02 August 2005

Project Teams Now

Let’s get back to brass tacks re: Internet industry in Puerto Rico.

Last week, my friend Kevin and I were discussing recent events when he suddenly asked The Jenius “Where can we get a million dollars?” My reply was a waffle, to which he clarified “We could use it to fund ten projects, at $100,000 each, to create new companies that would revolutionize local business.”

The Jenius agreed instantly and pointed out that the concept of “project teams,” mentioned earlier in this blog, was built along similar lines: local companies, using local resources to attack global markets. The only way to revolutionize local business is to make it clear that We can not only compete at a global scale, We have the resources at hand to dominate in global markets.

Kevin elaborated the concept to include a very heavy review session per project, to ensure that the concept is as strong as it can be and that the “seed” money would have the greatest impact. Nothing new there, really, for this “Special Fund” would be basically acting as a hands-on venture capital firm. The difference here is that the whole 10 project portfolio would be launched within a year.

Most VC funds in Puerto Rico are of the “home runs only” variety, essentially would-be “cherry pickers” looking to make big bucks with every project. It doesn’t work that way, for investing in new companies is a numbers game. For every 10 projects, you can expect (on average) 3 wipeouts, 6 average successes and 1 megawinner. No, the optimal strategy isn’t to “find” the megawinner; the optimal strategy is to fund 10 top-notch ideas and use the successes (and even the failures) to create the environment for a megawinner. One hears of legendary VC firms that launched Amazon, Dell, eBay and scores others, but one doesn’t hear of the hundreds of projects these same firms have backed that don’t streak across the economic landscape as blazing comets.

Over a period of almost three years, The Jenius evaluated over 2,100 business plans for a VC firm in New England. Of these, 11 were directly evaluated and 6 were funded. End result: five average successes, one wipeout. Net gain to the VC firm: 54%. Yes, one megawinner alone could have returned triple-digits, but the return averaged 18% a year, which is adequate. (The Jenius had the “slush pile.” From the “top prospects,” almost 800 projects were read, 91 presented and 61 were funded. The return there was well over 41% a year, but failures outnumbered megawinners 2.5 to 1.) The moral of this story is that doing the search-to-fund work is where the dividends are generated, not in the “lottery pick” method We currently employ.

Of course, now We have to find a million dollars. The Jenius has a suggestion: It might be easier to find 10-20 good ideas first, come together to polish them and then use the final group to seek funds. Great ideas presented well can find money anywhere, but the present environment of “weak ideas presented weakly” won’t find money anywhere except through political leverage in the local government. (The Fools know nothing about anything.)

So now, what constitutes a great idea for revolutionizing local business? It must meet the following three criteria:

1) It must propose a product or service that meets needs of consumers outside of Puerto Rico. Seems obvious? A recent article about Guayacán’s EnterPRize competition indicated that quite a few of the ideas presented were for local franchises and business expansions in Puerto Rico. Their target market of projects is different than what's proposed for this Special Fund, but even so, how can a business idea revolutionize local business if its target is limited only to the local market? That would lead to Red Ocean results (fighting for the same pie) instead of Blue Ocean results (creating a bigger pie.)

2) It must use local personnel and/or companies in its initial stages. Two reasons for this: establishing a power base and speed-to-market. Unless We develop Our own economic muscles, We will fall further behind. And when the project team has both talent and close access to more, the process of a launching moves faster. You doubt that? Then tell me why Silicon Valley rules and so many other places want to emulate it?

3) It must be built to last, not to be sold. Yeah, the dot-com dream was to build a company in 2-3 years and then sell it for megamillions. But look closer and you will see that the real success stories are the companies that ignored the short-term and focused on the long-term. In addition, a power base is not something you build then give away. For Puerto Rico to become a true global player, it will need 6-7 big homegrown successes. It might take a few more, but it certainly won’t take less. Look at it this way: six or seven megawinners are not that hard to create, not with the talent base We have here.

If We choose to do it.

The Jenius Has Spoken.

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