Sharing Tech Talent With Startups for Equity Stakesby
Sam S. Kim, 35, and Jason Jung, 32, last February developed an educational website for kids that attracted “a little bit of funding, but not enough to hire people right away,” says Kim. To improve Nanoogo’s performance and attract more users, they knew they needed to expand their technical team.
In May, they sold a 30 percent stake to Equitive, an Irvine, Calif., firm that invests in early stage companies by sending them engineers instead of money. Equitive put three engineers to work part-time at the fledgling business, starting in June. Now Nanoogo’s software is being beta-tested in 700 schools nationwide.
Most entrepreneurs know how venture capital works, but tech startups with low overhead often need people more than cash early on. Laurie Zorn, Equitive’s managing director, says her “human capital” venture firm sought to address that gap when it launched in May. “We’re piloting this concept now with a handful of companies,” says Zorn, who did management consulting for corporations such as Mattel and Unilever as well as smaller firms, before starting Equitive. “We’re really at the beginning stages.”
Her company and a larger fund that pioneered the model, Silicon Valley-based Originate, have in-house technical teams they loan out to the companies in their portfolios. Entrepreneurs “need to prove their concept to the next level of investors, but they can’t hire people to prove those concepts without more money. It’s a Catch-22,” Zorn says.
Instead of investing $10,000 cash into a company, Equitive might put two engineers to work part-time for the company for a couple of months, taking an equity stake in proportion to the work being done.
Equitive is concentrating on software engineers as it gets started. The 10 engineers working with the fund are compensated through shares in their equity portfolio, Zorn says. “We’re not recruiting people for full-time work. Most of them have a paying job elsewhere and they put in 10 to 30 hours a week working with our portfolio companies. They think of this more as an investment than a job.”
Rob Meadows, chief executive of Originate, founded the company in 2007 after he sold Lumitrend, his mobile software development and publishing company, to Asurion Insurance Services in 2006. “I made a big exit, did some angel investing, and then started a fund and hired a dozen engineers. Most of them had worked with me before and they were very entrepreneurial. They came back to me and said, ‘What are we doing next?’ and I said, ‘I don’t know, but you’re all hired.’”
Meadows says he wanted to add more value to the startups in his portfolio than just capital. “It’s easy to throw money at something. It’s harder to solve a tangible problem.” After he experienced the importance of engineering in his company, Meadows said he felt human resources would be the best route to go with his fund.
“It is the hardest part of building any tech startup. The difference between an A+ and an A- engineer is huge. You can get 10 times more done with a really excellent engineer vs. a just-good engineer,” he says.
The 100 engineers who work with Originate’s portfolio companies are primarily entrepreneurial, he says. “They don’t just blindly write code, they’re always thinking about the user experience. How will it work in five years with 10 milion users? How will it work with all the rest of the system?”
That kind of foresight and attention to detail is what Kim and Jung were looking for with Nonoogo. They are hoping it will differentiate them from the ed-tech pack. “This model is really different. As long as you’re not afraid of giving up a little bit of your company, you really have no choice unless you can find a technical team on your own,” Kim says.