Cleveland entrepreneurs undoubtedly need more help getting off the ground. There are a few channels for early-stage support including JumpStart, Techlift, MAGNET, CIL, GLIDE, and various university programs, each of which I've had great experiences with. Still, these groups can only do so much, since most first-time entrepreneurs really need direct and constant advice from entrepreneurs who have experience in their industry and have done it before. A Y-Combinator branch or Founder Institute program in the city would help immensely.
On the other hand, GCA's service appears to cost the same as the big-time incubators but without the major benefits. An entrepreneur should always ask themselves before handing out equity: "Is this person someone I will be glad I'm partners with in five years?" Adeo Ressi, Paul Graham, David Cohen? Absolutely. GCA? I'm not sure. Let me be clear that I'm sure the individuals at GCA are highly capable businesspeople, which they've proven with their press coverage and footprint so far, but this does not mean they should be coaching first-time entrepreneurs.
Here are some problems I've been thinking about since first hearing about GCA this spring:
1.) The partners have not succeeded as high-growth entrepreneurs. Whereas in the current well-respected programs you work with entrepreneurs who have one or more multi-million dollar exits along with long careers of direct industry expereince, the GCA team has collectively founded one VC-track business, Zolio, which never raised more than a seed round and currently has about 1,000 monthly unique visitors. I can't say that my track record is much better right now, but I'm also not running a startup advisory firm. Actually, the main reason I'm writing this blog post is that I had been thinking about doing something like this a few months ago and realized that if I did, someone would write this article about me ;)
- How they could fix this: GCA needs entrepreneurs-in-residence on staff that work consistently with clients. That would at least give some meat to the notion of value-added advisory for new entrepreneurs.
2.) The partners have very little other experience relevant to startups. Aside from Zolio, the management team has some work experience but not what I'd imagine is necessary to really provide something unique for their clients. Todd has some business analysis background which definitely helps, but that's about it. Dar's experience isn't very relevant (two years working as an independent architect; managing a P&L but for a one-man show). Their engineering expert Jeff worked as an engineer for a small hardware company for a few years - OK but not an industry expert. VP Finance Celia has worked in ibanking (looks like mostly family-owned companies, middle market manufacturing etc. as is common in NE Ohio), but as I've learned since my summer at Western Reserve Partners, finance in the ibanking sense has little relevance to startups, since you need operating history to do any sort of traditional financial analysis, and raising capital for an established business is an entirely different art than raising early-stage funding.
AGAIN, I am not ripping on the management here. I'm only saying that they don't seem to be the right people for coaching a first-time entrepreneur.
3.) The ambiguous economics of a GCA engagement could result in naive entrepreneurs getting taken advantage of. Visit GCA's website and look for the nitty gritty details of what a relationship with them will cost you. You won't find much. Go look at the competition's sites I listed above and notice that all these groups very explicitly describe their program's economics: amount the firm invests, all associated costs, amount of the startup equity taken in return, etc. They do this for good reason: there are a lot of snake-oil salesmen in the startup world due to the relative inexperience of startup entrepreneurs. I've run into the type before: pushy and sleezy financial advisors trying to sell insurance products to Fresh Fork while we were clearly struggling financially, "angel funds" pushing personal lines of credit as the best way to fund CitizenGroove (extremely easy to do, charge 5% commission, walk away smiling), a Nevada-based "social network expert, investment banker, and venture capitalist" trying to provide consulting for a cut of equity (soon afterwards found a web community comprised of people he had scammed in the past), the list goes on....
I doubt GCA is in that camp. I'm guessing the firm is well-intentioned, but they don't have the intuition and understanding that comes with a long history of serial entrepreneurship. They may enter into agreements with startups which they think are fair, even though the agreements are way out of whack when compared with competing programs throughout the country, simply because of this lack of experience.
- How they could fix this: there's no reason not to have a standardized, publicly-available business model for something like this. The details should be listed on their site. Should be easy enough.
4.) Although the details aren't publicly available, I gather that GCA is expensive even in comparison to industry-leading startup incubators. This is hearsay (although we could verify if the details were listed on their site, see above), but I understand that GCA asks for equity in the range of 5-10% for access to their consulting services and presumably free accounting/legal. This does not include any invested capital. This is *a lot* of your baby for some free business services, office space, and advice from people who, as mentioned, don't have any track record building high-growth companies.
Additionally, I'm not even sure the services offered are free of charge. From their July 2009 FAQ:
GCA will typically gain ownership in the start-up business. The extent of ownership depends on the amount of seed investment, business services and support the client needs. GCA also charges a monthly service fee for basic start-up services, business and communications tools and office space.
For one comparison, look at YC's program. You definitely receive some funding in the ballpark of $10-20k, help with all the legal work (although you pay for it in IOUs to the law firm) and services from people who have already made the mistakes that could sink your startup, and connections to dozens of angels and VCs (personal connections built over decades by the people who run the program, I might add). Oh, and if you have questions about your business you can ask someone with 20+ years of industry experience and wildly successful projects such as Paul Graham. How much does this cost you? 2-10% of your equity. Granted they don't offer you office space, but other similarly-priced programs do (Polaris' Dog Patch, Techstars...)
5.) Do the accounting and legal services actually help much? Unless there is value-added guidance from someone who has been around the startup block a few times, I can't imagine being pointed towards service providers (who probably will be paying a referral fee?) is better than doing it on your own. It's not too hard to network, get references, and find the right people to help with these things. I'd recommend going to Gorilla Group meetings, 20/30 club meetings, and getting in touch with groups such as Civic Innovation Lab, Jumpstart, and Techlift to get suggestions. Help finding these people should be icing on the cake, not the main reason you give up 5-10% of your company.
6.) Ultimately, we will not know if GCA is effective until a company raises institutional money. GCA's youth means their lack of seed or Series A raises is to be expected. I would personally let other people take the risk, though, and wait until at least one or two financings come through before I jumped on board.
Happy hunting to all.
Kyle
As a cofounder of CorkShare, a GCA portfolio company, I thought it would be helpful for me to respond and offer my perspective on what GCA is trying to accomplish.
I don’t think that Todd and Dar are trying to replicate YC/TechStars in Cleveland. GCA is closer to Sproutbox or midVentures in that their benefits include free office space, consulting/legal/accounting services, and opportunities to pitch to VCs and angels from outside the state of Ohio (SF, NYC, and Chicago).
It’s also a bit unfair to compare GCA to Paul Graham and David Cohen, two of the top early stage startup minds in the country. GCA is not on the same playing field, and we and other portfolio companies understand that. Todd and Dar don’t profess to be experts in the field; they are learning along with us, and helping us in any way they can.
GCA is more flexible in their portfolio company agreements than is reflected on their website, with equity percentages and investment dollars varying depending on each circumstance. There isn’t a straight investment formula like YC ($11,000 + $3000 per founder, ~6% equity) or TechStars ($6,000 per founder, 6% equity).
I agree with you on Zolio; they screwed up big time by investing in them two years ago. They funded a non-technical team in a space with strong competition (VisualCV, LinkedIn). However, a lot of other individuals believed in the Zolio team, including the Lorain County Community College Innovation Fund.
So I can’t fault GCA completely, and I feel like they’ve learned a lot since Zolio. The teams of other portfolio companies (Flexhire in particular) are much stronger with technical founders or founders who are experts in their field.
I think a big problem with GCA right now is that their website and public image does not clearly reflect their value proposition to CorkShare and other early stage startup companies. I’m going to be working with Todd and Dar to address this with a website overhaul soon.
Jim
Hi Jim,
Thanks very much for your perspective. I hoped that this post could start a public discussion so that other entrepreneurs in the area see both sides of the story before choosing to work with GCA -- it would be great if one of the GCA people could give some feedback as well.
Firstly, you pointing out Sproutbox and midVentures did help me to understand GCA's approach better. Still, I'm having trouble seeing the value. In bringing up Paul Graham et al I wasn't trying to say that something like this should only be done by world-renowned entrepreneurs, seeing as that would be tough to accomplish in Cleveland. If Charlie Stack, Dan Moore, or another local hero were to start something like this, I would be ecstatic. The problem is that the GCA partners aren't only lacking national recognition, they lack the bare minimum experience required to have an informed opinion on building successful startups.
Regarding out-of-state fundraising: what value is GCA offering in that regard? More specifically, can you give some guidance on the specific fundraising-related benefits Corkshare has seen so far? I thought through this while considering embarking on a similar venture, and I concluded that only an entrepreneur with many pre-existing connections and some notoriety could swing it (clearly not me, probably not GCA). I notice that they're connected to Tribe of Angels, but I don't feel like that connection is worth actually paying for. If anything, the GCA team looks like they are qualified to try starting another VC-track company, spend five years in the trenches, and then try to be a gatekeeper for early-stage fundraising. Do you as the CEO think it's better that another inexperienced person is fundraising on your behalf, or would you rather at least be making the first contact and building your own rolodex in the process? I understand that they are a sort of gatekeeper/aggregator, pooling a number of startups together to give non-local financiers a reason to make a trip and look at a number of companies, but I think this would be something a group with some notoriety (NCAF, ESP, JumpStart, Techlift, Flashline, a small local ibank like EdgePoint or WRP, etc.) should do for free or a price-per-showing basis rather than an equity cut.
Can you or the GCA crew give some specifics as to what kind of customization is required when determining cash/equity payments? I feel like most startups within an industry will have fairly similar requirements in terms of legal, accounting, office space, market research, design; and although some may not apply to some startups, I think those numbers should be public for the reason I mentioned in my post (e.g. "Legal: incorporation, provisional patent filing, trademark and copyright filings, operating agreement creation - 1% equity"). If not, maybe having some sort of "baseline" package cost, with the understanding that other services will cost additional equity or cash.
Kyle, first of all, great post. Although I may take issue with some points, overall I think you did a good job articulating legitimate concerns and proposing solutions.
As someone that's done the reverse trip: Silicon Valley to Cleveland (by way of Connecticut) -- and having worked in technology as well as economic development -- my perspective on some issues may differ.
1. I agree that GCA must articulate its model, services, fees, and *value* clearly and transparently. I believe they are working to do this.
2. I think it's both helpful, but tricky to speculate about precisely what type of quasi-incubator model may work in Cleveland. Having been around startups, fundraising, and economic development awhile, it seems that what works in one place is often difficult to do in others. Absolutely Cleveland needs to look at proven models, learn from them, and try to apply them to the region, but I think we should also be realistic in the near term about what's actually likely to happen in Cleveland versus Mountain View.
3. Is GCA a fit for every promising NEO entrepreneur? Definitely not, but it seems to me that there are a substantial number of promising young NEO entrepreneurs each year that can benefit from the types of assistance GCA offers. Over time, I think that GCA will demonstrate a track record of helping to keep successful startups in the region -- startups that would otherwise have skipped town. Is the help GCA provides today on par with YC. Nope. Will GCA get there? I and others are donating our time to help them get there. I'm not sure Cleveland can afford for GCA to fail.
4. Should GCA surround itself with experienced serial entrepreneurs? Absolutely, and I think that's slowly building, but I also think it's important not to overstate the criticality of tried and true, proven, high-growth entrepreneurs as advisors. Sure they can be helpful, but advice is cheap. Promising startups need resources to hire stellar, experienced employees and to constitute boards with similar individuals. In Cleveland, there's a paucity of both experienced technology/startup talent, and risk capital. What's the solution? Run lean and mean, build product, get to market, and mitigate risk. Smart money will always find good deals. In Cleveland we have just a handful of serial technology entrepreneurs and investors. One third spend much of their time outside the region, another third "invest" in later stage sure things, and the rest (maybe a half dozen folks) are knee deep helping others. That leaves plenty of frogs around that must still be kissed. Most of these will fail, but for Cleveland's future, I think initiatives like GCA must succeed in supporting the earliest stage entrepreneurs -- many of which otherwise will receive no help.
Cleveland's in a tough spot. In the spirit of your original post Ryan, I agree we need to be smart, look at what works in other places, try to apply what we can to this region, and watch out for the best interests of the risk takers: early stage entrepreneurs and the true angels and venture investors that support them.
I think you've tried to constructively critique GCA and that's always helpful. It seems to me that GCA is hell bent on making whatever adjustments are necessary to create more opportunities, jobs and businesses here in Cleveland. As someone now living and raising a family here, I'll continue to be a fan of these and other efforts to invest in the future.
Hi Paul,
Thanks for stopping by to comment, and more importantly, for contributing your time to the local startup community. Every little bit counts.
I don't have much to add in response but would like to reflect on your comment: "I'm not sure Cleveland can afford for GCA to fail." I believe that this is exactly the opposite mindset we should take to fight Cleveland's stigma of mediocrity. The subtext here says, "Cleveland is in such a bad spot that we need to support organizations like GCA no matter how poorly suited they are for the job." I don't like any part of that attitude. Cleveland needs help getting up to speed, but it's improving right now rather than taking its last breath -- I don't believe the city's current status warrants such desperation. And even if the city was languishing that badly, does embracing a poor organization really help young entrepreneurs and improve the outsider's image of the city, or does it serve as another example of mediocrity?
As their advisor you must believe in the GCA team, and it's great that they have support from individuals like yourself. I hope that they do execute their vision and that the city does benefit. Until then I hope that young entrepreneurs stay cautious and seek the advice of experienced mentors before jumping into a program like GCA's.
Kyle, you're reading too much into my comments, but I appreciate your enthusiasm and trying to protect young entrepreneurs. Let me assure you that promising entrepreneurs will make wise judgments for themselves. As for what kind of mindset we ought to take to fight Cleveland's stigma of mediocrity, it is always much harder to create solutions, to take risks, especially in a depressed region like Cleveland -- it's much easier to criticize. As I said before, GCA seems to understand it must evolve, but comments like "Poor organization" and "program like GCA's" betray your contempt. In a depressed region, constructive criticism is awesome -- contempt is poison.
Sorry if I sounded hostile Paul, that's not what I intended. By "program like GCA's" I meant an entrepreneurship-focused program. I have no reason to harbor contempt towards GCA; I am only a skeptic.
Hi Kyle,
I am a NEO entrepreneur looking for advice and came across this excellent post.
Is there an email address I can contact you at with some follow up comments/questions? I could not find one.
Thanks,
Jon
Hi Jon,
Glad to chat, feel free to email me at kyle@napierkowski.net
Thanks for reading!
Kyle