Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Greg Rice is Co-founding Partner at Activate Media. He spent the first 10 years of his working life in Silicon Valley, and then extend his carrier to dispense Silicon Valley ways in Europe. He has been involved in many start-ups in various capacities. He likes working with companies to develop solutions and help them realise their goals.
I’ve been an entrepreneur all my life. I’m not one of these people that just skipped University and went straight to business, creating the first one in a dorm room. Essentially I started early in the business, working all the way through my high school and university. Two and a half years after graduating from the university I’ve started my first business – I kind of had this type of blood flowing in my veins anyway. And after 40 years of doing it you probably not so interested in doing it yourself – it’s almost like giving back. You still want to be involved but you don’t want to be involved in the day-to-day; it’s exciting to be involved in the ideas and building of a company, but I’m not sure that I have the appetite to do that myself. I’d rather support younger entrepreneurs trying to build this type of stuff, it’s hot here, it’s hard, and having some good support from the top can be very useful – and can be a lot of pressure too.
I’m going to talk about one that’s in the current cohort in our Foundation program. We tend to work, primarily, with digital startups, with companies that are using a digital platform to either survey their product or service. One of the applications came from a company called Better Universal Grub. Their application program was really well done. Better Universal Grub stands for “bag” and they do insect meals. And they’ve been really creative in how they do it – all the packaging is fantastic, everything. To be quite honest, just the name was enough to say, “These guys are shortlisted.”
We’re overrun with applications now, after 4.5 years running the studio. I think it’s got known very early on: big companies that went through our studio usually got funded – we had 100% for 3 years, that’s a pretty good average in this business. So it got known for digital businesses: Activate is a place to apply. Almost all of the intake comes from our application program, although there are also reference companies that are referred to us, which we will generally put through our application program anyway, even if they were referred. Our application actually builds a very complete company’s profile: what an Angel investor or type of investor a company wants to see, market size, value proposition, all the different build-ups on the market and things like that. We’ve got a fairly rigorous application process it takes all that information in and then we have a criteria to evaluate.
This Fund is not a very kind one, I’m going to be quite honest here. The reason why we created our online program is because we’re getting so many applications. Effectively we were looking for about 3 or 4 companies a year to work with, but we are getting worth of 600 applications a year. Just evaluating the applications is a full-time job at this point in time. The first cut is a pretty brutal cut: generally, 80 to 85% will be done with that first cut, before we evaluate the rest of them. Out of the rest we evaluate a group of anywhere from 10 to 15 to work with and to see if they can actually make it to the next step.
I could tell you, but I would have to kill you afterward! We have internal criteria that we work by. Certainly, in an initial application that we get from a startup, we’re primarily looking for an idea that’s going to stick up in the world that we live in – and which is changed quite significantly in the last year. We look for that business proposition, for a startup that’s focused on an available and achievable market, that can actually deliver some real value. We also look at the team, too – does this team have expertise in the domain, does this team have what it takes to knock down the walls to make a company work. Those are probably the bigger things, but we have a whole set of criteria. As I said, the first cut is brutal, and most of these people and companies really shouldn’t start the business.
If you go through our program, the majority is trying to take all these different elements and create a story around it, because if you can’t get somebody interested in your story and why are you doing this, you’ll never get to the numbers. And I think that you identify it very quickly that it is a show; we call it “a story,” but it’s a show. If you cannot do a compelling show, you’re probably never going to get much further.
We work primarily with digital platform startups. We are agnostic in terms of where they are – we look for startups that are trying to do good for the world. We don’t look at startups that are doing arms and stuff like that, nobody wants to get involved in this. We want to work with companies that are going to make a discernible difference in the world more than anything, using a digital platform. Our investments have been pretty wide: we have a couple of Digital Health companies, we have a Digital media company, we have a company that works with pets – we’re all over the map.
The world is a big place. In our application process we try to limit it to the UK, although we have worked with some European companies and one of our portfolio companies is an Italian company. But certainly in the program we try to be very clear that you need to be a UK company to make the cut, and it’s one of the big factors for us. We get so many applications that it takes really amazing story and a great team to even make us look at it.
We’re kind of unique since we run a startup studio, or incubator whenever you want to call it. Before we put people into our lowest program, we’re not doing a lot of due diligence because we’re not making a financial investment in a company at that stage. We have the application process, then there is a foundation program, during which we want them to have an improvement – in their materials, and pitch, and numbers and try to make them tell us why they are good and show the places they need to improve. We kind of do due diligence in that stage, when we actually work with a company a little bit, and it gives us an idea who we think can make it and who we want to work with. For us it’s not just writing a check and saying “Goodbye and good luck.” We are working with them on a daily basis. If you don’t like your rich uncle, we’re not the right people to work with.
Depending on what we are doing with the company, our normal check is about £50K, and that comes in the way of match funding for services we’re providing for the company and all the business proposition work – design of the product, building of the product or a some set of these.
Everybody dreams of the multi-bagger 150X, but my view is that if you get one of those in your lifetime, you’re really lucky. We group companies in 3 groups. The first is those that don’t make it, and that’s going to be a reasonable group. I hate to say it. Then there will be the majority going into the dead zone: they created a little niche market, they may make money, but they never really make it, never achieve scale velocity, never be worth a lot of money. And then there’s a few percent that makes it out of that. I am ecstatic when we talk about 10X, but there’s a lot of luck involved in this – if you’re in the right Industry at the right time, you can make it, but, again, this is a once-in-a-lifetime, maybe twice. I’ve been lucky: I’ve had one of those already, I can check it in my achievement list. What we’re looking for in our companуs is if they need to raise rounds multiple times, will they be successful in doing that. We’re not looking for quick exits.
Yes. Provided that the relationships worked well, we have made some follow-on Investments to maintain or shareholding. Usually in your shareholding agreement, you do have an option to maintain your percentage of shareholding. I’m not going to say we do it every time, but we do have taken further investments in companies we believe in.
When we look at portfolio companies, we look to take about a 5% stake in them when we start working with them – that’s kind of our target. It depends on the company and it’s always a negotiation when comes down to valuation and stakeholding.
I come from the entrepreneur side, that’s where I originated from. And I’ve certainly seen a lot of mistakes from founders where they thought that they’re getting supported very early on, while somebody was just skinning them – they gave away too much equity too early. I’m one of these people that thinks that you should aim to giving away, at average, of about 15% per round, so you don’t get so diluted by the time you do your Series B or Series D and have some of your company left. Certainly when we’re investing we don’t want to take too much that the founder becomes unmotivated. If we took 30%, for example, the chances of finding other investors at a later stage is going to be really really small.
The most important thing that needs to resonate through is their enthusiasm. They need to convince us that they’re going to do what it takes to make it happen. Also, we need to know do they have the domain experience, do they understand the industry that they’re trying to go into, do they understand how they might disintermediated, is there an easy way for them to get in – that’s critical. Lastly, if it’s a team (and we do prefer teams rather than solo founders), are they complementary as opposed to do they do all the same thing, like being a programming team with no business person on board. We saw great teams coming from companies like Google or Amazon, who were all programmers and there was nobody who knew how to run a business or understood finance. And we’re looking for complementary teams.
I take the team.
Because we work with the founder or the team even before we actually ever write a cheque, red flags are people that don’t seem to take on advice and don’t seem to be able to change – they are just knowing everything. That’s the biggest red flag – people who cannot learn, because we’ll never be able to work with them and we will just never write a cheque. Other red flags are types of industries they’re in: if you were, for example, primed to start up a restaurant chain right now, we wouldn’t be very interested. What we’re looking for are people with understanding their industry. If they are going into some type of business just for the money and they don’t understand the industry, they go out with the first 80%.
We have had companies go out because they weren’t able to do the work because they didn’t agree with us or they thought they had a better way to do things. I can’t think of one that we parted ways with and I’m unhappy about that now.
Energy is really interesting, and we have had some startups creative on the fringes of energy. Pure energy is too big for us, while I find it fascinating. As far as I’m concerned, I don’t think we would ever apply in that, but it’s fascinating to me how that works and how big it is. Hospitality is something that’s interesting, but I don’t think I’d ever want to go there.
COVID-19 happened right when we had started our first digital pilot. It was January and by the end of March we look like a rocket scientists because we had the only program working. As far as investment goes – yes, it has, and the startups that we work with were very focused on making sure that there is a story around, why now is the time to actually invest in their business and build their business. We tried to build those stories with startups and make sure there is a reason to do it right now, because if there’s not, frankly, we don’t want to be the only people in that boat as investors. We look for co-investments, and if we’re the only one, we usually pass on the deal.
Both. In my history, some of the greatest businesses ever built have been built in recession – I know that. It’s because you have better available talent at less cost, you have more time to do this, you don’t have quite as many demands on you while things are down to a degree – you have a chance to build out of it. We haven’t taken our foot off the gas.
One that I am absolutely fascinated is not too technical, but completely changing the face of retail in the world – Amazon, just for the way that they drive process to create a great customer experience. Nobody’s ever approached things like Amazon approaches. On the other hand, they’ve made huge technological breakthroughs, that may save the world in a way. One of the biggest things that happened and that I lived in is the start of the internet. That wasn’t one company, but a series of companies that made that happen, and one of the spearheads was Netscape which turned into Mozilla. They pushed the commercialization, made it happen much faster – it would have happened anyway, but, I think, that’s more of a trend than a company that changed the world. I’m going to go (and you probably call it a safe bet) with Apple. I grew up during the early Apple era, in the Apple industry. They were always masters in understanding where technology was going and imagining what that could mean in terms of products. One of the thing that we talk about in our programs, like market testing: you couldn’t do it because you have to imagine the products. Apple were masters in imagining what people might want to do. If you go back 40 years ago and ask people do they want a mobile phone with a camera that they always have to carry around, they would say, “What? Are you nuts?” It’s something people couldn’t imagine. A lot of companies do this and do it well, but Apple is probably been there and doing it longer than anyone else.
There have been so many of them. All you have to do is go back to 1999 – there’s a trench with corpses laid in it of companies that were going to be the next best thing. Enron! It’s been outside of the tech world but it was fascinating because it was just a huge accounting scam run by a really button-down very smart ex-McKinsey partner. It blows my mind how a person like that goes from being that to basically running a completely illegal pyramid business. One in more recent times is Wirecard – how? They even had a German financial regulation authority on board for that one. That’s pretty exciting.
It’s certainly not checkers – that’s for sure. It’s somewhere between three-dimensional chess and backgammon. In three-dimensional chess, there is a lot of strategy and a lot of moving parts. With doing investments and running startups, there are a lot of moving parts and there’s a lot of things that could potentially go wrong if you don’t see them from the side. But, as in backgammon, there’s always some luck involved.
We’ve got a whole list of them that we use, so it would be tough for me to pull one off the shelf. And with the wonders of the Internet it’s all pretty easy to access these days, which is fantastic.
Personally, I don’t have to do this anymore. As I said earlier, it is, in a way, giving back to new-blooded people that want to do this type of stuff and supporting them. Out of it there is a lot of really interesting ideas happen, you meet a lot of interesting people along the way. I quite like my toe in the water, as to speak. How long will I continue to do it? I don’t know. Right now it is still interesting and we’re trying to expand things rather than contract.
Number one is: Focus. Absolutely Focus, laser focus. If you pick the beachhead market if you choose a way to approach that beachhead market, if you chose some pains to address and some gains to get – be focused. Don’t waver. My next one is: Don’t always listen to the next best idea. You’ll have so many opportunities that will come your way and it’s so easy to get distracted – don’t get distracted. Lastly: Know your business. You may be a marketing guru in XYZ industry, and you might know everybody in the industry and be able to connect everyone, but if you’re a founder and you don’t understand the rest of your business, if you don’t understand financials or fundraising or delivery, etc., etc., you’re not going to have a business very long. You need to take the time to get a grasp around the whole business and have an understanding of the business and figuring out where to put the right resources, like hiring a good CFO, if you don’t know finances well enough.