Solving the seed funding gap — is it time for a basic income for entrepreneurs?
Solving the funding gap — is it time for a basic income for entrepreneurs?
Instead of getting a job when I first graduated University, I started a tech company. Many years and iterations later, one of those ideas worked.
I was in a privileged position — I had money saved up from previous businesses, scholarships, and was paying cheap rent. I also had a huge safety net — there was always my parent’s basement to fall back on.
Not many have that luck.
I would love to see a world where more people can bypass traditional employment and set out on their own. I strongly believe that entrepreneurship is the most important economic muscle to build, and the more we can support it as a nation (and world) — the better off we will be.
We need more people to start businesses, and Canada has an opportunity to become a nation that embraces entrepreneurship.
UBI (Universal Basic Income) is slowing seeping into consciousness, with the rise of wealth inequality. Essentially, it boils down to this:
A type of social security that guarantees a certain amount of money to every citizen within a given governed population, without having to pass a test or fulfill a work requirement. Every UBI plan can be different in terms of amount or design.
The following is a half-baked exploration of why we need to help more entrepreneurs, and why a providing a basic income to entrepreneurs might be a good solution.
Reallocate government funding to very early stage companies with low capital requirements
The cost to start a startup has decreased by orders of magnitude. Anyone with a laptop can build a business if they have the skills and time.
That time commitment often means quitting your day job. Most people don’t have two years of savings in their bank account, which means they need to raise funding to cover basic living expenses.
Fundraising is the least productive and most time consuming parts of starting a company. This problem is even larger in Canada, where there is virtually no early-stage funding.
Along with the time wasted, raising money early forces founders to choose their company trajectory before having a product in the market. Misaligned incentives resulting from raising capital have killed many potentially great companies. It forces founders to focus on selling a vision, inflating numbers, and growth at all costs — when they should be focused on the only two things that matter: Building and selling something.
To help individuals build and sell product, there are a number of government innovation programs that are designed to help de-risk the process of developing technology. Those funds are typically reserved for companies with employees and capital. They don’t address the most important question — how do we get more people to start successful companies?
Research suggests that Universal Basic income is well suited to replacing complicated funding initiatives such as welfare and social security (and the Canadian Government agrees).
Can we solve the Canadian seed-funding gap by reallocating a portion of current government innovation funds to a Basic Income for Entrepreneurs?
Introducing the BEI
The goal of the BEI is to provide a basic living wage for a reasonable time frame to individuals starting companies.
This BEI will be enough to cover a founder’s basic expenses — food and rent — for a period of up to 2 years. This will enable founders to spend time in the early stages of their company in the most productive way.
After two years, there will be enough data for founders to know if they should raise money, continue building the company, or shut down.
Here are some of the upsides for the individual:
Entrepreneurs can focus on the one thing that matters — building a product that people love
Less time spent fundraising and more spent building
More opportunities to experiment and tinker without blowing your life savings.
More opportunities for people that can’t afford to start a company.
Right now to start a company you need to be very lucky. You need the savings, the spouse, or the family money to have the privilege to jump into this world.
Imagine we could eliminate the downside risk of starting a company, while allowing founders to focus on building and selling great products.
How would it work?
Currently, there are a many ways the government is supporting tech companies in Canada. There are tax credits, innovation programs, venture capital top-ups, and dozens of other programs I haven’t found the time to research. The biggest issue with these programs is that they do more to help companies that have already won, and don’t fund more potential winners.
Step 1: Consolidate government programs
There are a number of tax credits, bursaries, and grants available to technology companies. Unfortunately, the process of navigating this funding is opaque, and it typically helps later stage companies become more profitable — not early stage companies exist.
I do have some first-hand knowledge here — my companies have received over $300,000 in funding from these sources. I received $10k when we desperately needed it, and $150k when we were already profitable.
Here are a few of the programs:
SRED provides tax credits for R&D.
IRAP provides money for R&D projects. Once a project is approved, up to 80% of engineering salaries are reimbursed.
The BC Tech Fund has a 100m VC fund. This could be a good way to deploy some of that capital.
Canada’s Venture Capital Action plan pledges $1 for every $2 raised by VC firms.
There are dozens more random grant opportunities available that I’m not aware of. If we could simply take all the money, time, and paperwork being spent on SRED, IRAP, and the other funding programs available we could fund thousands of basic income entrepreneurs.
Step 2: Run it like a fund
Let’s take a 50m fund, and assume basic income (provided certain criteria are met) is 50k/year for individuals.
For providing that basic income, the fund will receive a % of companies that are a part of the program for 2 years — in the form of a SAFE
The goal of the fund is not to generate a 4x return, but to break even. Not bad by government standards.
Basic math
Note: I need to hire a PHD to do some real math here.
Assumptions:
50k/year salary for individuals.
2 founders per company.
2 year basic income period.
10% of the company in convertible debt (This is the most complex part)
With a $50m fund, we can invest in 250 companies.
Of those 250 companies, if we use typical startup math that two year period — here’s what path we might be on.
Raise additional funding and become big successes: 1%
Raise additional funding: 10%
Grow organically (large): 10%
Grow organically (lifestyle): 10%
Become side projects: 30%
Fail completely: 39%
Using this math, from 250 companies we will have the following:
2 “unicorns” — assume valuation of 200m+
25 raise more money — assume valuation of 10m+
25 good businesses — assume revenues of 1m+
25 small good businesses — assume revenues of 200k+
75 side projects — assume <100k revenue
100 failures
From a pure valuation perspective, this pays back the entire 50m fund. We can also assume that the “good businesses” will either pay back the debt, or let it convert to equity and include the fund in their dividend distributions.
There is risk here — but it’s not a charity. Because the government isn’t beholden to make a 4x return on their fund, it can break even. Breaking even would mean thousands of jobs created and millions in tax revenue generated — not a bad ROI.
Even if it loses money, it will have succeeding in creating a class of skilled entrepreneurs who will build something else in the future, hundreds (or more) jobs, and branded Canada as the best place for startups.
Who gets the money?
This is where it gets complicated. Now we have problems with vetting, fairness, and capital allocation.
Who gets the money?
We need a fair way to distribute this income without losing the principle of it — allowing more people to start companies. I propose some basic criteria such as having a good idea, industry experience, and a plan.
We need to take a strict metrics based approach to this. Creating a blueprint for each type of company (SAAS, hardware, e-commerce) will allow us to track whether a company is meeting it’s goal.
For example SAAS company needs to have a beta live within 4 months, and a full product launch within 6. Failure to meet criteria will result in a loss of funding. The goal needs to be eliminating freeloaders, but not failures.
Under this model we should expect failure, and celebrate the benefits of those failures (lessons learned and skills developed).
Societal benefits
Implementing this on a large scale is the best thing Canada can do for its economy.
Increased competitiveness
We need more people starting businesses. They are the lifeblood of the economy, innovation, and job creation. This policy would brand Canada as the mecca of technology, and would also attract the most talented immigrant entrepreneurs.
Job creation
Think of all the jobs! More new companies = more new jobs.
More opportunity for more people
Most people don’t start businesses not because of a lack of talent, but risk aversion. There are so many talented people stuck in jobs that are both unnecessary and a waste of their talent. The UBEI will free up that human capital to work on important problems and grow our economy.
Derisking the future
Many industries as we know them will not exist in 10 years. The skills that will be needed are the ability to solve problems, be creative, and innovate.
Imagine we can get more people out of traditional, dying industries and learning the skills needed to start their
Imagine a world with self-driving cars, automated factories, and AI powered financial markets. What does our labour market look like?
A class of workers armed with the skills needed to navigate a very fast changing economy.
We don’t need another mid-level accountant who will be obsolete in 5 years, but we do need her to start a financial modelling SAAS platform for tech companies.
The BEI will move us from a reactive to a proactive position, and create independent, creative thinkers that can solve problems in any economic environment — not one that depends on traditional employment models continuing to be true. It could expand into a development program to fund youth entrepreneurship as well — with a smaller capital requirement.
Who’s with me?
I’d love to hear the communities thoughts. As with most of my ideas, it’s a half-baked vision that needs some beating up.
I do believe that if we can use our resources more efficiently and pilot this program Canada will the best place in the world to start a company.
That’s a vision I can get behind.
Update: I wrote this in 2016, and still strongly believe in it. I’d like to try it out, but on a smaller scale. If you’re building a tech or tech enabled company in a country with low cost of living — please email me a blurb about you and your project. I want to pay your salary to go full-time.
Thanks to Tom Bielecki, Eric Kryski, Matt Smith (MRR), Daniel Eberhard for reading drafts of this.
Solving the seed funding gap — is it time for a basic income for entrepreneurs? was originally published in James Clift on Medium, where people are continuing the conversation by highlighting and responding to this story.