Business Builder: The alternative to an Accelerator for Startups
Back in 2010, I took a couple of months break after stepping down as CEO into a hands-off advisory role at my previous business. After a bit of a US road trip, I found myself in San Francisco thinking about what I was going to do next. I was hanging out at Pier 38 (at that time a “Dog Patch” incubator space) and was looking around at a cool space full of tech startups. It had me thinking more deeply about what startups needed, why most failed (90% within 3 years according to a CB Insights report) and only a few succeeded. On many occasions the answer (still the same today) is a lack of product market fit (i.e. people had built something that the world did not need) and the rest are put down to lack of revenue or they run out of cash (no surprises here). Having started five businesses prior to The Sandpit, with a mixed record (won two, drawn two, lost one) I had a pretty good understanding of what many of the factors were. For me, most often amongst first time entrepreneurs and principally tech founders, the biggest factor was bad execution of the go-to-market plan (growing revenues).
At that time, the likes of Y-Combinator and TechStars were starting to come to prominence with their new accelerator models and the VCs were coming slowly back online after taking a battering in 2007–08. In the UK, EIS investments by Angels and less sophisticated high net worth investors were growing in volume and amount and the first crowd funding platforms had registered for business (though were still some way from appearing on the scene).
For me, the best scenario for a tech startup was to attract Angel investment from someone who, besides money, could provide domain expertise (meaning they understood the problem that the startup was solving), had good contacts in the sector they were operating in and had a decent amount of time to sit with the founder and help execute on the plan. However, the challenge with most Angel investors is that they usually get involved in multiple startups (so get spread thin and end up portfolio managing rather than being able to really give time to the founders) and very often have their own project or a full time day job. The net result is that they usually can only provide advice (albeit often excellent advice) to the startup/founder, but more often than not, the founder does not have the skills, experience or time/mindspace to implement the advice.
On the other hand, accelerators have attempted to solve this at scale by providing a fixed-term program with access to mentors. This works for the startups that have a well-balanced founding team and probably would have succeeded one way or another, but who benefit from the expert guidance and profile of the accelerator to put them in front of investors. For the less rounded teams, or individual tech founders, the strike rate is not so high.
“We aren’t chasing unicorns, just building profitable, fast growth tech businesses.” Tweet this.
What also was frustrating for me was (and still is) the idea that every startup has to grow a horn and become a unicorn to be successful. There were plenty of blogs last year debating whether the founder who built and sold for £30M whilst retaining a majority stake and less pressure was net better off than the founder that sold for £500M after a gruelling journey including multiple VC rounds and ending up with a few percent of the business upon exit. Both become “life-changingly” wealthy. Both have very different experiences. The challenge as I see it is that almost all VCs are focused on betting big and wide in the hope of finding that elusive unicorn that provides a fund-returning home run. Don’t get me wrong, I don’t struggle with the desire to find a big win! Just with the number of portfolios which are highly leveraged in an attempt to get there, and fails when it falls out of favour. Often, this could have been a great £30M exit for the founder if given different support and a different trajectory. The epitome of “go big or go home”.
My thinking back in Pier 38 in 2010 was…how can I replicate the concept of an Angel with all the time in the world? Or even better, an “A-Team” of them who could work across a group of startups? How could I create an infrastructure that was totally aligned with the founders and the investors at every stage to ensure the best return for all parties? This is how I came up with what we now call the business builder model.
In place of handing over a cheque at the seed round and hoping that the founder is able to hire the right team, make all the best decisions, manage the finances and continue to develop and perfect a product, the business builder provides an operational team to step in and fill the gaps in the org chart with experienced, proven people focused on execution not just advice. The principal focus is on sales and marketing. All of the other logistical elements are included too: office space, HR, accounting, legal work, reporting and fund raising if needed, however the key is business growth.
The deal structure is 100% aligned with the tech founders. We replace the seed investment (cash) with our infrastructure (P&L — still means cash) and then bank on our ability to execute better than the capital alone would have. If we can help grow the business revenues faster than the requirements, everyone wins. If we are slower, we invest more to get there but don’t take more equity. We do not charge any fees, instead we take a sales commission on the sales we are driving, though these are capped as we only want to cover costs. We only make money if the startups are successful and ultimately sell or generate dividends.
Our model requires the ability to drive monthly recurring revenues (MRR) into the startup, for us that has proved to be more appropriate for B2B. This means the businesses are not reliant on the next funding round. If market conditions change, or growth is slower, they can tighten their belts and be profitable (and survive). The second rule of a business builder (seeing as we created it, we can state the rules) is the vertical focus. For The Sandpit, this is digital marketing tech (Rod Banner would say MadTech). By sticking to one vertical, we gain domain expertise, can reuse processes and strategies and, most importantly, customers!
Let’s take a real example. DeepCrawl, the world’s most comprehensive website crawler and winner of the European Search Awards 2015, entered The Sandpit with three technical founders, a great product and a couple of clients. In return for a significant minority stake, The Sandpit injected work and resources valued at approximately £500,000 and worked with the business for 27 months: during this time, we confirmed product-market fit, helped define the roadmap, built the team of 12, raised £350,000 of external capital for growth, grew the revenues from £2,000 to £80,000 a month and won a global client base of household brand names. DeepCrawl graduated from The Sandpit in April 2015 and has continued its fast growth and business evolution since, and is now well on the way to a £ multimillion Series A fundraising. We were, and remain, totally aligned with the founders to maximise the value of DeepCrawl and we are excited about the future for them.
The vision for The Sandpit, first conceptualised in 2010, has not changed, nor have the core elements of the model. What has evolved are the processes, focus and understanding of the gaps we need to fill operationally to help startups. We now have evidence and are scaling up. We believe that 9 out of 10 startups that get through our Proof of Concept stage (Stage 1 of the process of a company entering the business builder, when PMF is established) should succeed. We aren’t chasing unicorns, just building profitable, fast growth tech businesses.