DealBook: Entrepreneurs Help Build Start-Ups by the Batch

Peter DaSilva for The New York TimesRon Palmeri and Allison Rhodes Messner of MkII Ventures.

Just two years after its conception, Prism Skylabs has made enormous strides.

The 20-person company, based in San Francisco, uses video surveillance equipment to give retailers Web-like data on customer behavior in their brick-and-mortar stores. It has secured more than $8 million in financing from investors like Pacific Partners and Andreessen Horowitz and has contracts with 70 retailers.

But like many start-ups finding success in Silicon Valley and across the country, Prism Skylabs is not the brainchild of a rookie entrepreneur who risked everything. One of its founders is Ron Palmeri, a longtime Silicon Valley executive. He is among a growing group of professed company builders who are parlaying past successes — along with their own capital and thick Rolodexes — into operating companies and venture funds that work on multiple companies at the same time.

“There’s a group of us who are serial entrepreneurs who know a lot about building something and scaling it,” said Mr. Palmeri, who previously worked with CNET’s founder, Halsey Minor, at Minor Ventures. Minor Ventures used this model to build companies like GrandCentral, now Google Voice, and OpenDNS.

In 2010, Mr. Palmeri started his own operating company, MkII Ventures, with Allison Rhodes Messner, formerly of OpenDNS. The company is working on building out four different ideas.

The concept — often referred to as parallel entrepreneurship — is not entirely new. Back in the dot-com days there was CMGI, which once had a market value of more than $40 billion before dying a slow death and eventually being absorbed by one of its portfolio companies. Idealab, based in Pasadena, Calif., has been doing this for more than a decade, though with mixed results.

What is new is the number of prominent entrepreneurs and investors who are now going this route rather than staking their fortunes on single follow-up acts or taking less active roles as angel investors or venture capitalists.

“Venture doesn’t allow us to explore, only to accept and deny,” said Michael Jones, chief executive of Science, a builder platform in Santa Monica, Calif. He and a longtime entrepreneur, Peter Pham, started Science in 2011 with $10 million in venture backing, followed by $30 million from the Hearst Corporation.

Most of these investors-cum-inventors are motivated by personal passion to create companies. Under this model, entrepreneurs often tap their own networks and wallets to finance their ideas.

“I don’t have any hobbies,” said Max Levchin, a co-founder and former chief technology officer of PayPal. “This is what I do.”

His first version of this model, MRL Ventures, helped start the mobile business-rating platform Yelp and created Slide, a personal-media sharing service that Google bought for a reported $182 million but has since shut down. His new project, called Hard, Valuable, Fun, or HVF, will focus on a few big ideas with longer time frames.

Like Mr. Levchin, many of the builders came out of the recent wave of technology successes. Garrett Camp, a co-founder of StumbleUpon and Uber, has started Expa to develop new products and services and build teams to scale them. In Chicago, two Groupon founders, Brad Keywell and Eric Lefkofsky, put $200 million, primarily their own money, into Lightbank, an operating company. Lightbank has a staff of 20 and 60 projects in its portfolio, including Belly, a loyalty platform, and Frank & Oak, an online men’s clothing retailer.

Company builders say they provide a missing link in the life cycle of start-ups and do so more effectively than incubators. “The primary difference is focus,” Mr. Camp said. “I plan on creating just a couple companies per year, and spending significant time with all of them.”

Hunter Walk, a former director of product management at Google, said, “What’s often needed at the early stages isn’t more capital in a vacuum, but people with operational experience who can give their full attention to these companies.” Mr. Walk is raising a venture capital fund, called Homebrew, with another former Google executive, Satya Patel.

Once an idea gains traction, builders typically turn to venture capital firms for additional financing while gradually giving individual teams more autonomy. “It’s like raising children,” Mr. Palmeri said. “There’s a point where they eventually need their own space, but you’ll continue as a trusted adviser.”

Some company builders invest in a mix of their own ideas and early-stage concepts that fit a particular theme. Others, like Mr. Palmeri’s company, focus almost exclusively on homegrown projects, though they will recruit co-founders and teams to expand the companies into independent entities.

“It’s a highly collaborative process,” Mr. Palmeri said. “By the time we look for outside funding, the idea may have taken many different shapes.”

This approach resembles product development at large companies, like Apple or Google, only on a smaller scale. “The cycle of entrepreneurship can be pretty slow, so why not work on several ideas at one time?” said John Borthwick, chief executive of Betaworks, which was founded in early 2008 and is based in New York. (The New York Times Company is an investor.)

“Over time, you can build common tools, databases, analytics — all the things that give each idea a head start in the marketplace,” Mr. Borthwick said.

One of the biggest advantages to working on several companies simultaneously is the ability to share resources.

“The dollars used in the early stages of start-ups are often highly inefficient because you spend a lot of time and money just to get the business going,” said Mr. Jones at Science. His operating company has 25 people on its staff, specializing in areas like human resources, marketing and real estate.

“The early days of a company should be spent thinking about strategy and technology, not worrying about negotiating leases,” Mr. Jones said.

When start-ups fail, he said, often it is not because the ideas are flawed but because management did not have the tools or resources to execute the idea, were pulled in too many directions or did not move fast enough. Mr. Keywell and Mr. Lefkofsky noticed the same pattern in previous companies they had started or financed.

“We decided to bring those competencies inside of Lightbank,” Mr. Keywell said. “The whole model is designed to reduce risk and increase reward.”

Though some of the large venture capital firms have invested in ideas hatched by company builders, the concept has its skeptics.

“It’s very difficult to manufacture innovation,” said Andy Rachleff, a lecturer at the Stanford Graduate School of Business, former general partner at Benchmark Capital and chief executive of Wealthfront, an online financial advisory firm. “The reason most start-ups are successful is they had great insight, and the likelihood of having that killer insight more than once in a career is exceptionally low.”

While this approach allows individual teams to focus on ideas without having to worry about the nuances of running a business, it can pull the company builders in too many directions.

In 2011, Evan Williams and Biz Stone, who founded Twitter, and Jason Goldman, another former Twitter executive, restarted Mr. Williams’s Obvious Corporation as a builder platform. Recently, however, they said they would each focus more on individual ideas rather than work on several ideas at once.

“Turns out, we like focus,” Mr. Williams wrote in an explanation on the company’s Web site.

Nevertheless, proponents of parallel entrepreneurship argue that the odds are better for those who pursue multiple ideas. “The percentage of companies that are successful should be greater than the traditional portfolio,” Mr. Jones said.

Venture partners can regard company builders as “a monstrous insurance policy,” he added. “If something goes wrong with one of our portfolio companies, we can quickly dive back in and make things work.”

Entrepreneurs Starting Up With Fewer Employees

Success of Crowdfunding Puts Pressure on Entrepreneurs

But last week Apple announced a redesigned iPhone that is not compatible with the dock — and because of manufacturing delays, some of the project’s original backers were still waiting to receive theirs. The designers are now scrambling to make an adapter and update the product.

“I’m just hoping to get mine before the iPhone 6 ships at this point,” one backer wrote on Kickstarter.

Crowdfunding sites like Kickstarter and Indiegogo are letting designers and other creative people connect with audiences who want to finance their dreams, and they are becoming increasingly popular. Nearly three million people have helped a total of 30,000 projects meet their fund-raising goals on Kickstarter, the largest such site, to the tune of $300 million in pledges.

But for the creators of these projects, getting the money is sometimes the easy part. They then have to turn their dreams into reality, with a crowd keeping an eye on their progress.

This new model comes with a host of potential pitfalls that are often difficult for project creators to anticipate, and hard for the armchair philanthropists who back them to grasp. Backers are essentially putting their trust in the project creators, giving them cash in return for the promise of a future reward.

Those who give a few dollars to a moviemaking project may get their names in the credits, while someone who puts up $100 to support development of a smart wristwatch might be promised one of the finished items.

Much of the time this works out. But some projects, including several prominent and in-demand ones, have run into missteps and lengthy delays. The permits for a new food truck might not come through. Or a gadget like the Elevation Dock might be harder than expected to manufacture and ship.

The rise of crowdfunding came up often over the weekend here at the debut of the XOXO Festival, a conference that focused on new models and outlets for creativity on the Internet. The conference was co-founded by an early Kickstarter employee, Andy Baio, who sold $400 tickets on Kickstarter itself to gauge interest in the event and raise money for it.

The relationship between creators and backers on crowdfunding sites is still being worked out. The backers play the role of philanthropists, investors, customers — or all of the above. And when promised rewards are slow to materialize, eager backers can get cranky.

“It’s definitely a lot of pressure,” said Eric Migicovsky, whose Kickstarter project to create a line of “Pebble” wristwatches with innovative displays raised more than $10 million — more than 10 times what he had hoped to get. “There are 65,000 people who have preordered a watch that doesn’t yet exist.”

Mr. Migicovsky hired someone to help manage his in-box — nearly 9,000 people have e-mailed him about the project — and to post updates. He originally hoped to start shipping the watches in September, a date that he has had to push back, although he declined to say by how much.

A study by Ethan Mollick, a professor of management at the Wharton School of the University of Pennsylvania, found that 75 percent of design- and technology-related projects on Kickstarter, most of which involve physical products, failed to meet their promised deadlines. In general, project backers seem to be understanding of hiccups and willing to wait as long as they are kept informed.

“The honeymoon period that we are experiencing around crowdfunding is beginning to come to a close,” said Wil Schroter, co-founder and chief executive of Fundable, a company that is applying crowdfunding to the venture capital process. “People realize there is real risk involved in investing in anything early-stage, whether it’s an idea, a charity or a product, and they’re starting to understand they aren’t buying off of Amazon.”

Kickstarter says it is not responsible for making sure a project is completed on time, or at all. It says project creators are legally obligated to fulfill their promises, but if they do not, Kickstarter has no mechanism for refunding the money that was pledged. The project creators can refund the money if they choose.

Sometimes project creators can be overwhelmed by the success of a crowdfunding campaign.

The four college students behind Diaspora, a project that aimed to build an open alternative to Facebook, began with the modest goal of $10,000. They raised $200,000 from around 6,500 people. But after three years, they decided to start on another venture and turned the code over to anyone who might want to keep working on it. (One member of the team committed suicide last year.)

This article has been revised to reflect the following correction:

Correction: September 19, 2012

An article on Tuesday about the challenges of entrepreneurs who finance their enterprises through crowdfunding misspelled the surname of the co-founder and chief executive of Fundable, which is using crowdfunding for start-up companies. He is Wil Schroter, not Schroeter.

Success of Crowdfunding Puts Pressure on Entrepreneurs

But last week Apple announced a redesigned iPhone that is not compatible with the dock — and because of manufacturing delays, some of the project’s original backers were still waiting to receive theirs. The designers are now scrambling to make an adapter and update the product.

“I’m just hoping to get mine before the iPhone 6 ships at this point,” one backer wrote on Kickstarter.

Crowdfunding sites like Kickstarter and IndieGogo are letting designers and other creative people connect with audiences who want to finance their dreams, and they are becoming increasingly popular. Nearly three million people have helped a total of 30,000 projects meet their fund-raising goals on Kickstarter, the largest such site, to the tune of $300 million in pledges.

But for the creators of these projects, getting the money is sometimes the easy part. They then have to turn their dreams into reality, with a crowd keeping an eye on their progress.

This new model comes with a host of potential pitfalls that are often difficult for project creators to anticipate, and hard for the armchair philanthropists who back them to grasp. Backers are essentially putting their trust in the project creators, giving them cash in return for the promise of a future reward.

Those who give a few dollars to a moviemaking project may get their names in the credits, while someone who puts up $100 to support development of a smart wristwatch might be promised one of the finished items.

Much of the time this works out. But some projects, including several prominent and in-demand ones, have run into missteps and lengthy delays. The permits for a new food truck might not come through. Or a gadget like the Elevation Dock might be harder than expected to manufacture and ship.

The rise of crowdfunding came up often over the weekend here at the debut of the XOXO Festival, a conference that focused on new models and outlets for creativity on the Internet. The conference was co-founded by an early Kickstarter employee, Andy Baio, who sold $400 tickets on Kickstarter itself to gauge interest in the event and raise money for it.

The relationship between creators and backers on crowdfunding sites is still being worked out. The backers play the role of philanthropists, investors, customers — or all of the above. And when promised rewards are slow to materialize, eager backers can get cranky.

“It’s definitely a lot of pressure,” said Eric Migicovsky, whose Kickstarter project to create a line of “Pebble” wristwatches with innovative displays raised more than $10 million — more than 10 times what he had hoped to get. “There are 65,000 people who have preordered a watch that doesn’t yet exist.”

Mr. Migicovsky hired someone to help manage his in-box — nearly 9,000 people have e-mailed him about the project — and to post updates. He originally hoped to start shipping the watches in September, a date that he has had to push back, although he declined to say by how much.

A study by Ethan Mollick, a professor of management at the Wharton School of the University of Pennsylvania, found that 75 percent of design- and technology-related projects on Kickstarter, most of which involve physical products, failed to meet their promised deadlines. In general, project backers seem to be understanding of hiccups and willing to wait as long as they are kept informed.

“The honeymoon period that we are experiencing around crowdfunding is beginning to come to a close,” said Wil Schroter, co-founder and chief executive of Fundable, a company that is applying crowdfunding to the venture capital process. “People realize there is real risk involved in investing in anything early-stage, whether it’s an idea, a charity or a product, and they’re starting to understand they aren’t buying off of Amazon.”

Kickstarter says it is not responsible for making sure a project is completed on time, or at all. It says project creators are legally obligated to fulfill their promises, but if they do not, Kickstarter has no mechanism for refunding the money that was pledged. The project creators can refund the money if they choose.

Sometimes project creators can be overwhelmed by the success of a crowdfunding campaign.

The four college students behind Diaspora, a project that aimed to build an open alternative to Facebook, began with the modest goal of $10,000. They raised $200,000 from around 6,500 people. But after three years, they decided to start on another venture and turned the code over to anyone who might want to keep working on it. (One member of the team committed suicide last year.)

This article has been revised to reflect the following correction:

Correction: September 18, 2012

An earlier version of this article misspelled the surname of the co-founder and chief executive of Fundable. He is Wil Schroter, not Schroeter.

Entrepreneurship | Fellowships: The Thiel Fellowship Aids Young Entrepreneurs with Grants

The two-year fellowship, for applicants under age 20, was started last year by Peter Thiel, the Silicon Valley investor who believes more young people should be chasing breakthrough technologies instead of wasting their time and money in college. Mr. Wilson is in the second group of grant recipients, announced last month. He joins 43 other fellows — 39 men and 4 women — working on projects like developing unmanned aerial vehicles and building electric car motors with rare earth magnets.

By recruiting would-be Mark Zuckerbergs, Mr. Thiel is tapping into the lore of Silicon Valley, where coffee shops are crammed with C.E.O.’s barely out of their teens and being a dropout is a badge of honor — one held by tech’s biggest luminaries, including Steve Jobs and Bill Gates as well as Mr. Zuckerberg.

But the Thiel Fellowship has also fueled a fierce debate about the value of a college education in a changing economy, one where the skills to write software or build a robot, coupled with an outsize dose of ambition and a youthful belief in one’s ability to change the world, have the potential to produce fame and fortune in a way that few other professions do.

“You increasingly have people who are graduating from college, not being able to get good jobs, moving back home with their parents,” Mr. Thiel said. “I think there’s a surprising openness to the idea that something’s gone badly wrong and needs to be fixed.”

James O’Neill, a founder of the program, blames the cost of college for what he sees as a lack of innovation in areas like energy, transportation, nanotechnology, space travel and robotics. “Not only does college track you into a career with a big company,” he said, “but for many people, it piles on a huge amount of debt that limits people starting a company or quitting your job to tinker in your garage.”

The fellowship offers little structure. Fellows meet quarterly to discuss their projects and listen to guest speakers, but they work on their own. They are assigned mentors to turn to for what Mr. O’Neill calls “life-hacking skills,” like whether it is productive to work every day or to take time off and how much exercise entrepreneurs need. The grant comes with no strings; Mr. Thiel doesn’t even get first refusal rights to invest if fellows are raising money to start a company.

James Proud is a Thiel fellow who sold his start-up, a music recommendation Web site called GigLocator, in June. He said he knows he is missing out on the deep computer science knowledge that he could learn in college. “I would’ve been the first person in my family to go to university, so it was a pretty big deal not to go,” he said. “But I decided that I’ve learned so much over the past year, building a company, starting stuff and meeting all these people, that I’d be losing out more if I paused.”

Eden Full left Princeton to build a device that rotates solar panels so they absorb maximum sunlight, intended for the developing world. She has pilot projects in Africa, India and Peru. Ms. Full plans to reapply to Princeton when her fellowship ends. “I didn’t find college valuable before,” she said. “But I’ve learned so much about myself and I have this newfound appreciation for what college can do for me.”

But not all Thiel fellows are successful. John Burnham had bold plans to start a company to extract minerals from outer space. He quickly learned that $100,000 was not nearly enough to do that, so he came up with a new idea: creating models to make capital-intensive projects like space exploration economically viable. That idea also floundered, so now Mr. Burnham is figuring out what to do next. “It’s been really eye-opening for me to realize that just because you have a big idea doesn’t mean that’s all it’s going to take to make something happen,” he said.

For those who drop out — and fail to get a start-up off the ground — giving up college can hurt. Unemployment for those with just a high school diploma is 21 percent. And college has countless benefits even for out-of-box thinkers, from networking opportunities to learning practical skills that apply to starting companies.

William Damon, an education professor who directs the Stanford Center on Adolescence, is studying how young people become entrepreneurs. “A lot of the entrepreneurs are actually doing it based on the education they are getting in colleges or business schools, and the ones who aren’t, the famous exceptions, all have very deep and rich networks, often through their family.”

Mr. Wilson understands that. “College is the safe route,” he said. “The fellowship is definitely not the safe route. There’s a risk, but the only rewards come with risks.”

Entrepreneurship | Fellowships: The Thiel Fellowship Aids Young Entrepreneurs with Grants

The two-year fellowship, for applicants under age 20, was started last year by Peter Thiel, the Silicon Valley investor who believes more young people should be chasing breakthrough technologies instead of wasting their time and money in college. Mr. Wilson is in the second group of grant recipients, announced last month. He joins 43 other fellows — 39 men and 4 women — working on projects like developing unmanned aerial vehicles and building electric car motors with rare earth magnets.

By recruiting would-be Mark Zuckerbergs, Mr. Thiel is tapping into the lore of Silicon Valley, where coffee shops are crammed with C.E.O.’s barely out of their teens and being a dropout is a badge of honor — one held by tech’s biggest luminaries, including Steve Jobs and Bill Gates as well as Mr. Zuckerberg.

But the Thiel Fellowship has also fueled a fierce debate about the value of a college education in a changing economy, one where the skills to write software or build a robot, coupled with an outsize dose of ambition and a youthful belief in one’s ability to change the world, have the potential to produce fame and fortune in a way that few other professions do.

“You increasingly have people who are graduating from college, not being able to get good jobs, moving back home with their parents,” Mr. Thiel said. “I think there’s a surprising openness to the idea that something’s gone badly wrong and needs to be fixed.”

James O’Neill, a founder of the program, blames the cost of college for what he sees as a lack of innovation in areas like energy, transportation, nanotechnology, space travel and robotics. “Not only does college track you into a career with a big company,” he said, “but for many people, it piles on a huge amount of debt that limits people starting a company or quitting your job to tinker in your garage.”

The fellowship offers little structure. Fellows meet quarterly to discuss their projects and listen to guest speakers, but they work on their own. They are assigned mentors to turn to for what Mr. O’Neill calls “life-hacking skills,” like whether it is productive to work every day or to take time off and how much exercise entrepreneurs need. The grant comes with no strings; Mr. Thiel doesn’t even get first refusal rights to invest if fellows are raising money to start a company.

James Proud is a Thiel fellow who sold his start-up, a music recommendation Web site called GigLocator, in June. He said he knows he is missing out on the deep computer science knowledge that he could learn in college. “I would’ve been the first person in my family to go to university, so it was a pretty big deal not to go,” he said. “But I decided that I’ve learned so much over the past year, building a company, starting stuff and meeting all these people, that I’d be losing out more if I paused.”

Eden Full left Princeton to build a device that rotates solar panels so they absorb maximum sunlight, intended for the developing world. She has pilot projects in Africa, India and Peru. Ms. Full plans to reapply to Princeton when her fellowship ends. “I didn’t find college valuable before,” she said. “But I’ve learned so much about myself and I have this newfound appreciation for what college can do for me.”

But not all Thiel fellows are successful. John Burnham had bold plans to start a company to extract minerals from outer space. He quickly learned that $100,000 was not nearly enough to do that, so he came up with a new idea: creating models to make capital-intensive projects like space exploration economically viable. That idea also floundered, so now Mr. Burnham is figuring out what to do next. “It’s been really eye-opening for me to realize that just because you have a big idea doesn’t mean that’s all it’s going to take to make something happen,” he said.

For those who drop out — and fail to get a start-up off the ground — giving up college can hurt. Unemployment for those with just a high school diploma is 21 percent. And college has countless benefits even for out-of-box thinkers, from networking opportunities to learning practical skills that apply to starting companies.

William Damon, an education professor who directs the Stanford Center on Adolescence, is studying how young people become entrepreneurs. “A lot of the entrepreneurs are actually doing it based on the education they are getting in colleges or business schools, and the ones who aren’t, the famous exceptions, all have very deep and rich networks, often through their family.”

Mr. Wilson understands that. “College is the safe route,” he said. “The fellowship is definitely not the safe route. There’s a risk, but the only rewards come with risks.”