For past three years we have seen the emergence of a whole different kind of technology startup: the app startup. It leverages the cloud, standard protocols, open source software and most importantly runs off a platform owned by someone like Facebook. Apple or Amazon. These startups, however, have a fundamental challenge – how do you grow from being one product project to a larger company?
The traditional route has been to take venture capital funding and grow the business in a certain specific manner and we have seen that with a sharp increase in the amount of funds being poured into such companies. However, the problem is that the venture capital financing model was optimized for a much different kind of technology startup. However, if a man is a hammer, then to him, everything is a nail.
Well not for Tero Ojanpera, a life long Nokia (s nok) executive who left the company a year ago, after Stephen Elop took over as the chief executive. Ojanpera who was Nokia’s EVP of Services at the time of his departure, left Nokia to start a venture fund, with backing from Microsoft (s msft), Nokia and a handful of other financial investors. Ojanpera has now emerged with Vision+ and he describes it as a whole new kind of an investing model for the app-economy.
“The venture capital landscape needed fresh thinking and a different approach from what we have,” Ojanpera says. And what he (and his three cohorts) have come up with is a model that sits between equity financing and bank loans. Instead of financing companies (via equity investments), Tero’s group wants to invest in “products.” Here is how it works.
Products, Not Companies
If you have developed a service, app or a game and need cash to market and grow the business, you can get the funds from Vision+ in exchange for royalties — essentially a piece of your future cash-flow. For instance, if your total costs are $500,000 and you need $50,000 for growth, then Vision+ will get royalties based on the amount.
As part of the deal, you put your game or app in a holding company (that has been created by Vision+) but the developer retains the intellectual property of the game or the application. It is sort of like pledging your house for loan. Vision+ doesn’t get any equity in your company, but makes money on the idea that the service is going to be a hit.
I bet Tero was thinking about Angry Birds when cooking up this new approach to financing. The fund which has about $30 million to invest (so far) is going to be investing in up to 200 apps, games and services and would typically invest between $100,000-to-$700,000. “We have a very low touch model and as a result we can do a lot more investments in different companies,” Tero adds. “I am at Game Developers Conference and the inbound interest is pretty high.”
So far the fund’s focus is on Europe, but they are looking to go global and are talking to companies in US and India as well. And while Microsoft and Nokia are two of its biggest backers, the company is going to invest in all mobile platforms including iOS (s aapl) and Android (s goog).
What do I think about Tero’s idea? I think it is actually a smart approach to financing a different kind of technology startup. It allows a company to figure out its game plan – whether it wants to be the next Zynga (s znga) or just happy being a Camera+. Now, all Vision+ needs to do is find some takers!