Design Due Dilligence wich would turn in Constant Design Due Dilligence. For this I wouldn’t mind to give shares (5%–10%) assuming the guy is an expert.

So don’t do my design, just show me and my team the good and the bad. Just that. If we are good we should be able to improve if not ….

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