When and How to Back Franchise or Biz-In-A Box Concepts

As franchises and business in a box concepts get increasingly more popular with the venture crowd, there’s two basic/general axes on which to evaluate them:

Asset and operations - Heavy vs Light

• Heavy concepts need a lot of capex and take on a lot opex/operational burden. The overall investment in a single “unit” is high - both in hard dollar (buildout, hiring, etc.) and soft dollar terms (full time committment, pre-planning etc.)

• Light concepts need little or no upfront investment - whether because they’re virtual or just simple it doesn’t matter. They are operationally simple with few or no employees beyond the owner/operator who might be able to do this relatively part time or passively.

Value proposition- Retrospective Proof vs Prospective Hypothesis

• Retrospective value props are, obviously, only evident in retrospect. The value prop of a tastier chicken sandwich is only evident once you see a line down the block at lunchtime, for example.

• Prospective hypotheses are forward looking bets with intrinsic economic value that necessarily gets unlocked if you’re right.

Together these form a 2x2 matrix wherein each quadrant gets its own underwriting framework and suggests its own “venture moment” - the key point(s) in time when outside equity can deliver results and justify its high cost of capital.

The Four Types - when and how to fund them:

1. Opps/asset light and prospectively valuable:

This will look the most like a really great software or marketplace business in both how you capitalize it and how it grows. These can work on a “normal” venture trajectory with serialized fundraises to flip successsive cards, especially when they don’t take capital, staff, or full time committment to get started AND when you can get straight to selling units/tooling without needing to first operate them yourself. These are the most legible so they’ll also be the most competitive.

• Examples: Headway/Alma, Moxie, Fora Travel, Craftwork, OnlyFans

2. Opps/asset heavy and prospective value prop/IP:

It might be a long, expensive journey to flip the card, but there’s real transformational economics here that venture can fund/underwrite early. It works if you have/can get sufficient capital to take it all the way, knowing that once up and running it will take little or no outside capital to sustain itself and grow.

• Examples: Area2Farms, Stellar Pizza

3. Opps/asset light and retrospective value:

There’s not much to fund (no hypothesis beyond “it works, people like it”) but it also won’t take much to fund it (no expensive build out or complex staffing.). You can put together a FAFO round until things pop off, at which point you may have an option to back up the money truck - much like a typical consumer company.

• Examples: no one really does this - yet!

4. Opps/asset heavy and retrospective value:

You’ll need lots of evidence (from running units yourself) because operators/owners wil have a high burden of proof to make the investment. Outside equity can neither go straight to the scaleable biz of “selling units” (yet) nor can it invest in the systems to prove the hypothesis (there is none). Instead capital (and lots of it) goes into running the operating business. Eventual outside equity will look more like a growth round than venture.

• Example: Barry’s Bootcamp, Raising Cane’s, Drybar

There’s money to be made in each quadrant/for each type of business but only for the right investor at the right moment. Know thyself and capitalize accordingly.