Tom Kelly (IDEO and Design for Ventures): We have a team of venture capitalists in the startup community in Japan all the time and we are always looking for things.
20 Nov, 2020
Brian Dixon is COO and Managing Director at Capital Innovators. He has helped raise tens of millions of dollars for investment funds and assisted portfolio companies in raising over $330m. He became an avid investor and advocate of blockchain and cryptocurrency in early 2012 and his expertise and knowledge has landed him in over 50 features in publications such as Forbes, Inc., TechCrunch, and Entrepreneur.
I was coming out of a law school and early while studying there I’d learned about cryptocurrency. It was a time when only Bitcoin existed back in 2011-2012. I found it completely fascinated and knew I’d want to be involved with that one way or another. When I started to look at cryptocurrency companies, everybody was hiring engineers, and I didn’t have computer science background and wasn’t a fit. And I learned about VC with interests in technologies and those having access to technology and I found it fascinating. I came across Capital Innovators, where I’m located, in St. Louis, Missouri. It was at early days of Capital Innovators. They were working out of co-working space in downtown. One day I just came there, started to knock into people’s doors and asking what businesses they were working on. That’s how I’ve learned about Capital Innovators. It was very interesting, because they were a startup and they had a small fund they were investing into early stage technology startups. They had a group of mentors who helped with the program as well, so I thought I could learn a lot from them. And I could also learn the mechanics of the venture capital space, investing in companies and training those companies how to grow and scale. So that was initially how I first came around – it was basically me just learning about the space. I found them and said, “Hey, I will work for you for free, I just want to learn.” I started with an unpaid internship and then soon after that turned into a full-time role. We we did grow the organisation over the last 6,5-7 years.
We have two different areas and tiers that we do investments in. We had an early stage accelerator program, that’s focused on technology and consumer products companies. For that programs we like to see if the companies have their product complete, if they are taking it to market and in short term if it generates them consumers and revenue. That would make them a good fit for the accelerator program. What comes included in that is a $100,000 and we provide them with office space for the course of the 13 week program. Each company gets a little over a million dollars worth approximately and benefits from partnerships we have. So that can be for legal expenses, accounting expenses, a variety of different products they can use for free or drastically reduced cost, while in the program or afterwards. If you add up all these it will be over a million dollars to the partnerships that we developed over the years. Also these companies get what we call “lead mentor,” who becomes co-CEO of these companies for the entirety of the 3-month program that we run. This particular program is extremely intensive, very metrics-oriented projects focusing on the things that we do. And we expect a lot of entrepreneurs. The feedback we receive from our companies at the accelerator investment stage is that we are more intense – in a good way – than any other program they’ve been through. We’re working with them on a daily basis, we’re providing a lot of workshops, educating them, we help them to create deliverables and strategies that they have to implement in we’re going to review, get feedback on this, and actually help them from a tactical perspective on a weekly basis to move their business forward. Something that we’ve learnt from our businesses that with the level of intensity and how we work with entrepreneurs. It really puts our accelerator program into a unique position, and our success rate is really high as well. The other tier is early Series A investing. Our check range at this stage will be $500k-$1m of investment and that’s when companies will be raising a couple million dollars. They’ve already got the product figured out, got their market fit for the most part, and now they are really ready to pour some fuel on the fire in terms of scaling sales and marketing. Usually these companies are raising a couple of million dollars. And we go co-investing with them and provide that growth capital. We like to see in these companies that they’re doing a $1m in annual recurring revenue, they are really ready to scale in marketing terms, and they are ready to take it to the next level. So there are two different tiers – one for $100,000 that comes included with the accelerator program and the Series A investment from $500k to a million. We’ve, Capital Innovators, now invested in 130 companies from all around the world. We have seeded 85% of those companies that are still operating and growing, and collectively they raised more than $400m on following investments. Collectively they created 2000 jobs.
In the technology side or consumer side of business we’re industry agnostic. We are watching any types of businesses that fit the software based technology or consumer technology that has software aspect. If you have consumer type business and use E-commerce, we can consider your technology supplement. And we have any type investments from FinTech to AI, from Blockchain to IoT. We also manage a corporate VC fund for an energy corporation that covers the states of Missouri and Illinois in the United States, it’s name is Ameren. We help sourcing and find early stage investment opportunities for them with an accelerator stage fund the Capitals Innovators fund stocks from energy technology companies.
We’re looking for opportunities all over the world. In the last 20 months we’d probably looked at 1200 companies across 60 to 70 countries.
In the early-stage side if they have a minimum viable product that they created and they can take it to the market and it is starting to show that there is an actual interest from the market and it starts to generate early customers – that’s something that may interest us at the accelerator investing level. At the Series A level what is going to interest us is just solid growth rates. We’re looking for million dollars in annual recurring revenue, we like to see 20-30% month over month growth. So to see a big market for continuing to grow into it. We are not looking for some amazing new technology, that is one of those things that could be adapted, but could not – it is very transformational (while it is a great option, and we have a couple investments done like that). But usually what we look for businesses that are solid at the pain point. Sometimes those businesses are not really cool hit businesses, but they became successful because it was a true pain point. For example, one of the businesses we recently invested is the company creating a mechanism for people to better track, manage and push-up text information for W-9 and 1099 in the United States. Taxes is not something people get particularly excited about, but it is a necessary pain point that’s why that company was exciting for us. They are solving something a lot of people really challenged with, even while it is not a sexiest business.
Another company that we’ve invested in recently that was kind of interests is a business that turns monitors or TV-screens into an advertising network. We hadn’t seen something like that before, but we understood the model. Companies like Uber, that, probably, has the world’s largest transportation fleet while having no vehicles, or AirBnB – probably the world’s largest real estate provider, yet they own no property. That was the model that they worked through from advertising prospective: they want to build the world largest advertising network without owning any hardware. They pushed their ads, saу, through doctors’ offices, sporting events on arenas, restaurants. Anything that has a screen, that has not been fully optimized, you can install their software and you can select what kind of advertisement you want to push through the monitors for your particular audience – and the owner gets the share of predominantly the majority of the ad revenue they share.
We need somebody that has industry experience for the pain point they are solving. One of the founders of the tax company I mentioned before was a controller and had a long career in tax, in accounting and really understood the pain points. After years and years in that space they left because they realised, that that was such a pain point that other companies pay for and that was a valuable product. We are looking for people that have the industry experience and now they’ve dedicated their lives to build a product to help served customers to sell this pain point. Another thing that we look for is very important at the every stage investing we do but we really try to look for in the very early stages, because it will help to carry companies through the growth cycle – does the founder or founders have the ability to be mentored. Because if they’re resistant to taking feedback, that may also mean they may be resistant against investors, resistant against customers, resistant against partners and anybody trying to help them. If we identify that in a founding team that’s going to be a red flag for us. People that are mentorable, receptive to new ideas, tweaking their business model – those are really attractive. An additional things is how efficient are they with the cash, are they going the extra mile to ensure they can spend the least amount of money possible to get the firmest result within the business, because it is something that can helps a business to grow faster.
Yes, at our accelerator phase we actually invested in several startups with only one founder and helped those founders to identify co-founders and key employees they needed to hire. Still we prefer to invest in companies with at least two people; usually it’s somebody on the product side or the technical person who actually develop the product, and somebody on the business and operation side, who is doing the selling and raising the money. That’s a good fit early on.
It’s a tricky question, you know. Without Wozniak product wouldn’t be created, and without Jobs the vision may not come to that creation. In that particular scenario, based on my skills, if I was going to work with somebody it would be Wozniak, because I don’t have technical background, but rather one who creates a vision and sells it to raise money to execute the product.
We’re right now looking at, probably, between 1200 to 1500 opportunities each year across 70+ countries. Each year we’re investing in anywhere between 15 and 20 companies through accelerator programs, which run twice a year, and Series A investments.
We do a combination of both. Capital Innovators has been very fortunate. For the last 5 years we’ve been rated as one of the top accelerator programs in the world. Because of that, we get a tremendous access to inbound deal flow of companies that want to come to our program and receive our investments and partnership with us, get access to our mentorship and network, to the actual structure of our program to help them scale. But while we’re market our accelerator programs for applications, we do outbound recruiting as well and we have people that help us with that. For the Series A investment it is, actually, the same situation. We have a lot of companies coming to us, looking for investments and we always keeping an eye on scouting for good opportunities.
It is somewhere between 2 and 3 months for an accelerator program. We have in depth process where we are recruiting for applications, reviewing them, parsing the companies that apply, outreach them and establish additional relationship with those companies and getting more questions answered. Then we are able to receive applications. Then we’re doing a lot more phone and video calls and in-person pitches and bringing in some leads, subject matter experts and people on our board of directors for our funds. It’s a multistage process to parse the companies down until we reach the final six or seven that we invest in. In terms of the Series A investments it is very similar. We develop long-term relationships with a company. We are building a great relationships with the our startups and that takes a couple of months.
On our accelerator programs that is $100,000 check, and for Series A it is between $500,000 and $1m.
When you look in the VC space usually if a fund gets 3x, that’s a success. If you can do a 4x multiple, that’s that’s really, really well. If you can do a 5x, that’s a Grand Slam. As some kind of the industry standard we see something between 3x to 5x range.
In our accelerator companies we usually have investment of $100k in exchange of 5 to 10% of the business. Sometimes, if the company’s more mature, we would consider a smaller amount or we will consider a different investment instrument, like convertible note or a SAFE, when we don’t place evaluation on the business at that time. With Series A this number varies from deal to deal.
One, as I mentioned before, is mentorability of founders. If they resistant and pushing back the mentorship or feedback, that would be a red flag. Another red flag that we have is how does the founders portray themselves and their business when they are pitching it. What I mean by that is sometimes you have founders that are very salesy and they try to make you believe that the company is in much better position than it actually is. We really prefer transparency in everything that occurs with the business. As an example, you may ask a founder, “How many customers do you have?”, and get the answer, “We have 3 customers we are working with right now.” That doesn’t mean they signed the agreement and those are paying customers, but just send them a proposal. I think being very cautious in terms of how the entrepreneur is conveying the information, being very specific and forthright, and not trying to sell the investor more than what is realistic with what’s occurring in the business. If somebody is being way to selsey to the point where they’re being inaccurate with the information they portraying to the investor, that’s a red flag.
We have so much great opportunities that we invested in some companies and some of them work out well while others weren’t that successful. Every investor has companies passed on while they worked really well and those who didn’t. I don’t look back, I’m focused on finding new ones and focusing on managing them, making as successful as possible.
Right now it is Bio Technology and Life Sciences space. There is a lot of opportunity there, but the reason is because there are certain factors out of our control. For example if you’re creating a new pharmaceutical drug, one of those factors is will this drug actually work or not and the other one is if the government going to let us test this drug. Sometimes in the early days you won’t know that. Also these particular investments can take a very long time to see a return on your investment. It can also take a tremendous amount of additional capital before you reach that return. Many big players are very successful there, but it takes 15 or more years, and that is longer then we’re interested right now.
I think it’s probably an opportunity for anybody that’s trying to find a vaccination or medicine in that space because eventually I would see government trying to control or mandate the vaccination.
Now, when we have 130 companies we’ve invested in, we may see a product that exists in one of our companies and a business model existing in another one and if they flip-flop they can actually help each other grow quite a bit. Like if a product to the medical technology market and business model from the advertising market can make two companies more successful together. We can see with a bird eye the whole portfolio and understand the market situation, so we can crisscross things at different times to help our companies scale better.
I’m a big fan of different types of sales books, because I think it’s something that all startups may be better at. The books I’ve read are, like, The 10X Rule: The Only Difference Between Success and Failure by Grant Cardone. It has a lot of great material that could be helpful for companies. Another good sales book is The Sales Acceleration Formula: Using Data, Technology, and Inbound Selling to Go from $0 to $100 Million by Mark Roberge, who is a founder of HubSpot and is about how they built that platform based on big data and inbound leads. I also always recommend founders to read the book Think and Grow Rich by Napoleon Hill, it’s really good for mindset. And in terms of podcast, How I Built This is very good. I also have a podcast where I talk about entrepreneurship, and human potential, and consciousness and awareness, called Deep Thoughts W/The Dixons. I also wrote a book Intuition To Innovation that covers a lot of these lifestyle habits useful for entrepreneurs. Also, there is a lot of interesting blogs, so everyone can chose the topics he or she is particularly interested in to read,
If we think about the access to information, Google has obviously completely changed the game in terms of how we access information, so that would probably be one. The variety of social networking systems, including anything from Facebook to Twitter to Instagram, completely changed the dynamics of how we access information. Transportation wise, Uber is huge. All those had completely transform the way we do certain things. There’s also a lot of downsides in the systems being created, like censorship, how they filter information, how they reshape and reprogram the way humans think and the way we engage with each other. There is, of course, a lot of benefits, but negatives as well.
Yes, I am very satisfied with what I’m doing. We’re always looking for the new opportunities to grow and extend our knowledge networking and portfolio companies products in different ways. We’re always exploring new investment fund opportunities to enter new markets. We’ve developed such a great model in terms of how we help early stage companies scale. We’re always looking for opportunities to elaborate different components of our model to help a lot with corporate innovation. We help organisations to source and sсout technologies from all around the world. That’s something that I find really interesting is how can we take a startup we’ve invested in and help corporations by giving them access to innovations, and also really diversifying investment opportunities for people that maybe don’t have the same access to venture capital as some long-term VCs would, like some individuals or family businesses. Being located in the middle of the United States we’re seeing a lot of companies from around the country or from around the world, and that makes things really fascinating.
I’m really into working out, like exercise and fitness spend. I am also fascinated by ancient civilizations. I study ancient civilizations, like Ancient Egypt or Ancient India, and learn about different practices they had and how it translates into present day society. I mean, meditation, different diet lifestyles, ayurvedic medicine. I find these things super fascinating. And I’m also a huge cryptocurrency person, so I’ve been very fortunate that over the last couple years I travelled around the world and had been able to speak on conferences, maybe 50 or 60 of them, about cryptocurrencies, digital assets, investing. I’ve been able to develop such an amazing network and work with great people in that space as well. I think that digital assets is a huge transformational shift that is occuring right now. If you ask that question not about the top 3 companies over the last years, but a protocol, I would say that Bitcoin and other digital assets companies are going to be some of the most transformational technologies we’d ever seen.