🙊 Scrapheap 🙀
1. A Lean Studio for Digital Ventures. Two founding partners of Two Bit VC would like to explore setting up a venture studio in collaboration with Bain — one taking up the role of the Managing Partner for the studio and the other its Operating Partner — and both partners run this venture studio together as a Bain affiliate.
The studio’s managing partner plays a secondary role — along the lines of “Venture Partner in Residence” — at Bain. The idea is that the venture studio and Bain work together as one unified team in front of Bain clients — to do more than just a bit of venture building while bringing in new business to Bain — to create more win-win situations.
So we name our practice “Two Bit Ventures” — because a two-bit studio for digital ventures just seems more fitting than say, a fat foundry for startups — and better capture the lean startup zeitgeist of Silicon Valley.
2. How Does a Venture Studio Fit into This Picture? We’d like to share our plans to kick-start venture building at Bain by way of Two Bit Ventures. Think of the current view of Bain Innovation Exchange as a pre-Alpha snapshot.
3. Something Worth Building? A step-by-step, structured approach to venture building is the holy grail for Two Bit. True insights on the raw needs of Bain clients — uncovered by case work — form the basis for new digital ventures and — in no time — a main driver of enterprise value.
We are on the lookout for surprises — things that confound models or things that don’t fit templates. We like to see what we might discover using first principles thinking. That’s where we find our gems — something worth building.
4. Connecting via Bain Innovation Exchange? So what would be an example of just such a surprise? Take a look at Bain’s pre-Alpha snapshot again — surprise — no venture studio anywhere. But we think that’s something worth building — the timing feels right — so we’ve found our first gem.
Next step is to identify a suitable Bain partner — someone with a growth mindset — who might actually enjoy working with a two-bit upstart — like us. “20/20 in 5 years” is the design goal we’ve set for ourselves: 20 YC-quality digital ventures — no BOTs — one every quarter for 5 years, target of 20 exits.
5. Positioning “Two Bit × Bain”? Let’s take a look at the trajectories of startups that are spawned as digital ventures by resourceful parent companies. For studios like DV down at Manhattan Beach, these digital ventures are the perfect cash cows. But at Two Bit, we like zebras more. Zebras are capital efficient startups with a good chance of exit at a short time horizon.
6. “Four-by-Two” Design Space? Zebras are “high-tech horses” — their coat of stripes a literal “no-fly-zone” that creates motion-induced distortions in the visual field of a fly’s complex eyes. So flies bounce off a zebra’s hide whenever they try to land — hence a “dazzle of zebras.” But unicorns are rare — a “blessing of unicorns” a pipe dream — better left to the seasoned trappers at Y Combinator. That’s why we go after zebras — way easier to raise than unicorns!
Two-year-old zebras fetch decent prices — and good margins — if we can keep capital cost under $4M per head. So we’d like to venture build a steady supply of young zebras into the corporate spin-in segment of the startup M&A market.
We estimate a portfolio-wide capital base of $40M for 5+ years — syndicated on demand and turning over twice — is adequate for a venture studio to address this white space opportunity. The unit economics of “$4 million by two years” — “four-by-two” — we’ve identified here is compelling.
7. Make Deals People Want. We shall study 3 “DIVE or DIY” cases: Alpha, Beta, and Gamma to illustrate the salient aspects of Two Bit’s venture building process. Using a product analogy, we think of Two Bit providing “quality assurance” for startups going into Y Combinator. And YC provides the equivalent of “90-day warranty” through its 3-month program, financing on demo day, plus ongoing “crowd-sourced maintenance” leveraging its alumni network. It’s a rich offering — just what venture builders like us want!
But there’s more. Two Bit goes the extra mile to take care of M&A via spin-ins on the home stretch — that critical but under-served final segment of the startup journey. Two Bit completes the loop of capital flow by bringing prized liquidity to investors — so they can replenish their funds and make new investments — and the cycle begins anew.
“Make deals people want” — providing liquidity by recycling capital back to LPs of VC funds is what makes Two Bit different. On top of that Two Bit plays a complementary role to accelerators like YC in the startup ecosystem.
8. Alpha Picture — A First Cut. Let’s peek under the hood at one picture of corporate digital innovation — sans YC. Here you’ll find experienced “time tellers” participating in “art critique” style decision making — rendering quick judgment on a series of 60-second pitches where startups either sink or swim. Makes for great drama — so you see the problem?
Let’s take a closer look. Shark-Fin Cupcake didn’t make it out the gate — got all mushy. Narwhal the unicorn whale had an impressive early showing but was blocked from the final spin-in — wasn’t a good match with the shark family after all. And Lego Shark? It neither sinks or swims — sort of just floats rather unexpectedly — so the process stalled out with no decision. See what’s broken here?
The moral of the story is this: it’s a lot easier to make up individual stories for what went wrong — than to seriously think about the bigger picture of how to make deals that people want. It’s a systemic problem that needs solving.
9. Beta Picture — Take Two. So let’s try again. This time we bring into the ecosystem 3 previously missing ingredients: (i) Y Combinator — so bye-bye Shark Tank; (ii) deeper-pocket VC funds in place of angel syndicates; and (iii) higher-quality talent who invest time for sweat equity.
We also establish “Startup Springboard” — a Two Bit institutional setup to grow and evolve “digital ventures” in partnership with Bain — quality assured from the start. A feeder school of fish into YC — on top of which we now have a Two Bit Club to provide the much needed “X factors”.
Despite the ecosystem upgrade — plus well-positioned “clock builders” as stewards of the process — one problem remains. Post YC, Scuba Kitty — despite her long-standing friendship with Baby Shark — still came out “snake eyes” on the final dice throw and so didn’t get spun into the shark family. Bottom line: without liquidity from M&A — all for naught. So we’ll need one more try to get things right.
10. Case-by-Case Analysis? To solve the mismatch problem, we came up with a “4×4 framework” that can characterize up to 16 distinct match profiles — each a testable hypothesis about “BitCo × BigCo” compatibility.
We think the higher order bits of corporate development can be captured succinctly — using just a quartet of variables. Corporate spin-ins — because they are context rich — is thus an ideal place to start. After all, there is no good technical reason why we can’t match companies like we match people — right?
11. Is The Price Right? In fact, with enough data it might even be easier — since we already know how to model a startup’s valuation trajectory with financial numbers and other forecastable performance metrics. Furthermore, by leveraging client relationships forged through consulting case work as a bridge to estimating co-created values — industry by industry — we have arrived at a common basis upon which one could determine how best to share gains — and create a rational marketplace for corporate spin-ins.
So — given the right data — one can almost play the TV game show: “The Price is Right” with startup M&As — where good answers win prizes! It might even be every bit as popular as Shark Tank. This may yet be another bridge to future businesses related to startup M&As — after securing an initial foothold for corporate spin-ins of digital ventures.
Looking closer at this particular instance of startup trajectory model, one could see that it is possible to even offer a discount on consulting fees — an operating expense for corporate clients — but add that discount back to the cap table as sweat equity in the digital venture. Upon exit via spin-in, those sweat equity yields a nice “exit bonus” — paid for by the corporate client as part of its capital expenditure. The consultants get paid either way, but this way they pick up a nice exit bonus, too!
Corporate spin-ins can offer a level of flexibility in structuring upstream consulting engagements or midstream project implementation, leading to downstream digital ventures formation. It is a competitive advantage for any “Big 3” consulting firm — a good reason for working with Two Bit on a new venture studio we’re proposing here.
12. Third Time’s a Charm. With a little bit of model thinking, we now arrive at this third and final picture, where liquidity happens and we can see all 4 cycles of capital flowing in a positive feedback loop. This is the engine behind “the largest legal creation of wealth on the planet” — John Doerr’s remark from over 20 years ago that still rings true today.
To operationalize this engine at Bain in the context of “digital ventures” requires mounting 3 special new gears: ‘C’, ‘D’ and ‘E’ to the picture —
‘C’ is for Team Charlie — provider of liquidity service that drives capital flow back to the LPs. This is — in the big picture — the raison d'être for Two Bit.
‘D’ is for Team Delta — curator of “Open Aquarium” that spawns new schools of fish to drives deal flow.
‘E’ is for Team Echo — operator of “Smart Sonar” that finds entire shark family to drive exits.
Now we see whole schools of fish finally swimming in the right direction and how that eventually leads to liquidity.
We’d like to find a Bain partner that not only has the right background qualifications but more importantly, an outlook that is compatible with our unique culture and value — so we can work towards build a thriving business around digital ventures — in grand style — à la two-bit.
13. Working with Venture Partners. We think this Minimally Viable Quartet (MVQ) makes a good initial cast to kick-start a pilot season of venture building — as a Bain affiliate and in partnership with Y Combinator. How do you think?
14. Working with Advisors. We’ll be advised by the wisdom of AngelList syndicated deals backed by CSC Upshot — the largest fund dedicated to seed investing started by Ming Yeh; and by corporate development expertise that Kai Huang brings to the table — literally from all sides: startup entrepreneur, corporate executive, investor, and advisor. One of us was fortunate enough to invest with the Huang brothers back in 2000 — in what later became the company that created Guitar Hero, a multi-billion dollar game franchise.
15. A Two Bit Club? This is where we spend our 20% time tinkering with new ideas. We have a trio of projects spanning 3 different areas that are all very interesting. How — or whether — they can be turned into digital ventures someday would depend on the quality and motivation of people who join our club — so all are welcome!
16. Our Value: Bricolage. It means the construction of a structure of ideas achieved by using whatever comes to hand; that process of making do that leads to serendipity.
17. One-Picture Vision: Kaizen Wheel. Our two-bit vision is just one picture — that of the Kaizen wheel — a flywheel for continuous learning that encodes how we plan to achieve our 20/20 vision — a Big Hairy and Audacious Goal!
The key is in realizing that launching startups towards product-market fit is rather similar to launch rockets carrying satellite payload going into orbital space — both inherently high risk endeavors prone to frequent and spectacular blow ups — in the market or in the sky. So we eschew moonshots and unicorns — settling instead for slingshots and zebras. And we do this methodically — learning as we go.
So in a way we think of ourselves operating an “HFT-like” venture strategy — fully “market neutral” as long as there is a buyer on the other side ready to execute corporate spin-in. We don’t take positions — so we formulate no views on the market, and write no theses for the zebras.
18. Benefits to Bain? Power of a Mighty Mouse to lift the elephant out of the room — banish forever — using nothing more than a two-bit lever supported by a well-placed fulcrum — a digital innovation hallmark of Archimedean proportion.
19. Venture Building at Bain. How the picture changes from pre-Alpha to 4.0 — with the simple addition of a two-bit venture studio co-resident at Bain.
20. Two Bit × Bain? The timing feels right — hence our proposal for setting up Two Bit × Bain. Let’s explore further?
21. Slicing 20 Pies. We plan to do 20 deals over 5 years — organized into 5 annual seasons of 4 ventures each. This is a simple two-bit scheme to count bits and share gains.
22~24. Five Seasons in 3 Installments. The 5 seasons are grouped into 3 installments of 2+2+1 season(s) each.
25. Staggering 20 Launches — To build up momentum in the Kaizen wheel as we learn. We give ourselves 5 years.
26~27. Programming 20/20. Our planned annual, monthly, and weekly cadence.
28. Questions? Here’s our contact. But call the guy on the right first — he has all the questions.