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Posted on Sunday, Mar 9th 2008

By Frank Levinson, Guest Author

When I left day-to-day contributing at Finisar in early 2006, I wondered if it was not possible to teach others some of what we learned in those early years. So began my journey working with small companies somewhere between being an angel investor and a venture capitalist. Probably the best and worst aspect of this has been that I have done it without having a VC firm surrounding me.

The advantage of working inside a VC firm is that I could learn from their collective wisdom – what to avoid in terms of standard and well-known pitfalls. Right away it was clear that the Finisar experience was not sufficient to be able to help well. The disadvantage, I suspect, is that I would not see deals that are so raw and entrepreneurs that are so green.

All that I do today I collect under the name Small World Group, if you want a short synopsis of that look at the short note at the end of this essay, or for a longer version click here.

Keeping with the Finisar model, all of the companies (where I am an investor, board member) have sales. This was critical part of Finisar’s success, to have sales from a very early stage and it is a tipping point for my participation. The benefit for small companies to have sales early and steadily is not only that revenues help their cash flow. Sales and customers serve as a constant reminder to the small team that their goal is to create a business, not a technology. And the most important element of a business is to attract new customers and to hold onto existing ones. Customer’s keep the small venture entrepreneurial and not just creative for its own sake.

Today I have helped fund and established 3 companies where portions of the Finisar model are functioning, specifically all of these have sales. And I am actively engaged with another 3 that have ongoing operations that have consistent profits.

Additionally, there are 6+ more groups that are not yet full start up businesses where the engagement level is pre-seed. These groups need help in defining directions, thinking through funding levels, identifying early customers or government grants whereby they could get started as a business.

With these groups, typically there are periodic meetings where we don’t just sit and talk. Generally we try to work together to find some low cost and early way to engage with customers. Can we partner with someone to get funding for a prototype? What steps should they take in order to get to a valuation of their business that they like and that will be acceptable to a traditional VC?

Outcomes of these meetings typically have tasks for both the group and me to perform. I am to find a place where they could test a prototype, to find a development partner, to identify some IP that could improve their efforts quickly. For the group, the tasks are to write a plan, build elements of a prototype, produce some data, take some risk out of a design.

On the website there are shown the top 10 lies of VC and one of these is “We like early stage investing.” Traditional VC firms no longer like to engage in company building at this very small level. The reasons for this are legion but most significant is that today’s funds are so large in terms of funds to invest that to work with a group to place $500K or even $2M would mean that the firm might have to have 100s of separate investments.

But for me, working with small groups who are trying to get started is exactly where I like to be and what I like to do. I like the chaos and uncertainty. The problem is how to do this efficiently and to choose the groups where some engagement will make a real difference. And to realize that there are no magic meetings where all things get settled, that even here there is process and that it takes substantial time.

Mark Farley (Finisar’s long time SVP of engineering) and I used to have a development model that we liked when the chaos surrounding an idea was particularly great. We would say that early development was the act of getting more and more potentially good ideas out on the table. And as this happens teams start to think of how it all can work together. But we would realize that the moment of truth was coming.

We called it the KaThunk. As people contributed to a new and somewhat undefined goal, there would be a large ball of ideas on the table. It was growing at a fast rate. All the ideas that were a part of this ball looked important as they were added. But ultimately some are not. Many are not. The KaThunk is when the ball of ideas somehow rapidly shrinks due to a rearranging of the really good ideas and the tossing out, at least for now, of the ideas that don’t really fit. Visualize a ball of 1-2 meters in diameter somehow miraculously shrinking down to 10 cm … and there is some loud noise that sounds like KaThunk. And from that point on the team looks at the ball and all there can see how the project can be done faster and with much less risk. All there see how they can make an important contribution. And, in the best of situations, all agree that the ideas tossed don’t need to be argued for until the KaThunk project and goals are achieved.

When it happens well, KaThunk is visceral.

To enter my version of the formative stage you will need to –

· Articulate big vision

· Exhibit humbleness about expectations, this is key to KaThunk

· Have a short term plan where product and customer targets are clear

· Have some early revenue scheme that keeps you customer centric

· Demonstrated a strong willingness to be tight with money

Small World Group Scope

All of the activities I engage in today go under the banner of Small World Group. I tell folks that I called it a group just so I would not feel lonely. But today, there are 3-4 of us, so I guess we are a small group.

The activities discussed in this essay go under the title of Small World Capital. In this arm of our work we engage with companies through teaching, investing and partnering with others.

SWG has a philanthropic side, Small World Institute, where we work in a relatively under served part of the non-profit sector. Philosophically speaking philanthropy has historically been classified into 2 broad categories –

1. “give a man a fish” so that he does not starve today

2. “teach a man to fish” so that he can feed himself more steadily in the future

But like to think there can be another element to this. That is worded as follows –

3. “create teaching universities” where art of fishing can taught, researched and expanded.

SWG works with folks that want to create fishing universities. Sometimes this means we work directly with existing universities, sometimes with research institutes. But in the future we hope to find a uniquely entrepreneurial way to do this 3rd category for decades to come. Stay tuned.

Small World Engineering engages directly in projects, sometimes in collaboration with the companies or non-profit groups where we are otherwise engaged. This can take the form of writing software, building circuit boards, filing patents or working with customers to understand a need better.

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