Accidentally I found Eisaiah Engel on my googleing about investments. And my surprise was, for a guy like me who is involved in gambling business, that his ultimate book is named Innovation Casino. I was intrigue to found that Eisaiah talk in his book about “casino” as a metaphor for the odds of generating returns from investments in innovation. I wanted to know more about it and Eisaiah has the amability to respond to my questions and as a result is this interview with him which warm recomand for everyone to know more about investments and innovation.
What is a “digital ecosystem,” and how can it help an established corporation make money and an entrepreneur receive the investment they need without losing control over the startup?
A digital ecosystem is a platform with network effects. Famous examples include the Apple App Store or the Amazon Webservices (AWS) Marketplace. A digital ecosystem starts with a platform (e.g., the iPhone). External developers then build on that platform (e.g., iPhone apps). Due to features built by external developers, a digital ecosystem develops network effects that increase revenue for its company in three ways:
- by attracting new customers with new features
- by retaining existing customers with new features
- by causing customers to refer others so they can share data on a common platform
In building a digital ecosystem, fostering network effects is the hard part—that is getting customers and developers to join the platform, refer others, and stay. My book, Innovation Casino, presents a unique corporate venture capital strategy to jumpstart network effects. The strategy is for a large company to fund thousands of developers to build features on its platform. Such an investment model can offer entrepreneurs autonomy, a benefit angel investors and VCs rarely provide.
US venture data going back to the late 1970s show it is common to make big bets in only a few companies. In fact, six in 10 venture capital (VC) funds over the last 45 years have invested in 20 startups or less. Contrarily, Innovation Casino proposes a corporate investor make 100X more bets than VC, using policies that require startups to build features on its platform for specific customer segments. With such policies, a corporate investor does not need additional control over the startups it funds.
Here is what a corporate investor does need: a good buy in price. I think this could be setting up a new trade in startup investing. Entrepreneurs get autonomy and investors get a better deal.
In your book, Innovation Casino, why do you compare your strategy with a casino (“the house”) and today’s venture capital with “the players?” How can your strategy help the entrepreneurs too?
As you know, Innovation Casino is not a real casino but a metaphor for the odds of generating returns from investments in innovation. I coined the metaphor after studying how venture capital is done today. Venture funds, including many corporate funds, make large bets in often less than 20 companies. By concentrating their bets, venture capitalists operate like “players” in a casino. Plays can win big, but few do.
Corporate venture capital has what independent venture funds lack—a parent company. Being attached to a parent company, a corporate venture capital fund can play like the “house,” making lots of small bets on companies that contribute to its digital ecosystem. I spent five years modeling how corporate venture capital can break even by making 2,000 such investments. Breaking even is nice, but the real value of such investments is their contribution to network effects. Network effects are how digital platforms generate meaningful growth. (e.g., Facebook, Apple, Amazon, and Google largely owe their successes to network effects.)
While corporate investors should care about network effects, entrepreneurs should care about retaining control. Control is key to building momentum. As an entrepreneur, I learned that disagreements with investors who have too much control can sap your momentum and kill your startup. I shared a high degree of board control with investors. Looking back, I would have fared better financially by sharing more equity and less control of the board.
I wrote Innovation Casino to propose a way to capitalize startups that keeps entrepreneurs in charge. A startup would need to build the “app” it promised. Once delivered, the startup would have full autonomy under the Founder Friendly Standard. This is different than how angel investing and venture capital works today. Today, angel and venture investors ask for board seats and have special rights (e.g., veto power over your decision to sell your startup). Founder Friendly Standard is a corporate governance model I co-authored in 2017 that gives entrepreneurs control. See how it compares to popular funding templates from investors like Y Combinator, NVCA, 500 Startups, and more: https://eisaiah.blog/founder-friendly-standard-comparison/
Is it a good investment to invest in a gambling operation?
I don’t know. In the US, gambling is heavily regulated. So, I have not been exposed to the gaming industry except for the occasional trip to Las Vegas.
You invented the term “ecosystem innovation fund” (EIF). Please, explain what this concept is.
The term “ecosystem innovation fund” describes the combination of three ideas I shared earlier in this interview:
- A corporate venture fund makes 2,000 bets on startups in its digital ecosystem.
- Investments are designed to break even with gains coming from overall the success of the digital ecosystem.
- Startups build features for specific customer segments with the purpose of fostering network effects in the digital ecosystem.
Said another way, an ecosystem innovation fund, or EIF, is a seed fund for startups. I imagine EIFs as a hybrid of corporate venture capital and the US government’s Small Business Innovation Research grant program, or SBIR.
EIFs combine the best from both models to create a new vehicle for large companies to invest in innovation in their digital ecosystems. The closest examples to an EIF today are corporate venture capital funds, such as Salesforce Ventures, Google Ventures, Microsoft Ventures, and the Amazon Alexa Fund—all of which prefer to fund startups that build on their platforms. Here is where the EIF model differs: EIFs are for investing small amounts of money in more companies than venture capital.
To invest in more companies, the EIF transfers the investment selection approach of SBIR. SBIR has been around since 1982 and has catalyzed nearly 70,000 patents. SBIR is a better model for investing in lots of companies than venture capital, which likes to make large bets on a few companies. Like SBIR, you would fund startups that meet your platform’s innovation objectives.
What the SBIR model is missing are straightforward ways to recoup principal and generate a return on capital. For this piece of the puzzle, we look to venture capital, which makes equity investments. So, like venture capital, your EIF would buy equity in the startups it funds.
In general, what should a casino’s investment thesis be for an EIF?
An EIF might be appropriate for a casino with an iGaming platform. If a casino launches an EIF, its goals should be to (1) recoup principal and (2) build network effects for the iGaming platform.
A casino launching an iGaming EIF might have two funding options:
- invest in 2,000 startups on the platform
- invest in 100 startups on the platform and syndicate half of each investment with 19 other casinos on the same platform to reach 2,000 investments
Option (b) seems viable for casinos in different geographies who typically do not compete each other. Such an EIF could be orchestrated by a company that already provides iGaming solutions to casinos. The below graph shows how a syndicated EIF could work:
Where can we find your book, Innovation Casino?
You can purchase Innovation Casino on Amazon.com in digital, print, and audiobook format. You can also read a free summary of the book at InnovationCasino.xyz/summary.