Thursday, July 08, 2010

Towards a New Model
II

Original owner of photo: D Sharon Pruitt

One of the podcasts I listen to with some regularity is EconTalk, a weekly discussion on a range of topics and "how economics emerges in practice."  I will catch up on the archives whilst waiting for new episodes to post, and so it happened I caught the August 3rd, 2009 discussion with Paul Graham, one of the guys behind Y Combinator.

From the Y Combinator website:

Y Combinator does seed funding for startups. Seed funding is the earliest stage of venture funding. It pays your expenses while you're getting started.

Some companies may need no more than seed funding. Others will go through several rounds. There is no right answer; how much funding you need depends on the kind of company you start.

At Y Combinator, our goal is to get you through the first phase. This usually means: get you to the point where you've built something impressive enough to raise money on a larger scale. Then we introduce you to later stage investors—or occasionally even acquirers.
You will recall in my previous entry, "Towards a New Model" I went on about micro-financing, and how that may enable Under-99 companies to better raise the capital needed for a production budget.  I've also praised The Ford's Partnership Program, which "Supports Los Angeles County resident arts organizations by assisting them to successfully present performances in its 1,200-seat amphitheatre. It seeks to develop new audiences for the partner arts organizations, John Anson Ford Theatres, and the larger Los Angeles County performing arts community."

After listening to the discussion with Paul Graham, all of these ideas are spinning right round, baby, right round.

More goodies from Y Combinator:
We make small investments (rarely more than $20,000) in return for small stakes in the companies we fund (usually 2-10%).

All venture investors supply some combination of money and help. In our case the money is by far the smaller component. In fact, many of the startups we fund don't need the money. We think of the money we invest as more like financial aid in college: it's so people who do need the money can pay their living expenses while Y Combinator is happening.
 
What happens at Y Combinator? The most important thing we do is work with startups on their ideas. We're hackers ourselves, and we've spent a lot of time figuring out how to make things people want. So we can usually see fairly quickly the direction in which a small idea should be expanded, or the point at which to begin attacking a large but vague one.
According to the 2008 Theatre Facts report, the average annual LORT budget is just under $7 million.  What if a LORT company were to break off a chunk of that budget, say a meager $200,000, and fund ten Under-99 productions of new works to the tune of $20K each?
 
More from Y Combinator:
We think hackers are most productive when they can spend most of their time hacking. Our goal is to create an environment where you can focus exclusively on getting an initial version built. In any startup, the first couple months tend to be the most productive of all. Those first months define the company. So anything you can do to maximize their effects is probably a good idea.
 
We seem to have succeeded in creating a good environment, because many founders have told us that the first ten weeks of Y Combinator were the most productive period of their lives.
In addition to that $20,000, perhaps the LORT provides access to rehearsal space, stock set and costume pieces, the expert advice of dramaturges, etc.  All of it to help those ten companies produce the best possible show with the best possible production values that an Under-99 company can produce.
 
Now, let's say of the ten productions funded, a couple turn out to be big hits.  Perhaps the funding LORT company could reserve the right of first refusal to restage these seeded productions.  Take the one or two hit shows and graduate them to union houses, with the full weight of the LORT company behind it.
 
One last quote from Y Combinator:
Our goal is to be the preferred source of seed funding, and to be that we have to do right by everyone.
This would be a mutually beneficial arrangement, a way for failing LORT companies to use the Under-99s as laboratories, farm-leagues, etc; a way for Under-99s to budget a show without begging friends and family for more nickels and dimes.

Or they can keep producing Camelot while we produce original works in street clothes and spartan, black box sets.

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