Breaking The VC Business Model For Next-Gen Investors

By Dan Soha, Five Mill Ventures

I came of age with the digital revolution, and by applying my marketing expertise with the science of search, I learned how to start companies. Once I had a few under my belt, I realized I was a start-up junkie, and founded Five Mill Ventures in San Francisco before I was 30.

Instead of the old “throw-money-at-a-good-idea” approach, I based our strategy on the belief that the best startups are the ones that can become revenue-positive shortly after takeoff with as little upfront investment as possible. From restaurants to tech companies, I’ve seeded a number of new ventures with my own marketing know-how instead of just cash. I like to think that our generation’s digital skills are replacing the startup’s traditional hunt for capital – all we need is a good idea, our team specs it out to make it sell, and we self-finance each company off its own cash flow.

My personal policy is to get the idea going, make it sustainable, hire passionate and experienced managers to take my place, then move on to the next challenge. I remain the major shareholder in a number of what we consider “built-to-last” companies, all with strong valuations and ROI potential. Digital marketing is my expertise, and is the common thread throughout all our investments. Five Mill has managed over $100 million in online marketing spend and over $3 million monthly.

A great example of the Five Mill strategy at work can be seen in one of our most recent startups, a sock company called Argoz. It started out simply enough: I have a large wardrobe – but like most young creatives and developers here in the Bay Area, it’s all T-shirts and jeans. I wanted to update my monochrome outfit with argyle accents, and thought I’d start a new company while I was at it. Not only did we upgrade the San Francisco “coder” uniform, we accelerated to profitability at warp speed to become what we strive for in all our companies: a “best practices brand.” You can’t generate venture-class returns on an unknown “start-up” brand in mature, consumer markets, so we applied best practices in the areas of sourcing, styling and marketing that cut through the clutter of the stodgy old sock world. With our connections, flare for design and edgy style, we’ve established a following that has allowed our small investment of mostly time and creativity to scale into a more conventional consumer product line.

Once our sales reached a sustainable level, I brought on apparel pro Nathan Kohrs to round out the Argoz management team, which allowed me to step aside to serve as chairman. Silicon Valley entrepreneurs and investors love our premium socks, and we’re spreading that love around the country with growing sales sparked by creative marketing campaigns – all made affordable through digital management of sales and inventory. We’ve helped a traditional product category that’s been around for hundreds of years evolve from a mere fashion accessory to a full-blown personal statement, which will be supported in the future with line extensions and branded corporate “swag.”

This isn’t the first time that we’ve set new standards for an entrenched market, nor will it be the last. What we’ve done with socks in the fashion industry is just a preview of what we’re about to do on a grander stage within the mature market of teleconferencing. With the impending launch of Phonio, we aim to shift the telecom paradigms of traditional conference calls that take place every day by the thousands, from office team meetings to celebrity/fan engagements. This one is going to culminate my admittedly still very young career of boiling down today’s “broken” venture capital model, setting yet another new standard in the purest form of successful entrepreneurism: an idea and creative implementation that cash flows itself in record time, with minimum capitalization, and one that up-ends a traditional industry at the same time.

Here are a few of my “rules” for young investors and inventors on the new VC paradigm path for starting new businesses:

Remove the costs.

Traditional VCs used to just write checks for new ideas, but then ran away from seed-stage risk after the last tech bubble burst. Five Mill removes the most expensive element of entrepreneurism – the capital – and our companies start out by actually self-funding themselves.

Execute with the raw ingredients.

Our initial business plans have only the basics: an idea and creative implementation. We risk only time and intellectual horsepower – the essence of entrepreneurism.

Question everything.

Challenge the actions of everyone and every plan, and do it often.

A penny saved is just a penny.

You can’t make money by saving pennies, but you can make money by figuring out how to accumulate many of them. Know what your time is worth, and be realistic about it. It’s never going to make sense to spend one hour to save $5.

Keep it simple.

It’s easy to make something complicated, but much harder to make something complicated very simple. The simple things are often the best products.Fail early, but don’t fail often. It’s okay to fail early, but if you are failing too often, you probably aren’t learning from your mistakes.

Think things through all the way to the end before starting.

Then start at the end and build your product or process backwards. If you don’t, you’ll have regrets about your path to the end goal.

I’ve invested in a bar, flipped real estate, restored a classic car, and am always thinking of new technology products. It’s fun, because we spend very little, and make a lot. As a venture capitalist, I’ve found my groove in building on an idea, then stepping aside to allow others to build the business. But as an avowed startup junkie, I’m always looking forward to the next thing. Whatever it is, I know it will be self-funded, it will risk only time and creativity, and it will be on the defining edge of venture capital best practices.

With a computer science degree from the University of California, Berkeley, Dan Soha has founded and invested in a number of successful companies including Argoz, Five Mill Marketing, and Phonio with angel investments in Chute, Crowdsavings, Simple Energy, and FullContact. As president of San Francisco’s Five Mill Ventures, he helps young entrepreneurs brainstorm, network, gain market perspective and make key business decisions.