NEXT Studios: Creating Space for Innovation with John McDonald - Ep 41

This episode of the Social Enterprise Alliance Podcast aired on Tuesday, April 9th. This episode can be found on Apple Podcasts and Spotify.

Lauren: [00:00:00] Hello, everyone, and welcome to the Social Enterprise Alliance podcast. Today's interview is with John McDonald. John McDonald has over 25 years of experience as an entrepreneur. Most recently as the managing entrepreneur of Next Studios, Indiana's first benefit corporation Innovation Studio. He was the founder and CEO of Clear Object, the fastest growing technology company in Indiana for five years in a row, which successfully exited to private equity in 2019.

Prior to that, John served as the CEO of Chicago based startup Cloud One and also at IBM, where he led technical sales for their software development tools product line. Please welcome to the podcast, John McDonald.

David: Well, John, welcome to the social enterprise Alliance podcast. We're thrilled that you're here with us today. And, just [00:01:00] as we dive in, want to get started. What is your story? How did you get involved with social enterprise?

John: Yeah, I'm super excited to be here. Thanks for the opportunity to share that. Well, I, I think I would say we backed into it.

Um, so yeah, uh, , I was, uh, CEO of a technology startup company. In Indiana, which, was really great, grew very rapidly, able to sell that to private equity, , a few years ago, but, , all during that time, I never turned down the, , a meeting request from a startup founder because it's hard, you know, and I thought if there was some mistake that I made, I could help you avoid by telling you about it.

I'd be happy to do so, but there was a very distinct, you know, Pattern to these meetings, people had an idea, you know, they shared it with their significant other and they thought it was a great idea. And that's the extent to which they vetted the idea, you know, and then they had some friends coded for them for beer on the weekend , , and they were just looking basically for an investor to keep to [00:02:00] write him a check.

So I keep working on this project and we're very frustrated, you know, that, , newsflash, , other than a crappy prototype and a story kind of got nothing. So I got to thinking, is there a way that you could set up an organization that could help these startup founders, , as I like to say, stick the landing, particularly, , in what we like to call underserved founder communities.

If you look at the stats,, there's low single digit participation from. Practically any group you can think of women, Latino, black rule, doesn't really matter. , and why, , oftentimes venture capital tends to go back to the same people that they've served before because they're less risky.

And so, , you know, get these awful low participation rates from first time founders and people from these communities. And. The unfortunate circumstance is that when you add up all of those communities, they're actually the majority of the population, right? So we're leaving, , most people on the sidelines when it comes to giving them the tools to start their business.

, so I looked into this business model [00:03:00] called a venture studio or startup studio, and there are lots of them, hundreds all over the place, right? But all of them seem to have, again, a pretty typical business model where they, , will raise a big fund, right? Right. And then they'll come up with new ideas and new companies on their own.

Or if they like your idea, they want to buy it from you for like 80 percent or something, which is obviously it works. You know, there's a lot of people doing this, but I thought to myself, well, who does that deal? You know, who like comes up with an idea and then like willingly sells it to somebody else and becomes an employee.

So I started interviewing people that did that deal. And again, the pattern emerged, which was, I didn't think that I had what it took. To be able to do this thing as a startup founder. So I thought, man, that's borderline predatory in some ways, you know, I'm praying off of people's insecurities and buying their idea for a million.

I don't do that. No way. Um, so I started thinking, well, is there a way to do this without actually having to charge them for it? Could you [00:04:00] like, provide this coaching guidance for free? Problem is startup founders. They don't have any money. So you can't really ask them for it. And so how do you build a business that's sustainable?

And that's when we struck on the idea. Well, what if we got went into the business of helping companies be more innovative and apply some of these startup concepts to their own operation? We could charge them for it. And then, um, then we could use the proceeds from that and the profits from that to give away the coaching to these other founders so we didn't have to charge them for it.

And that's what next studios is. And so , the part of that, and hopefully we can get into in a minute is. , the benefits corporation or B Corp actually is a business model enabler for us to be able to do that. So it's more than just, uh, , something that's nice to have. It's actually how it works fundamentally for us.

So at any rate, that was a really short question and a really long answer, but hopefully it gave you something, uh, [00:05:00]

Yeah,

David: no, I love it. And I mean, I think the context is just, , important, , to be aware of and, and also just understand the direction. And yeah, I mean, now I can't wait to , dive in even more.

So.

Lauren: Yeah, that's awesome. , I love the terminology that you use of innovation studio, and I didn't know kind of the backstory of these other, what were the other studios you mentioned?

John: Yeah, startup studios, venture studios, there's a lot of names these things go by, but we try to craft it more as an innovation studio that can take on All different types of ideas that are innovative.

Yeah, I

Lauren: love that. Do you know, like, is that a kind of phrase that you all coined? Are there other innovation studios?

John: Yeah, there's other people that have used that terminology. , but it's not the common one. And we have found a few organizations that are kind of like us, , but there's not a ton. You know, most of the people that are in this business are doing the model I described, , [00:06:00] before and which is fine.

Again, it's nothing wrong with it. Obviously works really well. It's just not what we wanted to do.

Lauren: Yeah, absolutely. Well, I would love to hear more about your incorporation as a benefit corporation and how that ties in and, and really influences the work that you do.

John: Yeah. Thanks for asking about that.

So as you can hear, , before, The, we call it the Robin Hood model, you know, , take from the rich, give to the poor, but the rich know all about it and they love it because they get this, they get this extra benefit in the community. And we make sure that the participants in our free offerings or programming know all about who's really paying the bills, right?

So it's a good deal is had by all. , but that, if that structure of a benefits corporation of, of. Being, wired to give back right. It's part of the charter, right? It's the public benefit, right? Right. Why do you exist other than to make money? You know, it's this public benefit. That's what's in our B [00:07:00] Corp charter is, is advancing entrepreneurship.

That's our, That's our public benefit. And so it kind of wires it into the, into the architecture of the company itself, that this is why we're here. It's not just to be any old innovation consultancy. It's actually to be able to give back to the community. That's the entire point. Otherwise we shouldn't even try.

We don't need to enter a market with a bunch of other people that can do the same work if there's not an incrementally better way to solve the problem through what it is we're trying to do all the other benefits corporation benefits, if you will, transparency and auditability and, , Responsible citizenry and all the rest are all great things.

And it's a lovely thing, but I think for us, , it's actually the business model underneath it's enabled by that. , I, what some of the B Corp advocates had in mind when they originally,, we're thinking about all this stuff,

David: Yeah. Is there something like what specifically drew you to. The B Corp [00:08:00] model, , and what they're doing, was there something unique about what they were offering?

John: Yeah, for me, it's more, was more this idea of we're going to put into our actual charter, the requirement, to give back to the community.

I mean, you can be charitable without, being a B Corp, obviously. Right. A lot of companies are, but we wanted to make sure that it was in the actual architecture itself in the DNA, right? We were literally chartering with the state on the fact that we have this public benefit for his existence. That's written right into the documents, right?

And so that was the attractive thing to me. The other things are great. Like I said, there's nothing wrong with any of the rest of it. , It's all wonderful stuff, but in reality, it was the enabling part of the charter benefit. That was the big draw for us to

David: do that

John: very thing.

David: So, unpacking your story, serving underserved founders is really the heart and mission behind your work.

Um, I'd really love to unpack [00:09:00] what are the unique needs, , of that. Founder let you work. Yeah. How do you solve for those things beyond like additional funding or just opportunity?

John: Yeah. That's a great question. The needs of startup founders are the same regardless of whether or not you are underserved or not.

It's just your mean, your ability to access those things is what's different. , the two things that you need to, have a company if you will, or that you, that a budding entrepreneur needs are, , coaching. And money, if you boil it down, right, they need, they need the support, you know, some form, , process method, , steps, you take, , forms, you fill out all the rest of the stuff, right?

And guides and coach. And importantly, the support in the journey, because it's very, , Can be very lonely and very difficult, and they need access to the capital that's necessary to be able to grow their business in the underserved founder communities. You find a lack of both. If I don't have [00:10:00] somebody in my family that started a business or whatever around me, where do I get that input and coaching from?

And if uncle bill doesn't have 20, 000, he'll give me just because he's uncle bill. Where do I get that money from? Right. And the answer is I don't, and therefore nothing happens. Right. And so you end up with low single digit participation in those communities. And so to solve for that, you got to solve for those two problems.

And so the two things that we did, , to briefly outline them. , the first thing at the process and method, we created something called discovery workshop. , discovery workshop is what the industry calls a pre accelerator, but it's basically a lean startup bootcamp is what it's doing is it's trying to help you find what the business model is, , around your idea that you have.

, base assumption is that everybody has ideas, , they're free, right? It's just how do you turn that idea into a business and in particular, put a business model around. So simple questions like, , who, what problem are you [00:11:00] solving? You know, who has that problem? What should you charge for it? Right? How are you uniquely solving the problem better than the way it's being solved today?

Right? , things that for a serial entrepreneur are pretty common in their thought process. But if you've never done this before, maybe no one's ever asked you. , and I would tell you that the real outcome of Discovery Workshop, the real product of it, is confidence. , it's confidence in yourself, right, that, hey, this idea could be legit.

, But also, you know, I. Potentially legit as an entrepreneur, right? It's not just about the idea, but it's also about me. The other thing we did was we created something called the next community impact fund. And the next community impact fund is a venture fund in every way. It makes equity investments.

There's due diligence or studying the companies. so we're buying stocks on grants, right? It's Has been donated to the fund versus invested in it by limited [00:12:00] partners. And the significance of that is twofold. The first is that, , one of the main reasons we talked about before that venture capital tends to shy away from first time founders is they have to get these huge returns for their limited partners in their fund.

, and if I've never done this before, I look really risky and I tend to go back to the people that I've done, have done this for me before. But if the money's donated. All that risk goes away. So now I'm free to invest in first time founders earlier in the process. But the other benefit is if there is a return on that investment, and there's an expectation that there is the returns don't go back to the people either.

They stay in the fund because the money's been donated. And so you can grow the fund over time through its success. And something's called evergreen. In the industry, and so these two things then work together, obviously, in an attempt to cover off on the two major challenges that you have in pursuing, , a startup, particularly as you come from an underserved founder community, who helps [00:13:00] me through the coaching in the process and gives me confidence.

As an entrepreneur. And then secondly, where do I get the first money from if uncle bill isn't available to cut that first check to me? So, , again, long answer to a short question, but, uh, but that's a really just trying to cover off on the major problems that we find in those underserved.

David: Yeah, well, and I, I love that you said about the confidence too.

I mean, I can remember starting my first businesses and. You know, at this point I know all the answers, but I had the tools and resources and access to all of that to get to where I am today, , versus. You know, to, meet people that are young and, or whatever, have that, have the great idea, but don't know where to go.

, so I, I love that. And, and I think you hit on something that is really important, that having the confidence, having your ideas tested and vetted , and strengthened, , can be invaluable to a cohort of people.

John: That's the idea. You got to hit it right on the [00:14:00] head.

Lauren: Yeah, that's awesome. I was also really excited to hear about , the venture fund because I mean, that's a, a problem that I think widely social entrepreneurs, startups, , underserved founders, , it can be a tough thing to find the funding and to have access to that.

Especially if as you've said with , the kind of, , obstacles that you've outlined. So that's just like a really, I think it's a really cool, creative and sustainable way. To provide funding for the founders that you're serving. , so I was very curious as you were talking just to hear how you solved and address that problem.

And I'm, yeah, that's really awesome and exciting.

John: I think, thank you very much for saying that. I appreciate that. We We have now seen, at least here in our home state of Indiana, other communities pick up on the theme. We've seen our state's venture capital, , arm called Elevate Ventures is now building up a whole new pre seed fund.

, so it's [00:15:00] also, I think, had some effect on raising the overall water temperature, , and making awareness of this issue. Thank you. , and without, with all respect, intentionally, all respect to the people that have been in the space providing grants and pitch competitions and other sorts of stuff. , but, , we have to keep going.

We need way more. Well,

David: I'm kind of curious. So if the model itself is about empowering the startup in marginalized communities and underserved founders and really setting them up for long term success. It seems like there's also an opportunity to incorporate some additional social impact goals and objectives in their organizations that they're founding.

So there's like these multiple ripple effects. I think that you're sitting on top of, have you seen that

John: too? Very much so. So we put a. , in order to kind of capture what it is that you're describing, we wrote, , a white paper as a team, put it up on our, , [00:16:00] website and, , , it's about a convergence that we are observing.

See the, um, in, in every community you have sort of, A group of philanthropic organizations and people you'll have, , economic development people of some form, , and you'll have entrepreneurs and business owners, right? And historically, those 3 things are been very separate. You know, they have their own, , methodologies and acronyms and winners and losers and kings and queens, right?

, but there's a growing number of people very clearly, that are starting to. See that those three things may not be Three different things all together. They may in fact be the same thing. And in fact, it's in the overlaps where you find all the interesting stuff. Right? So when you overlap entrepreneurship with philanthropy, you get community impact funds, right?

When you overlap, , economic development with philanthropy, you get sustainable business models, right? And so. Is those [00:17:00] overlaps between those sort of three circles where everything interesting is going on. And so I think we're in those circles as well and kind of in the middle, maybe trying to invite people from those different constituencies to converge around some problems, , that maybe need to be solved in better ways than they had been solved in the past when you tried to just do it all yourself.

Right. So, for instance, if you introduced a little bit of entrepreneurship into philanthropy, what it may offer up is, , frankly, new ideas or new solutions to old problems, right? That couldn't necessarily be solved completely within one of those circles.

David: Yeah. Do you think that based on what you're seeing in startup and then specifically social entrepreneurship being incorporated into the startup as a whole, do you feel like, Many more startups are asking these social impact questions as they're going.

So like, there's no question.

John: Okay. There's no question. , it is, is it as a reaction [00:18:00] to market requirements? Probably. Is it reaction to, , employee recruitment retention? Probably. I just think that. , There's a growing appreciation that, , who you do business with and who you work for, , who you buy from matters, right?

 And I would even say if you looked at the portfolio companies, if the studio that we continue to work with beyond, , the first discovery workshop stuff, most of them are companies that are in this space somehow, right? We've got. One company that's, , developed, , tools for managing grant software, , who's an underserved and part of underserved founder community so that you can track the progress against grants that you get, right?

We've got another one that, , provides, . Charitable give back opportunities to employees so they can find new ways to give their time, talent, treasure, but then the business owner gets access to the data about how their employees are giving [00:19:00] again. So even the companies themselves tend to be. More and more in that space, , it's not just something somebody opened up a pizza place.

Oh, that's fine. You know, right, but

Lauren: yeah, that's that's yeah, that's really interesting kind of considering that landscape and where all these different spheres are headed. Where do you see next studios going in the next 1 to 10 years?

John: Yeah, thank you for asking that question. Well, what we've already seen happen is we've seen. People in other communities in our state and actually beyond that, , reach out to us in partnership, right?

, and they may be missing one or more of these elements in their local community, , or maybe all of them, , and they're seeking more of that, right? And so they've, , we've now seen our discovery workshop adopted by, , A veterans group adopted by an education, , oriented [00:20:00] charitable organization is their methodology, , by different, , regions of our state and different cities and different places that are like, let's just use their stuff, it seems to be working.

. Even this community impact fund idea, , have other communities that have been are trying to basically do the same thing in their community. So I think our future is more, looks more like partnering with existing people in different places, different communities, be they geographic or affinity based and helping them advance what they're trying to do in their community, , hopefully through some things that we built or could share with them or lessons that we've learned.

David: Yeah, that's fantastic. it feels, as a whole, the social impact ecosystem is tracking in that same way. Hey, here's something that I'm learning. How can I share it with? What would traditionally be competitors really, but how do [00:21:00] I collaborate with other people in other communities and in a way that I'm sharing best practices?

I'm also learning best practices. So to hear about how you can be taking what's been come, what's become really successful and accelerating it through other networks is really, I think, very inspiring. Well, and

John: a great observation you're making. I mean, that's, um, there's a book that was written, lots of books, but Written about this, but one of them particular is a book called startup communities was written by a guy named Brad Feld.

, he's written several other ones, including the startup community way and venture deals, trying to just lay down what they did in Boulder, Colorado, in particular, , to try and create a more entrepreneurial community there. But one of the, one of those books, maybe all of them sort of detail, some of the things that are necessary.

If you a successful, , community, one of them is, , embracing the weird, right. And saying, , stirring the cryo [00:22:00] tanks by inviting people and ideas in that are odd and different intentionally. Right. And, and that's just a new. Way to articulate diversity, frankly, , and, , , another one of note based on , what you just mentioned is the need to, , be giving of your knowledge and time without.

Necessarily having to know how it's going to come back to you or at all, right? This willingness to kind of lean into sharing, right? In the hopes that maybe someday that this will come back to me, or maybe not, maybe never, right? But that whole leaning into. Let's just see where this goes kind of a mentality, that is not frankly, and I'm not an economic developer and I am not a philanthropist.

I can tell you that, but the to the degree that I have learned about these other, , Disciplines those, those traits don't always come easily, , I mean, uh, economic development is always transactional, [00:23:00] you know, it's always, what are we going to get? What am I going to give? , and for sure.

And philanthropy sometimes doesn't embrace the weird and different. Unfortunately, sometimes it does, but not always. Right. And so. But those are very, very, , well known entrepreneurial community traits. That when you start to overlap those things into these other communities can again, hopefully come up with new ways to solve old problems.

So that's awesome. Yeah. I love hearing

Lauren: your, your insight, um, and experience and it's, it's just really exciting to see what the next several years will bring. Um, so for, uh, for us. Our listeners who are intrigued by your work, who want to learn more about it, maybe get involved somehow, or even start a similar program in their own community, , how can they connect with you and find your work?

Uh,

John: easiest way is nextstudios. org. It's all one word. N E X T S T U I D I O S. Dot O R G next studios. org. If you go to next to us. com, you're going to get a really [00:24:00] awesome video game development company out of Japan. So if you see that you're on the wrong website, dot org is where you want to go for that.

And we got all kinds of white papers, way to contact us there. Frankly, everything we do and how we do it is all,

David: that's awesome.

Lauren: Fantastic.

David: Well, John, , yeah, thanks so much for this conversation, for the work that you're doing, for seeing the needs of a community and stepping up to the plate , to make a difference in the world. Like that's what we need is more people collectively doing this together. And you're certainly pioneering so much in the startup space and sharing that with other people is just very inspiring.

John: Well, it's very, , very kind of you to say those things. You know, it's my belief in The belief of everybody here that entrepreneurship is the single best way to lift you out of whatever economic condition you're in, either becoming one or learning how to work with one or for one. [00:25:00] And we can't think of a single social issue that our society faces that wouldn't probably be helped by a big dose of entrepreneurship.

And so for us, it's a sort of missional, right? Uh, yeah to teach you how to fish right and see what happens. So thanks for the opportunity to share our story with everybody today. And it was, uh, it was just a delight talking with the both of you.

David: Yeah. Couldn't agree more.

Lauren: Yeah. Likewise. Thank you, John.

John: You're welcome.