Venture Mechanics, Led by Ron Wiener, Opens “Berkubator” for Tech Startups, Introduces Three New Companies

5/27/10Follow @gthuang

Looking to start a technology company in this era of small teams, lean cost structures, and fast times to market? You might want to check out Venture Mechanics in Seattle. It’s basically an outfit of four experienced startup executives who are trying to reinvent the process of launching tech companies. They held an open-house launch party last night in downtown Seattle, and they’ve just started to spill the beans about what they’ve been working on for almost a year now.

Venture Mechanics is not an investment fund. It’s also not an incubator, an accelerator, an angel investor network, or a mentorship program for entrepreneurs. That makes it different from Founder’s Co-op, TechStars, Founder Institute, Northwest Entrepreneur Network, or any number of angel groups around town that are also focused on early-stage companies.

It’s more like a “sandbox for serial entrepreneurs,” according to the website. But what does that mean? Forced to describe his new organization in one word, Venture Mechanics head Ron Wiener calls it a “Berkubator.” That means it takes some key elements of Warren Buffett’s Berkshire Hathaway investment model, and applies them to a portfolio of startups rather than acquisitions of established companies, he says. The main idea? Invest in cash flow-generating businesses, and use the profits to start new businesses.

Here are a few words of wisdom from Buffett that are applicable, says Wiener. “Buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” And, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” And lastly, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

Wiener, the co-founder and former CEO of Earth Class Mail (and five other tech companies), has assembled a team of “mechanics” that includes Peter Weiss, a 30-year veteran of finance and a prominent angel investor (he invested in Earth Class Mail); John Vogel, a longtime senior engineer with GoAhead Software, Tideworks Technology, and OneCommand; and Doug Choi, a lawyer and entrepreneur with leadership experience from Isilon Systems, F5 Networks, and Concur Technologies.

The word “mechanics” implies two things about the new venture. The first is that it will focus on the day-to-day structure and backbone of running a company. The second is that something is broken in the current system and needs fixing. That is what’s interesting here: In his long experience, Wiener has lived (or seen) just about everything that might go wrong with a company, from knock-down, drag-out management fights and bad funding decisions to failed market strategies and burned investors. And now he wants to do something about it.

The idea of Venture Mechanics is to align investors with entrepreneurs from the very beginning of a company, and then streamline the management team so it can focus on just what it’s good at. Part of the model, which will be tested out in the coming year or two, involves selecting a founding team that will typically lead the company for only the first 12 to 18 months, followed by a “takeover” team that will lead the next stage of growth. It’s usually the case that the founders are not the right people to lead a company once it becomes stable and profitable, Wiener says. Yet most young companies today are led by founders who won’t want to give up control.

“This is a radical departure from the world we’ve been living in,” says Weiss, the finance expert.

Here’s how it works, in a nutshell. Venture Mechanics regularly organizes what it calls “spaghetti sessions” where it invites a dozen or so entrepreneurs and investors to a restaurant to brainstorm startup ideas. They hash out business models and market strategies and see what sticks. As the ideas evolve, Venture Mechanics puts together a small management team around the fledgling company and handles the mundane duties that often take up founders’ time—things like legal issues, insurance, office space, human resources, and employee benefits.

In this new model, most companies will be set up as LLCs, for tax-saving reasons, and to pay out profits to stakeholders efficiently; this also avoids stock options, which usually end up being worth nothing because they are tied to a liquidity event or an “exit.” The idea is that the Venture Mechanics companies will be launched on about $250,000 of initial capital, and will need $1 million or less to get to cash-flow break even. Venture Mechanics is looking for an ownership stake in (and eventually revenues from) small, niche technology companies. And here’s the key: they are not looking to sell these companies, but rather to own them for the long term and use their profits to start more companies. “These are going to be businesses that are worth owning,” Weiss says.

Wiener adds, “We’re earning micro-salaries from each of the companies once they’re funded. But we’re trying to avoid all the trappings of having a fund.”

Venture Mechanics unveiled its first three startups last night. None of them has announced any funding yet. The names might change, but one startup is called OverSignal. The idea is around lowering the cost of mobile phone bills for big companies, starting with the BlackBerry device. Another is ShipSweet, a software service that’s a bit like Priceline for doing shipping with a network of local couriers and regional carriers. And the third is called Unleashed Traveler, a pet care service for travelers (for kennels, vet clinics, and pet sitters) with a business model similar to OpenTable.

It’s too early to know how many companies will be in Venture Mechanics’ portfolio in the next year or so, Wiener says. He did say he’s also looking at companies around the country that are further along, but don’t have dedicated teams to drive them forward; the idea would be to reform the companies with new management teams in Seattle, while allowing the original owners to keep a stake.

For an ambitious project like this, of course, the proof will lie in how successful the Venture Mechanics companies become in generating financial returns, and whether they can produce profits quickly enough. Wiener says, “The key challenges will be uncovering ‘germinators’ and having a strong bench. There’s lots of execs that have just left, or we don’t know about yet. Most of our time is spent on filtering ideas and filtering people, so we can fit ideas and people together.”

“This isn’t for everybody,” Wiener admits. “This is not the universal solvent. We are not going to have a Google. We’re not playing the numbers game…It’s more about accreting low-risk [companies and investments] over time that are not tied to a single liquidity event. The idea is you’ll make more money.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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  • ECM vet

    Ron would certainly know, from his own experience, about idiots running companies and founders who are incapable of running a business but refuse to give up control!