Ep 47 – A Radical Startup Model



Dr. Melanie Rieback is CEO/Co-founder of Radically Open Security (the world’s first not-for-profit computer security company), and “Post Growth” startup incubator Nonprofit Ventures. She is also a former Assistant Professor of Computer Science at the Free University of Amsterdam.

She was named “Most Innovative IT Leader of the Netherlands” by CIO Magazine (TIM Award) in 2017, and one of the “9 Most Innovative Women in the European Union” (EU Women Innovators Prize) in 2019.

Melanie is also one of the 400 most successful women in the Netherlands by Viva Magazine (Viva400) in 2010 and 2017, and one of the fifty most inspiring women in tech (Inspiring Fifty Netherlands) in 2016, 2017, and 2019.

Her company, Radically Open Security was named the 50th Most Innovative SME by the Dutch Chamber of Commerce (MKB Innovative Top 100) in 2016.



What does a cutting edge cybersecurity company have in common with the medieval Dutch church?

What’s the most critical ingredient for ANY company to fulfill a meaningful social purpose?

What important aspect of the venture capital model do most founders fail to understand?

In this episode, Dr. Melanie Rieback, CEO and Co-founder of Radically Open Security and startup incubator Nonprofit Ventures, talks about the inspiration behind the unique organizational structure for her startup, implications of VC funding that few founders realize, attractive alternatives to vc funding, and much more.

Episode Highlights

  1. What a medieval Dutch church taught this founder about startup structure
  2. What Radically Open Security has in common with the iconic Patagonia brand, and what it doesn’t
  3. What makes capital “leak” and why it matters to founders and startups
  4. How governance structure influences mission, and how this plays out in real life
  5. An introduction to “golden shares” and why they might be worth considering
  6. How to make your mission-focused startup a reality –  a practical guide
  7. The smart way to assess market demand for your startup idea
  8. Hidden traps technical founders fall into, and how to avoid them
  9. The unseen dangers of the hyper-growth that venture capital funding demands
  10. The real truth behind how the venture capital model works
  11. How to bypass the venture funding model and still build a great startup
  12. An introduction to the steward ownership model and how it impacts startup economics
  13. Practical action steps for founders who want to build scalable, mission-driven ventures


Links and Resources:

Radically Open Security: The cybersecurity company that Melanie co-founded

Nonprofit Ventures: the startup incubator that Melanie runs

The Mom Test: Book about assessing market demand in an unbiased way

Snowball Impact Management: Fund management company that is pioneering the steward ownership model

Interview Transcript

Shubha Chakravarthy: Hello, Melanie. Welcome to Invisible Ink. We are so excited to have you here!

Melanie Rieback: Thank you so much for inviting me!

Shubha Chakravarthy: You have a very interesting background, and you are pursuing a very different business model for your own startup. Can you tell us a little bit about your startup and what is different about the way you have designed it?

Melanie Rieback: Sure. I’m running a cybersecurity company that is roughly nine years old. We have about 50 staff members. We have had hundreds of customers, everything from Google to the European Commission to the Dutch Energy Grid, and nonprofits.

My company, Radically Open Security is a social enterprise in the cybersecurity space. We give all of our profits to charity. So, we are registered with a really funny business model that is called a fiscal fundraising institution, FFI, and that is a really archaic construction from the Dutch Church.

Sometimes a church wants to have some kind of a commercial spinoff then they make some brownies and basically the profits from that go with a tax benefit back to the church. We basically took that tax construction, and we made our so-called commercial spinoff, a cybersecurity company.

Our “church”, the NLnet Foundation, which is a funding agency that has been around for about 30 years, and they donate money to open-source projects, digital rights initiatives, and anything for a better open internet.

So, anyone here who is a techie, who has heard of us, some usual suspects like TOR, GNU, DNSSEC, WireGuard those kinds of projects basically are the beneficiaries of that money.

In the first, I think seven book years roughly, we donated approximately three quarters of a million euros to the NLnet Foundation. So, we donate 90% of our profits to an outlet. The last 10% is our cash flow buffer which is what we need to make payroll at the end of every month.

For the rest we can reinvest as needed and also just for building a solid platform of a business.

We also provide cybersecurity services on a nonprofit basis, on a zero-margin basis to nonprofits, NGOs, and civil society organizations. They have literally got the world’s scariest attacker model, like a nation state after them in almost no budget.

In that sense we operate with a bit of a Robinhood kind of model and that, the governments and the corporations basically pay our bills and allow us to keep the lights turned on and then once that flywheel is spinning, we can use it to also service the little guys.

Shubha Chakravarthy: First of all, multiple congratulations, great progress and just a very impressive client list. Love the longevity. I love the economic discipline behind it. What got you interested in it and how did you come up with this model in the first place?

Melanie Rieback: So, actually one other thing I didn’t mention, and which is kind of important, is that I also very early on sold the company for one Euro to a foundation. In that sense it is a little bit like Patagonia actually. But rather than giving away the company, at the end, after it was worth a whole lot, I kind of built it in that way from the beginning.

So, what made me decide to go this route? It was because I was not entirely happy with the incumbents in the Dutch cybersecurity market. We had companies that were working with intelligence agencies that were hacking activists that were building surveillance boxes and then selling them to developing countries.

Then the Dutch hacker community would call them on it and say, “Hey, that’s not a good thing to do.” Did they stop? No, they just sold that part of the company. If it wasn’t them, it was like the big accountancy firms, which weren’t necessarily sketchy, but they were so commercial that it was worthless.

So, in that sense I really decided that we need parties on the cybersecurity market that really deliver value in the sense of being open and transparent in how they are working and sharing knowledge rather than just putting everything into little proprietary black boxes that can be withdrawn the moment a customer stops paying because security is a long-term process, and it is a mindset. It is not just a set of patches that you get from a test report.

Basically, I wanted to build an organization that really optimized for that knowledge transfer. It just so happens also that that’s pretty good value for customers because that really helps them to meaningfully improve their security posture.

So, between that and the fact that our business model also attracted a number of very talented, idealistic hackers, which also allowed us to serve security services of pretty good quality. That was the formula that really allowed Radically Open Security to take off.

Also, it didn’t hurt that a lot of Chief Information Security Officers of large corporations just so happened to also be idealistic, techno hippies that were also part of the hacker community and they also fought the bureaucracy of their corporations and governments organizations to get us in the door.

That was really how Radically Open Security got established and also became as successful as it has been.

Shubha Chakravarthy: Do you have examples of the same structure being successful and tried out in other countries because it sounds like there is a Dutch artifact in terms of this fiscal foundation infrastructure.

What examples have you seen and what would be comparable models or structures that would be available, for example, entrepreneurs in the United States as a starting point?

Melanie Rieback: I think the FFI is a cute talking point, but I don’t think it’s necessary. I think the real part that’s important is to try and build businesses that aren’t leaking capital.

I think that that’s very well encompassed by the Steward-Ownership movement. think the FFI is nice, but I think what is more important is that we are foundation owned and that we also have some, protections in place to prevent the company from being sold.

There is an entire global community of companies that are doing this. Oftentimes, foundation-owned companies, perhaps that incorporate golden shares or similar constructions to prevent companies from exiting because my hypothesis is that if we can prevent people from becoming unnaturally wealthy from a company.

When I say unnaturally wealthy, I mean anything above middle class salaries with a pension. Of course, we need to support our families, but it is just that we don’t need millionaires and billionaires.

Without that incentive there, the only thing left, like the only reason for being for these companies is social impact in the sense of also providing some kind of a product or service, that has enough of a product market fit that people need it and that they value it enough that they are willing to actually pay something for it.

We need products and services to run our societies, whether it’s just like the restaurants on the corner or the plumber or just the hairdresser or a software development company.

I think every company can be a social enterprise, regardless of whether or not you are focused on the sustainable development goals. If you have a government structure where you are changing the incentives in as such that there is no money leaking out of the company to build a 1%, and that’s it.

If the leadership of the company is willing to put such governance structures in place, that’s also leadership from the top. That permeates through the entire company.

It sort of sets the north star of the company as being impact, which then means that everyone throughout the organization, in day-to-day operations, are going to try and choose the thing that seems most aligned with the social mission – in that sense, it’s taking a systems thinking approach where we can try and play whack-a-mole with symptoms like with the environment and with society.

But actually, I believe that it is the governance structures that are the root cause, the environment and society, these externalized costs onto environment and society. These are the symptoms of the problem.

So, really if we can reform governance structures, reform the G in ESG, then the E and the S will kind of come along for free. That is my way of looking at it.

Shubha Chakravarthy: Those of our listeners who are not familiar with “golden shares”, can you just give a very quick overview of what golden shares are?

Melanie Rieback: So, a golden share is a kind of poison pill construction that prevents a company from being sold. In other words, I can give you a single share which is basically a veto, a share which you can basically use to just block the sale of the company.

That is all it does. There are no profit rights associated with that share, but it is just to ensure that you are trying to raise the bar and to make it harder for the company to ever get sold.

Shubha Chakravarthy: So, let’s say I’m an entrepreneur. I’m very inspired. I want to create social impact. By the way, it reminded me of what Peter Drucker wrote, I think 70 years ago, that the first purpose of a business is to create a customer. So, in my view, you are existing because you are here to serve in need. So, that definitely resonated.

So, I’m here. I’m inspired. I want to start a business. What are the first steps you would recommend that someone like me would take?

There are some businesses that are capital light, and then there are some businesses that are capital heavy. Can you first talk about how I would take the first steps, and then secondly, also talk about how to address the capital problem if it is a capital-intensive business.

Melanie Rieback: Sure. I would say start with yourself, what is it actually that you care about? What is it that is important to you?

If you could consider your business to be a form of activism, to change the world in a way that you think it needs to be changed, how would you start a business related to that?

Shubha Chakravarthy: I hear what you are saying. Clearly there is a business model that needs to be here. No matter what your governance structure is, it needs to be economically value creating.

It needs to somehow put out into the world a little bit more than it took in and the little bit more comes from your ingenuity, the fact that you have super smart hackers in your case, and they make the world a better place than it would be without the hackers.

So, there’s some economic model that’s creating value. How do you make sure that that happens when you are driven by market forces in terms of revenues, pricing, and costs?

Melanie Rieback: My answer doesn’t change. Start with why.

There is a reason why that Ted Talk by Simon Sinek is so popular. If you start with a why, then you can work your way over to the what and the how.

Shubha Chakravarthy: Is there an example, aside from your own business? I know you also run an incubator and we’ll talk about that, where you can talk specifically to the pieces around how they create a monetization model, how they put together a system that basically works on a sustainable basis just like yours does.

Melanie Rieback: If you want to create a business where you are keeping yourself independent of external capital, then really what you need to do is you need to find launching customers.

This means you have to create MVPs, so Minimum Viable Products. Then you need to collect validated learning by trying to sell it. Then you need to pivot to follow the pain in the market and you need to iterate many times. The point is, with these MVPs, really try and find something that someone will pay for.

If it turns out that whatever your initial idea was, it won’t sell, because it is one thing surveying people or just asking people, “What do you think about this?”

There is a really brilliant book on this topic that is called The Mom Test. It is basically about, “How do you survey the market in such a way that even your mom won’t lie to you?”

It is based on the premise that basically when you ask people, “Hey, I’ve got an idea, what do you think?” They are always going to lie to you. They are going to be like, “Yes, I love it.” Then you are like, “Yes, great. Are you willing to pay something?” Then they are like “No.”

That is a perpetual problem that founders have. We just think if we do some kind of survey that somehow we are going to get valuable feedback, but it couldn’t be further from the truth.

We collect what people think that we want to hear, or because they are trying to be supportive or be good friends to us. It doesn’t actually tell us anything at all about what people are willing to pay for.

So, really we need to try selling something. But that’s uncomfortable because at the moment that you have to ask for money – this is where the rubber meets the road. If you are a business, you should be selling something, otherwise you just have a hobby.

So, really the essence if you are trying to build a business is just to run these experiments and try and sell something. This is the opposite of the VC and hyper-growth approach that the entire rest of the market is pushing you to follow. That is the opposite of the lean startup because if you get a huge amount of external capital that you are supposed to put into some kind of R and D, the problem is that because you are not actually trying to sell something, you wind up creating a product market disconnect.

This is a particularly pernicious problem with techies. Particularly ones who are in love with technology. I’m a former assistant professor of computer science, so, I know this firsthand.

I also have a first failed startup that died exactly with this. What you wind up building is a beautiful technology that is exactly what you envision, you want to make it beautiful and complete, and you build these technology cathedrals, and then when the money has almost run out, then you ask yourself the question, “Okay, I wonder if someone wants to buy this.”

This happens by that time it’s too late.

Then it just turns out that whatever it was that you were building for yourself, it wasn’t what the market wanted. But by that time, it is very difficult to pivot.

It is not to say that you can’t pivot at that point, you can, but the problem is the sunk cost fallacy because at that moment you have so much legacy baggage that you put so much time and money and energy into that you are very reluctant to throw that away and start over.

That is actually, ironically enough, why it is actually easier to bootstrap a company without capital. A lot of people call VC an accelerator, but then the question really is just, “What are you accelerating?”

Because also, even if you can build something, and even if there are some users that have some kind of uptake of whatever you are building, your business model still isn’t going to work out because the unit economics won’t make sense.

The reason why they don’t make sense is because you are hiring people too quickly. People are the number one expense of most companies. People are expensive.

This kind of hyper-growth where you get this external capital, and you are just hiring people as quickly as possible to externally look successful.

This is all optics, but if you then actually check the balance sheet, most of these companies are terribly in the red. The thing is, they are not actually trying in that sense to be whatever company it is that they are positioning themselves as.

Let’s say you are a small cybersecurity company and you have received some amount of venture capital. The business model with this is not selling cybersecurity services and products. The real business model of such a company is equity because the moment that they are working towards is getting acquired most of the time or if not that then going public in an IPO on the stock market, which again, is a liquidity event.

You are making your money off of equity and that is a very different business model than selling products and services.

But the problem is, then what you have got is a whole bunch of small startups and they are successful in this hyper-growth approach which one out of 10 maybe are because remember the statistic, 90% of startups fail, right?

So, the majority of them, they are just going to run out of money. If they are not successful in continuing to play this VC game to get these increasingly large rounds so they can reach the liquidity event. Nine out of 10 startups fail, and then the one out of 10 is basically the one that succeeds. They are attempting to become a unicorn.

A unicorn is a company with a 1 billion US dollar valuation or higher, and we look at these things like they are these great success stories. We want to build a unicorn, or maybe even better, let’s make it decacorn?

If I want to be super successful, then I do it multiple times, and then I’m a serial entrepreneur, right? Then after that, I become a VC. That is the next step, but the point is that is this really what we need?

Because here’s the thing, first of all with our IPOs, so, okay, you’ve got this thing that is bleeding money, terribly, because of this hyper-growth approach.

What you are basically doing is you are hyping it up and you are pumping up this cash losing thing. What you are essentially doing is you are performing a kind of pump and dump scheme onto the public markets because if it is cash losing before the IPO, it is probably still going to be cash losing after the IPO.

But people don’t care. They buy the shares during the IPO because they are speculating and they are betting on something called the Greater Fool theory, which basically means, “It doesn’t matter actually what I buy, as long as there is a greater fool who is going to come after me, who is willing to pay more.”

You could do this for shares on the stock market or IPOs or cryptocurrency and NFTs or tulips. I mean, take your pick. This works in a growth economy. But the moment that the economy starts to stagnate or, for example, the Fed decides to raise interest rates, then we find ourselves in a recession kind of situation, which we happen to be in at the moment, then of course everything tanks because the unit economics never actually made sense to begin with. They still don’t make sense now.

That is when we have these really big corrections which wind up causing all kinds of people to get laid off, all the asset owners now. A part about this, although that is really tricky, is, with these cash losing unicorns, like WeWork for example, I think they were spending money five times faster than they were getting it from customers or something like that.

We don’t ask the question often enough, whose money are they spending? It turns out that 65% of the investors in US-based VC funds are pension funds, which basically means, the money is ours, for when we want to retire. Most people don’t think it through to this extent.

You would ask the question, “But why are pension funds investing in VC?” Quite simply, up until recently, the answer had been low interest rates, because basically the kinds of safe investments like bonds and negative interest on PEG accounts, I mean, they were moving over to so-called riskier asset classes like VC, because they were promising much larger returns.

“Hey, we’ll get you 10x, 20x, or whatever.” Truthfully speaking, though, VC has not had those kinds of returns. If you historically also look at the performance of the stock market over the last 25 years, and then compare that to the performance of VC funds, 85% of VC funds have failed to keep pace with the stock market.

So, most of them, if they are saying “10x returns”, no offense, they are full of it. Statistically speaking, that isn’t what has been happening. If you had literally bought an index fund and held it, you would’ve done better than 85% of VCs.

But the thing is, we don’t know this, and we can’t even evaluate VCs correctly anyhow, until probably at least 10 years after the creation of their fund. By that time, they have already received their 2% management fees and then cashed out.

Now they are on some island somewhere in the Caribbean and at that point it is too late. But the problem here is that we have created this system where 9 out of every 10 founders are failing, which I would say is pretty bad.

The pension funds are losing money. Basically, they are losing money after the IPO if they buy the stocks and then it tanks, they are losing money before the IPO because the VCs aren’t giving the returns to LPs that they are promising.

Then you need to ask the question, “Okay, but who is winning here? Who’s winning in this system?” It turns out that actually the only people that are winning are the fund managers. The very lucky founders that held an equity position and maybe some of their service providers. But that’s it.

The problem though is that those who have the most money have the loudest voice because they have got the largest marketing budget. They are the ones that are setting up our startup ecosystem in the current form that it is now in the form that when founders get there, we are told that we need to follow the Silicon Valley model of Capital Scale exit.

But what we are not doing is that we are not asking the really important questions of, “Is this capital scale exit model actually getting us where we need to go as a society? Is this treating our planet in a responsible way?”

We sort of vaguely know that the system is responsible for it. But then if you ask people, “Well, what is the system?” Then they are just like, “Nobody knows.”

Very few people can actually tell you how the financial system works. But the moment that you start digging, and you start following, it is follow the money approach. You start understanding the incentive structures, and it’s like Charlie Munger says, “Show me the incentives, I’ll show you the outcome.”

What we need to do is that we need to really take a systems thinking approach, in the sense of just understanding that rather than playing whack-a-mole with the symptoms, we need to realign the incentives because that will cause the larger, emergent organic behavior of that system because as long as we are financially incentivizing people to externalize costs onto environment and society, they will continue to do so.

Shubha Chakravarthy: Got it. It was a very masterful exposition of how the financial system works and what the first order and second order consequences are on entrepreneurs. So, thank you for that. That is very articulate and cogent.

That brings us back to what the micro level action is that an entrepreneur can take? I want to focus on one thing, which is, you talked about the very large hypergrowth which certainly resonates, right? Then you have the micro, very capital light model where maybe you don’t have to invest a lot.

Certainly, I take your point about not needing to hire super-fast, but there is a case in the middle where capitalists need it to be able to build a functioning business, not a unicorn.

What models work in your experience and in your mind to fund where there is a delay between the time you start putting in the work and the time you start generating revenues and cash on a sustainable basis?

What are the funding options and how should a post growth entrepreneur be thinking about that funding requirement?

Melanie Rieback: Right. So, there are indeed these cases in the middle, and if I talk about bootstrapping, the first question I always get is, “There is some stuff you can’t bootstrap. Like what about a power plant? You can’t bootstrap a power plant.”

It is true, you can’t bootstrap a power plant, but I think in the case of a power plant, it is probably government funded and that is also a special case.

There is this really wonderful economist whose name is Mariana Mazzucato, and she is an economist from University College London, and she has written many books, one of which is a book called The Entrepreneurial State.

Her thesis in the book is basically that the government is the world’s largest VC, but we are socializing the costs and privatizing the benefits. In the case of our power plant, what actually is happening here is that the energy company that is running this power plant probably falls into the category of a business that I would call a quango, a quasi-NGO.

Actually, its main purpose is to serve a social need, “We need power” and frequently anyhow, the, main shareholders of such quangos happens to be the government.

But in this particular case, the problem, again, socializing the costs, privatizing the benefits, we need to ask ourselves the question of, “Okay, but how is that happening?”

Let’s take a really frequent case of government investment in academic research and fundamental research. We can take something like vaccine research, and I can give you a good example. There was a company, basically an academic researcher who was at the University of Leiden in the Netherlands.

They wanted to valorize their research that was probably funded by the Dutch Science Foundation or the European Commission, or, one of these parties.

So, what happens if you are an academic and you want to valorize something? Well, you are probably going to go to the Technology Transfer Office at your university. So, the TTO officer, at that point, the first thing they are going to do is to try and patent anything that moves, which is a bit odd if you think that we are a barrier to entry in front of using stuff that was publicly funded, but all right.

Then the second thing that they try to do is they will probably push you through to the academic incubator that is affiliated with the university.

Now, the academic incubator most of the time will then say, “Hey, I happen to know some venture capitalists that I can introduce you to. We can get some additional investment so we can turn this thing to a company.”

Now, there is a problem with this. The problem is that the venture capitalist is coming in at a relatively late stage of the game, and they are also for a pretty small investment compared to the huge initial investment that the government made. They are getting a significant percentage of both the profit rights and the voting rights for that startup.

So, that leads to the kind of situation where you have governance issues for the company. Coming back to this example of this researcher and Leiden, they did exactly this.

Then, their company got VC funded, grew exponentially, and then they were acquired by some party from the United States. Then at a certain point, the pandemic happens, and then we need, of course the facilities of this company in order to produce vaccines.

Only one problem, the American owners of this company based in Leiden, forced the company to serve the US market before the Dutch market. That is sort of the moment where the government actually needs to start asking themself the question of, “Well, what, what are we doing here? If we are creating this investment in these kinds of local companies, why are we considering it actually a good outcome for this to be sold?”

This happens again and again.

In cybersecurity there is also another example of one of the market leaders in the Dutch cybersecurity space that originally bootstrapped, but eventually wanted to go the hyper-growth growth route. So, they went with some VCs.

At a certain point it was like “Congratulations to this company. They’ve just been acquired by a different British cybersecurity company.” Then the problem was that the monitoring boxes that the security company had made were all throughout the Dutch government defense, big business, intelligence even.

The entire customer base collectively let out an “Oh shit, our data’s going to the British.”

So, what happened next was they started jumping ship and there was another spinoff, a smaller startup that had spun off from the same company and some of these customers switched over to this startup that was making similar monitoring boxes because hey, at least this is still a good Dutch startup, right?

The same story, then they also got VC funding and then grew exponentially. Then two years later I read the press release. “Congratulations to this other company. They’ve just been acquired by the Romanians.” At a certain point it’s like, “Okay, like, are we ever going to learn here?”

It turns out actually that yes, we do learn because the Dutch government at that point started requiring a golden share to be held by the Dutch government for any critical cybersecurity company, that was dealing with the government or with critical infrastructure.

So, they did learn, and they don’t call it this, but it turns out that that’s actually kind of steward-ownership. That was the solution to their problem.

So, coming back then, to these government projects, the government doesn’t want to bootstrap things. They just want the problem to be solved. If you are a government, you want a vaccine, you want a school, you want a road, you want a bridge.

You don’t want to have to deal with the whole process of, “How do I get there?” You just want to give it to a company or an investment fund and let them work on it further and then just be done with it.

But what we don’t want is cash leaking in every direction in the process of building that government project, which oftentimes happens with the contractors, and then you get scandals and things are over cost and things are out over the deadline.

But this is actually where building what I would call a non-extractive company can help because if at that point you give the assignment to a foundation owned, steward-owned company, in which you ensure that basically all of the cash is getting fully reinvested into the business beyond middle class salaries and a pension, and you are also preventing any kind of a liquidity event, any kind of exit of that company being sold.

Then what you are doing is that you are creating asset locks. You are creating a company where you actually can’t pull that financial value out of the company, which means that the only purpose left for the company is to provide that product or service in the most socially responsible and environmentally responsible way, and then they’ll do that for you.

So, for the company, it makes total sense actually to embrace the concepts of non-extractive business for these kinds of government subsidized projects. The same concept also extends to investment funds as well.

You can also create non-extractive investment funds that also use steward-ownership, foundation ownership, and also reformed fee structures that similarly prevent cash from leaking out of this whole thing to ensure that if you are going to be running this fund, it really is focused on what it is supposed to be focused on, which is realizing this product or service or groups of companies and providing these products or services that are something that the government and society really need.

Shubha Chakravarthy: I like how you differentiated the big power plants, like investments, which you clearly need a huge player for, like the government, right?

Whether it is Cleantech or whatever the case might be.

Then there are also the other companies which are, let’s me say, ABC company down the street that does need scale, that does need capital, but doesn’t have as tight a nexus between some state infrastructure goal and funding and yet needs capital.

What I’m hearing you say is that capital is just a force. You just need a resource to make it happen, but it is different from the governance structure, which is really your focus. You can say you can have the same amount of capital, a different governance mechanism than you do today in the VC standard model is the first point I took away.

So, coming back to our entrepreneur who wants to start this company. Now she has a necessity to get funded. She is not cleantech. She does not have something that is state sponsored, or state funded. What options does she have from a capital acquisition perspective to go and fund whatever she needs to fund to meet her objectives?

Melanie Rieback: Right. Look, there are two approaches that you can take. If you are smaller and don’t mind organic growth then I think the best approach is to just to start a service company and then use margin off of the sale of these services to fund the research and development on product.

It is a really good model. I mean Radically Open Security; my own company has used that model. We have a thriving services business with a high margin. We use the cash from that to fund my other projects, some of which are activist in nature and some of which are things like building infrastructure and software development.

The nice thing is I can open source all that software that I develop and give it away for free because there was no VC who can tell me not to. That is also kind of nice.

Also, by not putting up a barrier to entry to the stuff that we are creating, that also generates a lot of reciprocity, which is good business stuff, which sells more services. It creates a virtuous cycle.

It is not as slow as people think, by the way because there are occasionally contests, like a fastest growing company and things like that but I did notice one time that a VC funded company probably did grow roughly around the same speed as my company did.

The big difference is that we have been profitable from day one, whereas this other company, while they were also successful, they got acquired in the end. So, if that is your definition of success, they also met that goal, but it is just a different model.

For the ones who don’t want to take that kind of lateral thinking approach where you are using a service to cross subsidize product development, I think another approach is that you would need to have, and I mentioned this before, kind of a non-extractive investment fund. This really requires brave financial professionals to create a market that right now actually barely exists.

I can give you one example that I think is quite nice and it is called Snowball Impact Management. So, the CEO, her name is Daniela Barone Soares. She wanted to create in this case, the VC fund of funds.

But she wanted, first of all, to make things that are different and optimally social. The first thing that she did is foundation owned. That is already different than most investment funds. The other thing that she did after that is she reformed the fee structure.

Let me just make it a small segue on fee structures. So, the typical structure that most financial professionals, including VCs tend to use is something called “Two and Twenty.” 2% asset under management fee and a 20% of what is called carried interest.

So, if I am a VC, then what that means is with the 20% carry if one of my portfolio companies rose exponentially, with that hockey stick and then they exit, I get 20% of that.

Now, that is a super powerful motivator for me to push my portfolio companies to grow exponentially in an exit. So, you can even say that that 20% carry embeds the growth imperative into startups.

If you want a VC that will willingly cultivate companies or the long term, then are allowed to grow organically and that aren’t just expected to exit in three to five years, just take that 20% from their compensation package and toss it. Just get rid of it because if you change the incentives, you get different outcomes.

The 2% is also the management fee. So, if I’m a pension fund and I give money to this fund manager, I pay them 2% just for managing my money, with the hope of getting returns. If the fund is small, 2% is, is not that bad. But if that fund grows, this 2% can become extremely extractive.

For example, let’s say that I want to retire someday, so I get have a Roth IRA or a 401k or one of these kinds of investment vehicles, and let’s say that I have a fund manager with a 2% management fee for that fund. Given the historical performance of the stock market over the last 25 years with a 2% management fee, I will have given two thirds of my returns to the fund manager even before the 20% carry.

So, most people don’t realize how extractive this is, but John Bogle who is very famous, for those who don’t know who he is, he was the founder of Vanguard, which is basically one of the big three investment firms.

He used to talk all the time about the tyranny of the fees and about the conflict of interest between the fund manager and the investors, and by investors he meant people like you and me, pensioners and retail investors and really the reason why Bogle invented the index fund, and the index fund is just passively tracking the entire stock market.

The reason why he created this was because he wanted to drive fees down to zero, by basically passively tracking the stock market via an index as opposed to active portfolio management, which requires humans, who within pull fees out of this.

He was largely successful with this, with the index funds because, now if you want an index fund, what are you paying? Probably four or five basis points. I think Prudential has literally a 0% index fund.

It is a loss leader for their other services. But it really shows, John Bogle was trying to create a not-for-profit investment fund. The whole concept sounds crazy, but it actually has a really storied legacy and they called it Bogle’s folly, you know? The index fund when he first invented it.

Of course, that also grew out into an entire thing because of Electronically Traded Funds (ETF), and passive investment is now 35% of the total investment globally. So, yes. Folly indeed. Right?

But the point is though, with this kind of mutualized mutual fund that Bogle was attempting to create, if you talk now about creating investment funds that are not for profit, that idea is not so crazy. I’m coming back to Snowball and what Daniela Barone Soares is attempting to do.

She took that fee structure, that “Two and Twenty”, and she took the 20% carried interest and she got rid of it. Then she took the 2% management fee, and she changed it into cost of doing business, assuming middle class salaries and a pension. That’s it. The whole thing is foundation.

So, she too was creating a not-for-profit investment fund, and she has applied it in Europe, but she is not the only one, there is another example also of an ETF that is called Impact Shares that is based out in the United States. It was started by the NAACP, The National American Association for Colored People.

They are an NGO that wanted a sustainable funding source. So, they created this ETF, and they housed it basically as a 501(c)(3) and then the point is that they had all of their profits and returns reinvested back into the fund itself.

But of course, because it is an index fund, it is giving the returns that a typical index fund would have and what it is then doing with the rest of those returns is that it is donating them to the NAACP.

Shubha Chakravarthy: Very similar to your model. Right?

Melanie Rieback: Very similar to my model and to Patagonia’s. So, the thing is, there are ways that we can create non-extractive investment funds or even investment funds that are cross subsidizing charity, not with 10% of their profits or 5% of their profits, but with literally 100% of the non-reinvested profits.

The thing is that any investment professional could do this. There is nothing unique or special about the people who started Impact Shares. I mean, Daniela is great, don’t get me wrong, but anyone can do this, and she encourages anyone to do this.

Coming back to this Mariana Mazzucato problem, let’s say that I’m the government and I want to have some SMEs that are dedicated to tech, to something medical, to food, to whatever.

Then what I could do is that I could basically create a VC fund that runs in exactly this fashion with a reformed fee structure and with reformed governance, with things like steward-ownership and foundation ownership. Thus, ensuring that the fund manager will only ever be middle class. Then you are going to ask the question, “But what fund manager will want to do that?”

Shubha Chakravarthy: Well, I was just going to say that removing the 20% definitely changes behavior, but it’ll also change the pool of people who want to become VCs.

I’m not saying that is good or bad, but that does have ripple effects where you need to figure out, “Okay, what does it do?” Just like, Bogle’s Vanguard changed the class of fund managers and created a whole new class of non-managers. Right?

Meaning you don’t need to be sitting there watching what is happening. But that’s a different story. Please go ahead.

Melanie Rieback: But it might cultivate a different crop of fund managers but is that necessarily a bad thing because a lot of people who go to business school, and who want to study finance, or other business topics, oftentimes they are there because of money, because they want to be able to earn big upon their graduation.

Well, it could very well be that there are some mid-career professionals who are sick of everything and have been there and done that and they are in their forties or fifties. They realize the clock is ticking and there is not a whole lot of time left. Time is the limited quantity, not money.

Some of these people might actually be willing to be that pioneer. To be that change in the world and to leave their legacy because you can’t take that money with you. They can use their experience and their expertise and their experience in whatever fields that they happen to have been working in and apply that.

They probably can make perfectly good fund managers and they are there for a different reason. See, we assume that good fund managers are greedy. What if it just so happens that the best fund managers might be the ones that aren’t doing it for the money.

Maybe there are some people out there that are just willing to do it and to be middle class, but the pool of people that you need to get, you might need to get them from somewhere else because the problem is that these kinds of excessive fees are so normalized in the financial industry.

Now of course those who are already receiving them are probably not too likely to want to make that kind of switch with exceptions. Look, Daniela used to be a more traditional fund manager before she decided to go this way with Snowball. It could even be with you, maybe you have been there, done that, been in banking, gotten burned out.

You’ll need to try something else. You are also the kind of person that very easily could start a fund like this, but it is just a matter of desire and making that entrepreneurial decision to do things differently.

Me too, like with Radically Open Security, nobody twisted my arm to make me sell my company from one year ago to a foundation. I knew full well what I was sacrificing when I did that, and I’m not blind to the fact I read the same industry trade press and publications.

I know what I gave up by doing this, but I also know what I gained. What I gained is the knowledge that I created a really unique organization that is creating a huge impact through cybersecurity.

Anyone can do this, and you would then think about what founders would want to make that sacrifice. Turns out a lot of them. I also created non-profit ventures which is an incubator for non-extractive startups. So, basically anyone who is interested in charity models.

So far in the first three cohorts I’ve had roughly 50 Startups who wanted to be incubated this way.

We also just opened a combined “Train the trainers and incubator program” also for 2023. I just opened it roughly like a month ago. I’ll tell you, I posted on LinkedIn for the “Train the trainers”, for example, and within three and a half weeks we had 130 applicants.

Shubha Chakravarthy: That’s great.

Melanie Rieback: It’s crazy, and also for the incubator, I think I’m busy with interviews right now with the folks that applied, but we also have roughly 25 applicants this time.

Usually, I narrow it down not to have smaller cohorts, just to keep things personal, but I’ve got more people applying than I can handle and that is just from one post on LinkedIn to people in my network.

That is the whole reason also why I’m doing the “Train the trainers”, because I believe if other people were to create similar incubators in their own local ecosystems, you would find traction and you would find people who want to do it.

Of course, at the beginning, the people who are going to do it are going to have very strong opinions and very strong convictions in wanting to take that unusual step to be the role model.

But the thing is, it is like crossing the chasm. It starts with the early adopters and those who really are willing to go out on a limb to do something really unusual.

Then at a certain point you start getting the other ones who are a little bit willing to do it, but not quite. Then you eventually get to this chasm where, the mainstream is on the other side and once you get enough of these early adopters together, then you leap across that chasm and then the mainstream starts working with you, not because of their ideals, but just because you are good and at that point once you get the mainstream, eventually decades later, probably the laggards will come running afterwards from behind just because they don’t want to be left behind.

But that is kind of the way that you have to approach it.

So, we have to really start with the coalition of the willing, and with those who are like-minded and who are willing to be the role model. Then once we exist, we are the case studies that the business schools will write about, and we will show that it is possible to operate things this way successfully.

When I told people I wanted to start a nonprofit cybersecurity company, they thought I was crazy, or they thought I was lying.

Now, 9 years later I can show them how much money we have donated to NLnet, and I can open our books and show it to them, and it is one thing to be like, “You are full of crap”, before you’ve started, when it’s still theory.

It is a whole another thing once you’ve done it. I’ve got 50 people that are earning their living and I’ve got huge numbers of customers that are getting services from us on a daily basis. That is what will quiet down the skeptics.

This is also the problem in general with new economics, with things like post growth, de-growth, donut economics. It needs to be more than just a macroeconomic theory. It needs to be more than just that concept.

We need to take those frameworks and they are beautiful frameworks, asking the questions of is growth good and how do we build ecosystems that thrive rather than needing to grow?

These are pertinent questions, but we need to take that, and we need to translate these down one abstraction layer into the entrepreneurial level, and it is us as single individuals, now we’ll build it, and that is how it is.

We then collectively form our economy and then slowly from the bottom up we can start getting more and more market share as you would call it, until we start becoming the mainstream. That is the point where it starts becoming viable because right now most people don’t even realize that there’s a choice to be made.

There are people who would choose it. It’s not the majority of people, but there are some people who would choose it. But the more role models in case studies there are, the larger that movement becomes, and the more people will start coming along because it starts being perceived as a normal choice that you have to make and that is how we are going to change things.

Shubha Chakravarthy: Excellent. So, you have given us a very thorough, very expansive, and very enlightening panoramic view of this whole concept of post growth entrepreneurship.

What I’ve taken away is that it starts with a why and it permeates every step of your journey, your business model, how you grow, at what pace you grow, why you grow, and where you grow.

You have also laid out your funding choices as an entrepreneur, your different growth paths, whether it is bootstrapping or seeking funding from like-minded and congenial capital sources. We had deep dive into what that means.

Also, from a second order perspective for the funding industry, all of this is just fantastic, right? So, I feel pretty well informed and well equipped.

Let’s say, Monday morning, I want to start on this journey. What are the top five actionable pieces of advice or guidance would you give to an entrepreneur who wants to take this tab?

Melanie Rieback: The first thing that I would say that you need to do is educate yourself. I have been recording some videos. I taught a class at the University of Amsterdam called Post Growth Entrepreneurship.

I finished up about two months ago. I’m starting to put some of those videos on YouTube. Our company is called Nonprofit Ventures.

So, if you have a look there, you start seeing that there is also a playlist. If anybody wants to reach out to me, I can also send you a link and we could put it on our website too and anyone can connect with me on LinkedIn, and we’ll give you this information.

But I would say it starts out with just watching those videos and informing yourself about exactly what pro-growth entrepreneurship is. At that point, you’ll have at least the basic concept, and then the next question is, getting started.

Then it really starts with entrepreneurship, and it starts with deciding that you actually want to take the first step and that you want to get started, and when you get started, you are not going to know what you are doing.

The entrepreneurial journey is very much a creative journey, and it is not the kind of thing where you are just going to write out a 50-page business plan at the beginning and think you are going to get everything right.

If you write that kind of a business plan and if it turns out to be right, then you probably weren’t being creative enough, and anyway, you wouldn’t probably just got lucky most of the time. The world is different, and the market is different than you think it is going to be.

That’s the reason why equity isn’t pivoting. You really need to start on that lean startup journey. The other thing that I would say is to connect this really closely to yourself and there is a particular practice that I would encourage that you won’t be recommended for most business schools, but there is a really wonderful book called The Artist’s Way by Julia Cameron.

Shubha Chakravarthy: I thought you were going to say that. Love it.

Melanie Rieback: Yes, basically the book is for what she calls “blocked creatives.” So, in other words, people who kind of fancy themselves to be some kind of creative or artist or people who just have some greater purpose that is within them, but it is just getting buried by day-to-day obligations and by our careers, our jobs, our requirements, and obligations.

The whole idea is that there are two tools in this artist way toolkit. The first is called the Morning Pages, which is basically three pages of long handwriting every morning.

The second tool is something called an Artist Date which is basically once a week you take yourself out for a date, which is just trying to give yourself the kind of creative input, just stuff for fun. It doesn’t have to be useful; it doesn’t even have to be educational.

It is just something you are curious about. Then what you will discover is that entrepreneurship is a creative journey of synchronicities, and most of the innovations actually come from lateral thinking.

They come from taking something from one area and then applying it to a completely different area. That happens to be where most innovation happens but us rationalists and business people and techies are not so good at lateral thinking because we were taught how to be rational, and how to think logically and just in straight lines.

The great thing really is just that what these morning pages do every morning is they clear the rust out of your brain that is just dunking things up, and it just allows you to get some kind of creative flow that puts you in those spaces where that synchronicity will start to happen.

In business, your first customer is probably going to be your cousins, uncles, neighbors, dentists, you know, those you happen to talk about it with. But I know this person who has this company.

That is how business happens. Synchronicity in finding customers, synchronicity in meeting the right people, synchronicity in finding the partners that you want to work with and that equals getting off the couch. But it also means that you need to be constantly intersecting in, “How do I connect this to me as a human being?”

That is why I also start with why. I mean, you do need to keep connecting it back to your why and making sure that it continues being connected to your why because with entrepreneurship it is hard.

You are going to fail sometimes. You are not going to find traction. You are going to fail at product market fit. You are going to try and sell things and it will just not sell. You need conviction to continue on this path and to not quit at the first sign of trouble.

If you are doing something that is connected to you, you are going to find that conviction to be able to stick it through, and to really be able to stay the course whereas if it is just some idea that you happen to get from some pitch competition where people gave you a few topics and you had to choose one, that is not going to be something that is super personal for you.

It is the same thing also with just choosing some topic because it is hot or because you think it is monetizable or whatever, or because you can have some PEs income stream.

Look, I’m not saying you can’t be successful with these things, but if you look back, are you really going to be satisfied? It’s not just about the result, it is about the process. You can have both.

Shubha Chakravarthy: Awesome. That rang very true, I can tell you personally. So, thank you for that. Wrote morning pages for a very long time. I need to pick back up.

For five years I never missed a day, so thank you very much. Is there anything that you wish I had asked you, but I didn’t?

Melanie Rieback: I don’t think so. You too also have a very interesting story, and I hope that you are also adequately sharing it, I’m sure also on your own.

Shubha Chakravarthy: Thank you. Yes.

Melanie Rieback: Maybe the one thing is just more just like a question for you. If you were going to reflect on all of this that I just said, what do you think, really just from your perspective, what would you make out of all this?

Shubha Chakravarthy: To me, the single biggest takeaway, there are a lot, but if I had to just nail it down to one thing, it gave me an internally consistent route to entrepreneurship that sacrificed neither impact nor economics.

To me, that is the holy grail because I have seen too many attempts or schools of thought or disciplines that go too far in the direction of impact.

Not to say that it is wrong or that go too far in the direction of profit. So, both of those resonate with me and both of those kinds of are like the two scales of a balance.

But I cannot fundamentally being a dyed-in-the-wool finance person, I’m not able to accept that you can just go for impact and economics be damned. That doesn’t make any sense to me because economics fundamentally is about a study of how you use scarce resources to meet unlimited needs and wants.

So, if you are not meeting those, it is like you cannot defy the law of gravity and you cannot defy the laws of economics either.

To me, the single biggest takeaway is that you can build an economically disciplined, scalable venture that respects what the market discipline forces on you, but at the same time pays equal importance to social impact and the larger impact that growth in itself is not bad.

It is the why and the how and the so what of growth that matters. So, to me that was a single biggest message and a very encouraging message that I got from all of what you talked about.

Melanie Rieback: Indeed. Definitely a mistake that I think a lot of impact minded people really make is they think they have to do everything not-for-profit, and they think that they need to pay themselves below market.

This isn’t sustainable. I mean, you get what you pay for. You also get how you treat people. If people can earn a better living elsewhere and they need that to support their families, they will do so.

They will go somewhere else, just because you are a non-extractive company, which basically is locking the assets in the company, it doesn’t mean that you have to underpay.

I mean, heck, it means actually sometimes you can even pay better because you don’t have cash leaking out of the company and if that cash isn’t leaking out of the company towards the 1%, then it means you have more cash left over to reinvest, which includes paying your staff better.

So, we need to pay living wages and we need to financially make those numbers meet and we need to get the unit economics right, because if something financially doesn’t stand on its own two feet, it is not sustainable.

Shubha Chakravarthy: I love it. That is a perfect way to encapsulate everything you said.

So, I want to thank you again for taking your time. I know you are very busy; you have got a lot going on.

I learned a ton. I’m sure others will too. We wish you the best in everything you are doing. They are all very inspirational and noteworthy. So, on that note, thank you so much, Melanie, for taking the time. We have had a great conversation. Thank you!

Melanie Rieback: Thank you. Thanks for the invitation to come here!