The accelerated economy

Autumnal light sifted into the reclaimed industrial confines of HQ Greensboro, a co-working space in the city’s burgeoning South End district on recent Wednesday evening as Joel Bennett handed out nametags and directed guests to the back for pizza and beer before they heard presentations from investors.

A business consultant with a background in industrial design, Bennett is a principal at New City Ventures. Founded by April Harris, a community and business development manager, New City Ventures is a prime mover in the hive of workshops, pitch events, competitions and mentoring programs that have animated the startup community in and around the city’s makerspace and two co-working spaces. The evening’s program offered a twist on the usual format of entrepreneurs pitching their business models to investors with the apt title “Reverse the Pitch.”

As retired executives, graying academics and young entrepreneurs — about 70 in all — settled into folding chairs or huddled along the exposed brick walls, Monica Doss, also a principal at New City Ventures, laid out the presenters’ dual challenge of explaining how they work with startup founders while also attracting new members to build capital.

“They’re going to be speaking out of both sides of their mouth,” Doss said. “Not like investors don’t do that all the time. Just kidding.”

Timothy McLoughlin, a junior partner with the Cary-based investment fund Cofounders Capital, went first.

“Thanks for welcoming me all the way from Cary, North Carolina,” he said. “It was a pretty quick trip. We need to get over here more often.”

He explained that the $12 million seed fund typically finances the first round of investment in business-to-business software.

“We invest in local companies,” McLoughlin said. “The reason we invest in local companies is because we are incredibly hands-on, which we’ll talk about in a bit.” The funds’ investors — “high net worth individuals, formerly successful entrepreneurs, C-level executives in big companies” — bring not only cash but expertise to the table. The fund typically writes checks for $300,000 to $350,000 in exchange for 15 to 20 percent ownership in the companies, he said, acknowledging, “That’s a pretty big chunk of equity that we’re taking in the company.”

McLoughlin salted his presentation with references to deals Cofounders Capital has recently closed with North Carolina companies.

“One thing we are very, very excited about is Urban Offsets, which a lot of you know Urban Offsets, which is a local company out here,” he said, eliciting whoops and clapping from the audience in recognition of a tenant at HQ Greensboro. “And that just closed Monday.”

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Urban Offsets, which sells carbon credits to universities and then uses the funds to pay cities to plant trees that sequester carbon as part of an effort to limit climate change, recently completed its seed round of financing with Cofounders Capital, pumping $300,000 into the company and allowing it to make payroll for its six employees for the first time.

Like many startups that are quickly ramping up in the Triad, Urban Offsets’ young life has been markedly affected by a passage through an accelerator — a program that literally speeds up development by testing and modifying business models to achieve viability and quickly obtain financing that helps to overcome the substantial front-end costs needed to make a product and deliver it to market.

The process emerged, naturally, out of Silicon Valley, the region that leads the nation in tech innovation and wealth generation. It utilizes a method called the “lean startup” popularized by Steve Blank, a professor at Stanford University. Blank credits one of his students, Eric Ries, with coining the term based on similarities in the Toyota production system known as “lean manufacturing” to an emerging schema of “iterative agile techniques.”

“Why the Lean Start-Up Changes Everything,” an article written by Blank for the Harvard Business Review in May 2013, outlined the process. The “lean start-up” method, Blank wrote, “favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional ‘big design up front’ development. Although the methodology is just a few years old, its concepts — such as ‘minimum viable product’ and ‘pivoting’ — have quickly taken root in the start-up world, and business schools have already begun adapting their curricula to teach them.”

At the time, Blank wrote that the lean start-up movement — based on “principles of failing fast and continually learning” — hadn’t “gone totally mainstream” and remained “mainly a buzzword” that wasn’t widely understood.

Today, according to a recent story by Tad Friend in the New Yorker, there are 160 start-up accelerators in the United States, and thousands more around the world. Perhaps the most illustrious accelerator, San Francisco’s Y Combinator — which helped launch Airbnb — provides $1.7 million to its startups.

The lean start-up model immediately appealed to Bennett, for whom iterative processes were second nature thanks to his background as a designer. Among other jobs in his portfolio, Bennett created models for the Swedish home-appliance manufacturer Electrolux and designed a trade-show display for Tanger Outlets.

Like business incubators, start-up accelerators act as a kind of intervention by providing external support to allow new ventures to weather adversity and eventually become viable. Bennett made the case in an interview that accelerators are particularly suited to the rapidly innovative environment for tech companies.

“An accelerator has a specific start and end date,” he said. “There’s an injection of capital. An accelerator is an immersive process with specific benchmarks. You have to prove your hypothesis. You validate your assumption or not. If you can’t validate your assumption, you have to pivot. An incubator has a different duration of time; it’s a longer-term engagement. Both an accelerator and an incubator provide resources not easily available like mentors and service providers. Tech companies can accelerate — that is, grow very rapidly. That’s a new business model because of technology. That compressed timeframe — three months is all you need.”

Not all accelerators strictly adhere to the model, as Bennett acknowledged, and some don’t provide capital to their startups. In 2014, the Greensboro Partnership recruited Bennett to lead the Triad Startup Lab accelerator, whose graduates include Home State Apparel and the Artist Bloc, at the Collab co-working space. Bennett said the Triad Startup Lab, which ran four sessions from the summer of 2014 through the winter of 2016 and received public funding, was “not a true accelerator” because it didn’t provide investment capital to its participants.

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Bennett’s design background shaped his mentorship of the startups under his tutelage.

“I know a little bit about engineering,” Bennett said. “I know a little bit about human factors and user-experience design. I owned this design firm for years in Greensboro that had clients like Volvo Trucks. These are skills that entrepreneurs need to start companies. Building websites — that’s something I can do. I can help entrepreneurs come up with a concept and illustrate it. I’m not the only one who believes that design adds value to companies.”

Urban Offsets also participated in a modified accelerator program, but in a roundabout fashion the experience helped them secure funding. As a “first-step accelerator,” Groundwork Labs in Durham doesn’t provide funding to startups, while offering programming free of charge to participants.

Urban Offsets applied for an NC Idea Grant in the fall of 2014, but didn’t initially make the cut, just before landing a spot in the Groundwork Labs accelerator. Immediately after completing the program in the spring of 2015, founder and CEO Shawn Gagné applied again and secured the grant.

“It was critical; our success was directly determined by our participation in that program,” Gagné recalled. “I was by myself at that point with untested ideas. Although I knew what I wanted to do, I wasn’t sure how it would work. Through the accelerator program I was able to scientifically test my theory, to iterate. Why isn’t this working the way I thought it would? What would work instead? Accelerator programs will continually force a participant to test and re-test and learn from mistakes.”

The timeframe at Groundwork Labs was also more elastic than the traditional model.

“The official accelerator program I believe is eight weeks long,” Gagné said. “Like any good accelerator, if you’re making recognizable progress and showing coachable behavior you’re able to stay on. That’s why I was able to stay on through the spring of 2015.”

Through the accelerator, Gagné learned that his initial assumptions about the market were incorrect.

“One of the first assumptions we made was that sustainable for-profit companies would be the first ones purchasing our carbon offsets,” he said. “We interviewed Volvo and Burt’s Bees. We found there was a disconnect between what I thought they wanted — community-based offsets — and what they wanted. It didn’t matter as much to them where the offset came from. We had to pivot. We had to understand the marketplace a little better and find a way to serve it. All this stuff is self-learning.”

Gagné also came to realize that the voluntary market for carbon credits was different than the compliance-based market. “The standards in the voluntary [market] are very hard to work with on a small scale,” Gagné said. “We tried to use the California standards. They’re untenable at a community level. They’re too expensive. There’s no way we could bring the community up to them.”

Urban Offsets wound up collaborating with Duke University’s Carbon Offset Initiative to develop a new standard, and tested it in Wilson, NC.

While Joel Bennett was running the Triad Startup Lab in Greensboro, an entrepreneur named Peter Marsh cofounded Flywheel Coworking in Winston-Salem with Alicia Hardin and Brad Bennett (no relation to Joel) in 2014. The co-working space has signed up 130 member companies, including 80 tenants.

“We have created over 20 companies since we founded the co-working space in September 2014,” Marsh said. “A lot of those companies were founded by members, from the accelerated serendipity you get from the co-working space.”

Like HQ Greensboro, Flywheel hosts a seemingly endless stream of programmed events designed to push out information, promote collaboration and bring entrepreneurs, investors, designers and other members of the innovation economy into contact with each other.

“On any given month we’ll have around 400 people attending our curriculum — all designed to stimulate the ecosystem,” Marsh said.

From the start, the goal of Flywheel was to launch an accelerator, and to raise capital to support the startups that went through the program.

Marsh said he and his cohorts at Flywheel hold the theory that “there are three essential ingredients for a start-up ecosystem.”

The first ingredient is possessing a multitude of ideas. “Secondly,” Marsh said, “you need a very disciplined and structured method for helping entrepreneurs get from ideas to repeated revenue; that’s what accelerators are for.”

The third ingredient is capital investment. “The best accelerators are funded; that’s the fuel that makes them go,” Marsh said. “The investment accelerators attract the best of the best.”

Marsh and his partners at Flywheel leveraged their connections to raise capital for what would become the New Ventures Challenge Accelerator. Marsh is a vice president of the architectural firm Workplace Strategies and Brad Bennett is the cofounder and “chief firestarter” of the Wildfire marketing and advertising agency. Their track record of success with their respective companies gave them the credibility to ask for money, Marsh said.

“We went to not established wealth, which is who people usually go to,” Marsh said. “We went to the wealth creators who are developing wealth. We used some demographic tools to figure out who our potential demographic might be. We went to them and we got immediate traction, and they said, ‘We’ve been waiting for this.’ We were able to put together a fund in three months.”

Marsh said the partners at Flywheel assembled the fund through 200 one-on-one meetings over breakfasts, lunches and dinners, adding that they’ve created five sequential funds ranging from $350,000 to $500,000 per year that the New Ventures Investment Club plans to deploy through 2020 with the goal of creating 30 to 40 new companies.

“Our playbook, our principle, is that startup ecosystems do not get energized until the local entrepreneurs put their shoulder to the wheel,” Marsh said. “You’ll hear quite a lot of talk from universities, the Greensboro Partnership and the Winston-Salem Chamber, which is really good. What really makes it go is when entrepreneurs pony up with time and money.”

Investors are motivated by a mix of altruism and profit motive, Marsh said, but it skews towards the former.

“I think this is 55 percent altruism and 45 percent profit motive,” he said. “If we do our job well and create a highly curated portfolio of startups, we expect there will be returns on a few of the startups. It’s not going to be huge.”

Marsh and his partners raised $355,000 for Flywheel’s inaugural accelerator, which ran from June through early September. They chose Joel Bennett to run the accelerator.

“The startup community is a very open force,” Marsh said. “All of the investors, all of the angel groups, all of the accelerators get to know each other and try to support each other. We roam around the state going to lots and lots of events. I first met Joel at a startup weekend event I think three years ago. I admired his work, admired his passion and devotion to the startup community. He was running the Triad Startup Lab. At the time it was the only structured program around lean startup methods. And so we just felt like he was the top talent in the market, so we invited him to come over and manage our accelerator. He did a great job.”

Out of 230 applicants, five companies were chosen to participate in the New Ventures Challenge Accelerator. With one dropping out, four companies ended up going through the program. Catalant, a Greensboro company that collects productivity metrics to help businesses improve employee performance, was a graduate of the Triad Startup Lab. Scout IoT, also based in Greensboro, is a data collection company that serves industrial clients. Wilmington-based Petrics is developing a mobile app to help people manage care for their pets. And Leading Role in Winston-Salem is virtual-reality gaming company.

The companies competed for the first of three tranches of capital, but over the course of the program the funding was equalized so that each one received a total of $50,000 to support their growth.

The accelerator culminated in a Demo Day at BioTech Place, where the startup founders used PowerPoint presentations to pitch their businesses to investors. The Sept. 8 event drew luminaries like Mayor Allen Joines, Councilwoman Molly Leight and Wake Forest Innovation Quarter President Eric Tomlinson.

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“I was talking to someone before Demo Day, and I tried to draw an analogy,” Joel Bennett recalled. “Have you ever seen the movie Code Black? I felt like I was running triage in an emergency room. I’ve got a group bleeding. I’ve got someone crying over there. This one wants its mom. It’s time limited and deadline-driven. You’ve got to get it done. There’s this urgency. I really admire the courage of people who launch startups and I enjoy being around them.”

Mike Oder, a cofounder at Leading Role, said as much as anything else the accelerator was helpful in providing moral support.

“We can actually have a more vibrant, open culture,” he said. “It can help us succeed. If we’re all working together we can do better. Being a businessperson can be challenging. You need that support structure…. When you get down because things aren’t going the way you want them to, it’s hard to get the motivation to keep going.”

Before the accelerator had finished, Leading Role had a first-person shooter game called “Cyber Threat” on the market as a kind of test-run in advance of the more ambitious “Sherlock Holmes: A Scandal in Bohemia,” a narrative virtual-reality game the company hopes to release in mid-2017.

“We’ve had 1,200 sales so far,” Oder said. “It’s about $18,000 in revenue. “This is a very small market. The estimates are it’s going to grow dramatically. It’s never going to be easier than now to get in on this.”

The release of HTC Vive and Facebook’s Oculus Rift headsets earlier this year stand to double the market for virtual reality games, Oder said. PlayStation VR hit the market on Oct. 13, and Oder said his company will probably target the platform sometime next year.

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While Peter Marsh was raising capital to support tech startups at Flywheel, Margaret Collins was laying the groundwork for a similar effort to assist creative ventures.

“They definitely need this help and this exposure to the business curriculum and the business expertise, and they’re not usually included,” said Collins, who started the non-profit Center for Creative Economy in Winston-Salem in 2011. “It’s not that they can’t apply to tech accelerators; they’re just not marketed to. This is a real niche to just go out and market to creative companies. They’re receptive to it, and they find real value because we deliver a program that caters to them.”

Collins founded the National Creative Economy Coalition, through which she met Alice Loy, the founder of Creative Startups in Albuquerque, NM. Collins traveled to Albuquerque to observe the culminating week of Creative Startups’ accelerator program. Chad Cheek, who owns the Elephant in the Room design-consulting firm in Winston-Salem, accompanied Collins and acted as a mentor for the accelerator. Cheek also serves on the board of directors of the Arts Council of Winston-Salem/Forsyth County, and he argued to his fellow board members that the council should provide financial support to help bring the Creative Startups accelerator to Winston-Salem. The Kenan Institute for the Arts, the city of Winston-Salem and Wake Forest Innovation Quarter eventually pitched in, along with an array of other funders.

Six of 10 companies selected to participate in the accelerator were from North Carolina, with the remaining startups coming from Chicago, Nashville, Atlanta and Mexico City. The eight-week program utilized a Stanford University curriculum customized for creative businesses, and brought in financial and marketing mentors from as far away as Singapore. The accelerator culminated in a competition that resulted in three of the companies splitting $50,000 in seed funding, including Chicago-based Embodied Labs, as well as the Feeling Friends and Muddy Creek Café & Music Hall, both located in Winston-Salem.

“Even when companies have different products and business models, it’s really helpful to have a group of people who are going through the same kind of challenges so you can bounce ideas off each other,” said Carrie Shaw, the CEO and medical illustrator for Embodied Labs. “It’s like being at the awkward middle school stage, so you can bounce all the basic questions like how you handle legal issues or customer acquisition instead of paying someone on your own like a lawyer or searching by yourself.”

The company, whose products provide health training by simulating experiences like vision impairment and hearing loss through virtual reality, was founded by four Winston-Salem natives, although it is now located in Chicago. Shaw met future cofounder Ryan Lebar when they worked for a bat biologist at the Center for Design Innovation in Winston-Salem. Shaw’s graduate studies focused on biomedical visualization, and she chose the University of Illinois at Chicago because of its reputation for being tech centered. Her senior thesis on how to illustrate first-person patient experience led to the formation of the company.

“We brought Ryan on the team when we decided to integrate virtual reality into our prototyping,” Shaw recalled. “None of us were planning to start a business. Over the year, we saw that we had created something innovative. I was set to get my PhD this fall, which I deferred to start this company.”

[pullquote]“Our playbook, our principle, is that startup ecosystems do not get energized until the local entrepreneurs put their shoulder to the wheel. You’ll hear quite a lot of talk from universities, the Greensboro Partnership and the Winston-Salem Chamber, which is really good. What really makes it go is when entrepreneurs pony up with time and money.” — Flywheel cofounder Peter Marsh[/pullquote]The $25,000 in prize money received by Embodied Labs will help the company cover operating costs during pre-production for its initial product line.

“Coming in, our biggest goal was to get mentorship, and the next step was to take a lot of feedback,” Shaw said. During the last week of the program, known as the “deep dive,” Shaw said her company “almost had some blanks that we were hoping to fill. We did that through working with someone with a background in publishing. We did something with an animation studio that we connected with through seasoned venture capitalists, or angel investors. Through them we were able to hone in on what we needed to address for our business.”

Karen Cuthrell, founder of the Feeling Friends, said she found the accelerator mainly useful as a conduit to financing.

“To raise capital, no one really understood what I’m doing,” she said. “I’m not a tech company, I’m not a biotech company. It gave us the opportunity to pitch in front of investors as a creative startup company. You know, ‘Sesame Street’ was turned down by all three networks. We’re like the ‘Sesame Street’ for the 21^st Century. Social-emotional learning is trending. There’s so few products on the market right now; there’s a missing gap.”

Cuthrell got the idea for the Feeling Friends when her daughter was diagnosed with depression at the age of 6. She decided to create a line of characters with names like Lotta Love and Hattie the Hippo, with accompanying coloring books, musical CDs and e-books.

“Her psychologist said, ‘You’ve got to get her to talk about her feelings,” Cuthrell recalled. “It was the characters and the music that really helped her. We take the plush toy — Lotta Love sings about what love is. Hattie the Hippo sings about what makes you happy. Each one comes with a book so the children have a story that helps them understand how to handle that feeling.”

She’s spending the $15,000 she won in the competition as the second-place finisher on ordering prototypes for plush toys from Raleigh-based manufacturer Gann Memorials, and to develop an online community.

Cuthrell has ambitious plans for the Feeling Friends.

“I envision the Feeling Friends making Winston-Salem a destination,” Cuthrell said. “It would be a place where parents could have a great time with their children. It would bring revenue to Winston-Salem from hotel stays and provide jobs. Think of what the ‘American Girl’ series of books did for Wisconsin. I want to get a warehouse in Winston-Salem, and get a great place that people can come to that would revitalize the city. Think of what Oprah did with Harpo Studios. We have big plans. We’re going to work with the economic development officials in this city. There’s no reason we have to take this to another city.”

Sharing and transparency are the key factors in what Joel Bennett likes to call the “innovation economy” that help entrepreneurs like Cuthrell quickly access financing and launch their businesses.

“If you’re a community leader and you’re not thinking about creating a coworking space, a makerspace, incubator or accelerator, you need to be,” he said. “This isn’t an isolated incident. It’s happening all over the world. In this innovation economy, the sharing of knowledge is the vital piece.”