Thursday, December 29, 2005

Part-Ups and Personal VC

Part-Ups and Personal VC
I've decided to create a new buzzword: Part-Ups.

A part-up is a startup which the principals are pursuing part-time as part of a deliberate strategy, rather than as simple moonlighting.

Increasingly, I'm meeting people who are pursuing a portfolio career where they spend some of their time on cash cows, and some of their time on part-ups.

Take my friend Auren Hoffman, for example, who uses cash businesses like the Stonebrick Group to fund his real work of founding technology companies.

Or how about my buddy Ramit Sethi, who is the co-founder of PBWiki, but is also a part-time consultant for VCs, and has a popular personal finance blog.

I know more part-up founders, but since some of them have day jobs, I won't name names....

Of course, a part-up really isn't the ideal solution. As Ramit and I discussed at lunch today, the issue is paying the bills while waiting for a liquidity event.

That's why I dusted off an old concept of mine from the 90s: the personal IPO. Except in this context, I think it should be termed a personal VC investment.

Let's take a bright guy like Ramit, who can generate ideas and companies on a weekly basis. The problem is that he faces the choice of either taking a job to pay the bills (which would suck up all of his time), or finding enough freelance work to do the same (which sucks up all one's time in a different way). What he needs is his $50,000 per year.

Now imagine a rich investor who believes in Ramit. He can't invest in a company like a VC, because not all of Ramit's value creation methods involve companies.

What he needs is a way to invest money with a claim on Ramit's future value stream.

Enter the personal VC investment. For $50,000, he purchases a claim on 5% of Ramit's future value creation, up to, say, 10X his investment. If he believes that Ramit will find a way to create $10,000,000 in value for himself, he, the investor, can make $500,000.

Is this a good deal for Ramit? Maybe, maybe not. Depends on if he can convince someone to loan him the $50K on better terms (or just find a rich sugar mama). But it's certainly food for thought.

2 comments:

Auren Hofman said...

i'm glad to be a small cog in the part-up revolution....


also -- regarding taking a small percentage of future earnings ... i could see harvard business school doing the same thing: tuition is free if you give us 5% of your earnings over the next 20 yrs ...

Chris said...

Cool idea, Auren. The only problem is that HBS already has the financial aid issue solved. Citibank will loan an essentially unlimited amount to any HBS student to pay for their education.

This means that students can get cheap debt financing, obviating the need for expensive equity financing.