Case Study: HackFwd
Ed. note: This case study is a selection from the 2011 “Making the Case” competition, in which an esteemed jury identified submissions that demonstrate the value of design in a clear, compelling and accessible way. It serves as an example of how to explain design thinking to clients, students, peers and the public in general, based on specific metrics.
Internet icon Lars Hinrichs came up with the idea for an early stage, pre-seed, evergreen (no fixed funding cycle) investment company for top technology talent across Europe. His vision: Free the best developers and coders from their corporate jobs and help them build their own game-changing companies.
Hinrichs, who previously founded XING (a popular social-networking site for professionals), asked our designers to help him turn his vision into a reality. Together we developed the business from scratch.
HackFwd accelerates the route to beta, profitability and success by enabling entrepreneurs to focus on what they do best and by providing support for administrative tasks that do not drive value. With HackFwd, Hinrichs aims to revolutionize the European tech industry, increase the number of successful start-ups in the region and put Europe on the global innovation map.
Hinrichs saw that most start-up innovation was happening in Silicon Valley and wanted to unleash the tech sector’s potential in Europe. His strategy was to put the needs of developers and engineers (or “geeks”) first.
“The geeks know things much earlier than the rest, like what works, what doesn’t, what is the newest technology,” he explained to the Financial Times in October 2010.
IDEO assigned a European-led global team to the project, which began with interviews of developers and coders throughout the U.S. and Europe, to understand what they wanted and needed most. Their input provided valuable insights into how to build a truly revolutionary company.
Putting the needs of developers and engineers first would mean developing an early-stage investment company from the ground up—or designing a brand-new way of doing business in the financial industry.
That was a tall order. The challenges Hinrichs and the design team faced were mostly external and hinged upon three major factors:
- Technological advances. Traditionally, many development tools were cost prohibitive for individuals or just slow to use. But as technology becomes more accessible and less expensive, it’s easier to conceptualize and prototype businesses. Online platforms and networks enable developers to reach a global audience and to experiment with low to no costs. Innovations like cloud computing enable individuals to build companies with close to zero capital expenditure.
- Limited Venture Capital (VC) models. In September 2010, a design team member explained to Wired UK why traditional VC models in Europe were not meeting the needs of many start-ups—and how HackFwd fills this gap: “Most venture-capital firms have been built around their constraint…raising capital. This is reflected in many aspects of their design—for example, their websites are designed to sell a great story to investors and the partners are chosen for previous investment success. It is rare for the sites to address start-ups’ basic questions and concerns. However, across all industries it’s the end consumers who realise the value…we view all aspects of any business model through the eyes of those who realise the value. When designing HackFwd, we looked at the established VCs through the eyes of start-ups, and concluded that their fundamental needs weren't being met, and that we might be able to meet them in a new way. Those needs included an experienced support network, confidence to take risks, transparency and simplicity of deal terms. HackFwd was designed to meet these needs in a completely new way.”
- Cultural barriers. “Early-stage tech companies in Europe are hampered by lack of funding,” Hinrichs explains, adding that “Europeans always want to get it perfect.” This quest for perfection creates internal barriers to funding for many companies. HackFwd is designed to minimize these barriers.
The design team (including Hinrichs) began by interviewing developers and coders throughout Europe and the U.S. to understand what these professionals wanted and needed most. Their input provided valuable insights into how to build a truly revolutionary company. As big believers in the “power of beta,” the team started prototyping and testing possible business strategies right away. As a start-up, they knew the “final” strategy could evolve and grow over time.
From there, the team designed HackFwd’s business model, financial model, organizational structure, hiring strategy, tools to vet and build investments, brand strategy and identity, and events to cultivate a strong sense of community, encourage sharing and collaboration, and provide inspiration. The team began development with four start-ups, called HackBoxes, and experimented with every aspect of the start-up experience to see what resonated and needed further iteration.
HackFwd works like this: Prospective developers and engineers submit business ideas through a referral network, which makes selections, based on an individual’s or group’s passion and on whether the idea meets a clear consumer need. The ideas must be pioneering, scalable and ready to beta test within six months. To eliminate the heavy early negotiations of the traditional VC model, HackFwd’s model features a fixed investment, depending on the team size, against a fixed stake in the business. If chosen, HackFwd roughly matches the current salary of those behind the idea and brings them into a network of highly experienced digital entrepreneurs. These advisers review and offer input over a 12-month period. During that time, the individual or team launches a beta product or service and receives critical user input to help determine how best to move the business forward.
HackFwd handles most of the administrative load—including legal setup, payroll and accounting—and helps each individual or team find talent when they are ready to scale up. This allows the “geeks” to focus on their expertise. In exchange for the financial support, creative and strategic advice (from a board of experienced entrepreneurs), and the help of promoting and marketing the product, HackFwd takes 27 percent of the equity, the founders keep 70 percent, and advisers who assisted the team receive 3 percent in options.
A start-up can be located anywhere in Europe. Although they operate independently, they can rely on support from the HackFwd core team and its network of experts: HackFwd is based in Hamburg, Germany, and the tech entrepreneurs and board members live and work throughout Europe. In addition, once per quarter, all start-ups meet with the HackFwd team and selected experts in Mallorca, Spain, for workshops and team building.
Since launch on June 8, 2010, HackFwd has invested in a total of eight new companies from several hundred submissions. Its effectiveness is defined by:
- An agile business model. In its first six months, the HackFwd team has been able to iterate its strategy, using feedback and reactions from target users. An example of this is the recent launch of the Phase Two Generator, a business model visualization tool that streamlines the processes of planning and applying a business model to the HackFwd program. It also helps the board and referrer network review applications.
- The value of a good network. The referrer network has proven to be a significant asset for HackFwd, even more than planned. The referrers are the academics, industry experts and entrepreneurs in the countries that HackFwd aims to invest in. They are a highly networked group, whose connections greatly increase HackFwd’s reach. Each referrer has a distinct specialty, which allows HackFwd to tap into expertise in any aspect of technology or online and mobile business. By selecting the right referrers and empowering them to act as ambassadors, HackFwd continues to strengthen its business model, by virtue of its depth and breadth.
- A flexible approach. The companies HackFwd has invested in are already demonstrating how this new VC model can succeed. Any investment in a good venture capital portfolio must have the following two features: Both the idea and the team executing the idea must be excellent. Even if the concept does not meet expectations or cannot be developed, a stellar team can learn on the fly and change directions quickly in order to develop something new. The team has already seen this happen: During one of the Mallorca meetings, a business model was changed and prototyped literally overnight based on feedback from HackFwd referrers. This can only happen when the combination of fast and accessible development tools, a flexible and technically talented founding team, and cultural fit between the start-up and the mentor network is right. The resulting product is one of the live projects on the HackFwd site.
- Focusing on the target user. Selecting to fund only “geeks” has had cultural importance, ensuring that people in the organization figuratively speak the same language and share the same expectations, even with a highly distributed model and only four annual gatherings. HackFwd doesn’t need to educate anyone on the team about the basics of lean product development or hacker mentality. This culture is a key component of ensuring that the designed strategy is able to scale.
- Looking ahead. Since HackFwd’s launch in June 2010, Hinrichs has reviewed hundreds of ideas, funded eight and hopes to finance another five by next June. The first investment to go live—Loved.by, a web service to share products on online shopping sites—launched in January.