Episode 3: Startups & Investors

Transcript

Introducing Philip Gassatura (Country Director, Katapult Africa)

Abhijeet Malik: Hi, everyone. Welcome again to our podcast series Startups of Today for the Impact of Tomorrow. And, in our latest episode we are going to delve a bit deeper into the world of startups and investors. According to Atomico's State of European Tech. report, at the end of 2020, there were 115 VC-backed unicorns in Europe. Less than a year later, that number rose to 202. According to Techcabal, four out of five VCs feel that Africa is going to have an entrepreneurial boom. So I think given that in various geographies, investments into startups are on the rise, this is a very poignant topic. And, it's also very good for us to have wonderful guests to discuss this with me. So I'm very excited to introduce Philip Gassatura, Country Director for Katapult Africa, as our first guest. So Philip, would you like to maybe introduce yourself and tell us (about) your company? What kind of investments does it generally make?

Philip Gasaatura: Thanks Abhijeet and thank you all for listening in. My name is Philip Gassatura. Again. I'm the Country Director for Katapult Africa. Katapult is a Norwegian venture capital company based out in Oslo and for the last couple of years we've been investing in ‘early stage’, particular focus on ocean and climate. And, today we've got investments in about 155 companies around the world with US$100 million man-assets under management. And, this year we're launching into Africa. And, as Abhijeet said, we are very excited about what we see happening in Africa. So we're looking to position ourselves there for what's happening within the ecosystem and investing in companies that are solving problems on the continent. And, so today we've started looking at launching our program. We do run alongside our venture capital fund and accelerator program, (with) particular focus on impact investing. And, today we're excited to be here and joining you for this podcast.

Introducing Steve Butterworth (CEO, Neighbourly)

Abhijeet: Thanks Philip. So it will be wonderful to have a perspective from the investor side. And, similarly I'm also very excited to introduce our other guest which is Steve. Who is the CEO of Neighbourly. So Steve, please tell us more about Neighbourly and you know, the investors and investments you've received so far.

Steve: Great, well thanks for the intro. and wonderful to be here today. Neighbourly is a community investment and engagement platform. We help to connect big businesses with large numbers of local good causes. So effectively helping to remove the friction in corporate giving when it comes to donating, volunteer time, financial support and also surface product. We're sector agnostic, so we work across all types of businesses. But to the extent that you're trying to localise those giving programs, that's not very easy. And, we are operational right now across the UK and Ireland and there are about 22,000 vetted local good causes on the platform and getting the support of organisations from the big supermarket retailers through to large insurance companies, telcos, FMCG and major international global brands. So very much about helping to localise their social purpose. But doing that at scale. And, one of the key things now of course is not just making that connection, not just managing that communication, but then being able to aggregate the data to be able to report on the impact that these programs are having both socially and environmentally. And obviously, with the rise of the corporate ESG agenda that piece has become particularly important.

But there is a public facing side to the Neighbourly platform which is really about telling the human story behind these programs as well because it's all very well to get caught up in the metrics and numbers, the quantification of these initiatives. But actually what does it mean? It's kind of the ‘so what’ and it's bringing that contribution to life which makes a real difference. So Neighbourly is a business that has taken investment from business angels in the early days to institutional funds more recently with both a Series A and a Series A plus and we'll be looking towards a Series B in the next 12 to 18 months.

What VCs look for when investing in Startups

Abhijeet: Thanks again. So I'm very excited for the things we're going to be discussing today. So let's start with some of the simple things that I think a lot of our viewers would be interested in. So Philip, maybe I'll start with you. When your fund looks at investing in Startups, is it just simply the basics as people would assume, the financial health, is it the product line, is it the innovation that they are bringing to the market. Or, is there something else? What exactly do you look for when you're looking at a startup?

Philip: I think because of the nature of our investment, because we are (a) very “early stage” investment, we tend to look at the founder, the founder of the team and the market fit. Does the team understand the market? Do they understand how to navigate within this industry? So do they have history in this industry? So that (is what) we have tended to look at because “early stage” the businesses are going to pivoting quite a bit. So you are taking a long bet on the team that they are going to actually not be able to navigate through the terrain. Beyond that, I think we tend to look at the products. Is it something that the market does want or is it just a very small market? What's the kind of market size scalability? And, because of where we are, we're looking at the impact. If this did have the scale, did (have the) reach, what would the impact be? And, that's what we tend to look at from an investor point of view. I think finally one thing we look at is what's our additionality? If we invested in them and they went through our program, would there be any additionality to what we would provide?

Is this something that we have the expertise to be able to do? So those are things that we sort of cross our ‘T’s and dot your ‘I’s on, see if there's something that we, the team, would like to invest in.

What are the dos and don’ts for Startups when looking for investment

Abhijeet: So I'm going to ask you to maybe go back in history either when you're now currently with Katapult or even before. The startups which were good cases and startups which were not so good cases. Like what is it that startups did right when they were looking for investment and what is it that startups could pay more attention to?

Philip: One of the things particularly, again I speak in this one point of early stage investment. Because most venture capitalists aren’t looking at investing in ‘early stage’; would look at many. Hundreds of them would go into portfolio. Those that we make it, I think, is in how they communicate? What's their story? What's their impact? Does the team have a belief in where they're going? And, that's really what we're looking at. I think it's Abraham Lincoln that had once said, ‘that compass will tell you that that's the north. But what it won't tell you is between here and there, there's a river, there's a mountain, there's a value’, you've got to navigate that. And, so you're looking and saying, does the entrepreneur, the founding team that are able to communicate what the north is quite clearly. And, you're really looking and saying, is this a team that's going to get you through they’re pivoting through this journey that you're going to get on? I think it really is a journey that you're going to be getting on. ith the startup.

Those that didn't were those that were not able to communicate that clearly and it was really fuzzy. The idea is there, but communicating how, also in terms of who their customer is? Why? And, is this customer in the hundreds or thousands? Is this something scalable? I think that's one of the things that we've seen that those that we didn't end up investing in. And, a couple of those that we've invested in Europe but also in Africa, where I speak to. Are those that were able to clearly say the kind of scale that they have to get on who the team is. The team is quite very important. Is this a team that will help you scale through that journey that you've got to get on?

Abhijeet: Great. So Steve, if I could ask you on the topic of the founder and the team as well. What has been Neighbourly's journey right from starting to where (it is) now that they have you as the CEO. In terms of how's been their journey, in terms of the founder of the team and also how they have communicated with investors.

Steve Butterworth: I'll echo quite a lot of what Phillips just shared from outside of the board table and I'd be interested to hear it more from Philip around sort of what classifies as an early stage investment. In terms of, is it pre-revenue? Is it loss making but making revenue? Is it profitable? Because obviously that becomes an important part of any investor’s investment criteria. Which will obviously govern their target audience. If you like, in terms of who they want to invest in. But from Neighbourly’s perspective, the business was incorporated at the beginning of 2013. The founder had come from a marketing agency background. He'd had the idea for Neighbourly off the back of having done what Neighbourly does, but offline. So he had been looking at how to help the lower performing end of a business's estate. So let's say it's a supermarket chain, he might take the bottom 10% performing stores and help them become more profitable and better performing. And, one of the ways that he realised he could do that was actually ingratiating yourself to the local community by supporting them. So being an invested corporate citizen, if you like, in that community. But (it is) really hard to do that when it's not online. So Neighbourly was born as a result of that idea.

And in the early days, he got investment (in) very traditional ways. He got money from family and friends. He got money from a very early stage business angel. And that was over a number of rounds between 2013 and 2016. So this is business raised in round numbers, about £3 million over four different rounds over that time period. And, during that time, to his credit, the founder decided that actually, he probably wasn't the right person to lead the business forward. And, as Philip will attest, there's a very different skill-set going from Startup to Scaleup. And, I'm sure he has ‘many a story’ of working with management teams that have sort of struggled with that adjustment. And, while I'd say the business was still very, “early stage” when I got involved, it was definitely at the point when it probably needed to put in place more processes and procedures. It needed to be structured in a way that meant it could scale, so that there was repeatability. There was maybe (a) better defined value proposition. And so, from my perspective, I came in very much of the view to say, what do we need to put in place to help us get to the point where we can go out and raise money from an institution? I.e. - Let's go out and do a series A, even if it's a small one. But of course, having an institution on your cap table rather than just family and friends and business angels really validates the value prop. as well because there's a level of confidence then to all the points that Philip just mentioned around the team that's going to deliver it. And, I would absolutely agree with him that when it comes to backing management, that needs to be from the “get go”, front and centre, because that's where all the communication piece is going to come from. And that relationship between investor and investee is obviously critical and we'll talk more about that later. 

But from the point of view of being able to then bring on board that third party investor, that value-add piece becomes critical as well. And, we found through our fundraising process that value add was a really important part of our selection criteria. We were fortunate enough for our investment process to be competitive, so we had multiple investors wanting to invest in the company and there's multiple things that you take into account during that process. But what we found in Guinness Asset Management, who invested in Neighbourly and have put in about four and a half million (dollars) so far, we had a very supportive, very responsive and a very collaborative partner.

How the Founders’ role changes as the Startup evolves

Abhijeet: So one interesting point and I say interesting for me, I would say it's an emotional point. This is probably one of the reasons why I haven't started a startup, although I have many ideas. Is because I just feel, you know, to be emotionally invested in a project like that is from the point of view of founders, some of our viewers will be founders, (is) knowing at what stage or gauging what stage their idea has now become into a business. Is now at the stage where it needs to expand or scale. And, it's taken a life bigger than them and that they probably need other people, sort of diverse expertise to sort of come on board. So maybe from your experiences, I would ask the two of you. I'll start with Steve. What would be a recommendation to founders who are listing in to manage that sort of emotional decision?

Steve: It's a great question and I think it actually is something that is just as relevant in the scaleup phase as it is in the startup phase. Even if the founder has stepped into a different role and you've got a new management team in place. And, for me, it's very much around making sure that you've got the right people around you. In my experience, successful Startups generally are not the doing of one person. It is a team effort and it's really important to be able to self-reflect as a leader in a business and know where your strengths and your weaknesses are. And, what are the gaps that need to be plugged to make sure that you've got the full complements of skills that are going to help steer that ship in the right direction and get to the other side. The individual that I think sometimes, not, gets overlooked necessarily, but doesn't always get quite the recognition as to how pivotal they can be, is the chairperson. And, I would say to any founder, even if it's in an unofficial capacity, having a chair that can be there as a sounding board, who's been there and done it. Who's got skulls on their back, especially, when it comes to managing investor relations, and I'll come back to that in just a moment. But that individual, I believe, plays a really pivotal role in the success of a business, regardless of how “early stage” it is.

And, to Philip's point around governance, obviously as that role gets formalised and becomes official in a chair capacity, they're obviously ultimately there to handhold and ensure that governance piece is maintained, (and) is formalised. I've seen investor relations go bad when the chairperson doesn't do that role well, because the founder is an emotional being. We all are. But it's their baby and you need someone to have a steady hand on the tiller. If the founder is the Captain, and I think the chair is the Admiral, who's on the shore often. Not always on the boat. But can provide advice and can help sort of steer that Captain in the right direction. 

But when it's back to what Philip was saying around, I absolutely subscribe to the same processes. You should never surprise your investors with something you ‘knew’ about. I would always share bad news pretty quickly, if for no other reason, then my investor is probably going to have a view and have an opinion and may be able to help. And, I think the chair needs to be able to play that role of greasing the wheels between management and investor and that really helps to smooth away. And, so I would never underestimate the value of a good chair in a business of whatever size.

Abhijeet: And Philip, similarly, what would be your advice?

Philip: I couldn't agree more with having a role of the chair. And, I like the analogy of an Admiral to the Captain. I think, to echo what Steve said, the teams. And, recently I'm a football fan and I like the analogy of how coaches are managing their teams. And, it plays out directly on the field. Being able to move from the Startup to the Scaleup. The kind of teams and you see them transition from when they've gotten through the first quarter or so. And, they're into the second half or from the first half. You see the kind of level of management. That kind of skill. So for a startup, I think it would be more around the kind of team they bring on board when they need it. Having that chairman or board as well. Being able to say, “this is where we're weak in”. Being able to find that resource. Sometimes even for the Startup, the founding team, they may not know who to bring on. And, so having that relationship with investors, being able to bring them on board at a certain time helps steer that. So to me that will be critical for Startups, knowing when to bring on someone else.

And, I think here where I live, there's a local saying which says, “where a short man reaches, that's where he stops”. If you're in the elevator and all you can reach is the third floor, that's where you're going. Now it is either you find shoulders to stand on to get you to the fifteenth floor. But knowing where that help is that you need is critical to bring forward to success for the company.

How to balance the need for investment with keeping Equity

Abhijeet: Great, that's a great analogy. And, I want to actually move to a similar topic. Which is slightly emotional as well. But actually very much driven by hard facts. And, I think that's where it would be interesting to get the perspective from both sides. Which is the issue of equity when you're looking at investments. So from a startup point of view, Steve, a Startup is looking at investments. Yes, for all the reasons that we've been discussing. But that means giving up a percentage of the ownership. And, what are the things that Startups generally sort of think about when making that decision? What are the things that they should sort of think about? I would say in the long term and the short term, like, what would be your advice there?

Steve: So I'm not a financial adviser, so I caveat everything I say here by saying I've been on the receiving end of these negotiations between investors and investing companies. But the reason you have a shareholder's agreement is so that it is very clearly set out as to what the rules of engagement are. When it comes to the voice of the investor in the business. How much input can they have? And, the key word for me is control. Actually, what can they force a startup to do? And, so I would always be very keen on having good lawyers to help you in the first instance for both sides. Just to make sure that the playing field is established in a way that everyone is going to be happy with it. And, everybody understands everything from, let's call it a call, consent rights. Do I have to ask permission for me to do something? Whether that's employing an individual on a particular high salary or whether it's to do with bringing in other institutional investors. And, I think for me it's very much around making sure that you understand what you're giving up, when you're giving away equity.

Equity is very easy to give in the early days because it's very difficult to raise debt because you can't service it because you're not making money. But it is, I'd say, something that you should be as frugal with, as possible, as circumstances allow. Because the more equity you can hold onto for longer, as long as it's not ultimately at the expense of the business and therefore it is a very delicate balancing act. But it is a case of making sure that you can hold on to it for as long as possible. Because the minute that control changes, that dynamic in the boardroom is very, very different. And, I'm sure Philip's got much more experience than I have having sat on many boards and invested in many businesses as to the importance of that relationship. For all the reasons we both discussed, around communication and expectation management. But when control changes, that can play out in a very different way.

Abhijeet: So Phillip, I'm going to ask your opinion as well, but to add on, from the investor point of view, is taking equity just a financial decision?

Philip: I don't think it's just a financial (decision), it's also a question of risk. Because there's a risk reward in this one here. And, again in the judgement of when we're making investments, as we review, a lot of the boxes may be ticked but there's certain aspects that may not be ticked. So we feel that, look, this is a risk. So if there is a risk in this thing that we don't see a mitigation. Therefore, there, we will be looking at negotiation to increase our stake in that one. But what we'd like to see is that again, the entrepreneur, the founding team, is in control. And yes, to Steve, your point. Yes, within that there should be certain clauses  within the shareholder agreement or investment agreement. That trigger(s) what are some things that (are) boundaries within which the team can work. Because we typically like to see that they get to a ‘series A’ within at least the founding team combined has at least 50%. Because when you do the economics after that, they're getting so diluted. And, there are vested interests after that,if they're below that you are not sure if they will stay the course. And, so you typically like to see that they get to that point.

And, so I agree that entrepreneurs should be able to hold onto as much equity as possible. We have seen in the past a lot of “sharks” that come and “eat” a lot before a ‘series A’. You're wiping out,diluting the entrepreneur. So those are typically what we see as though we can't get in. Because it really dilutes the founding team so much that you're (the investors are) not sure that they're going to stay the course on this one here.

What is the role of impact in investing

Abhijeet: So we are very lucky with the two guests. One of the points that is becoming more and more commonplace is around ESG (Environmental, Social, and Governance). Around Sustainable Development Goals. But to actually put it in one word, it would be around ‘Impact’. So as an investor, Philip, if I may ask you, what is ‘impact’ for you? And is it something which is important when you look at investing in companies? And if it is important, how do you measure businesses with more impact versus businesses, perhaps with less impact?

Philip: Thanks Abhijeet. I think impact is what's at the core of what Katapult did. Because even the kind of companies we invest in, our thesis looks broadly at the kind of companies we're going into. If we back them, what's the kind of impact it would have on society, on people, on their economies, particularly here in Africa. Or, wherever they are across the world. And, so we're not a ‘profit at all cost’ (investor). For us we certainly believe that it is profit because of impact. And, there's a space for that. This is what we're seeing even from a lot of the assets under management that are looking across the globe. That have now moved to 50 trillion I think the last I looked at, of assets and management that are really pushing for ESG. In our focus here, we're looking at the kind of teams that understand the impact of what they're doing. The solutions they're bringing to their markets. Whether that be in alternative proteins. Whether that be in new ways of doing irrigation. Whether that be in ways of doing new insurance to microsocieties. In terms of microinsurance and microfinancing. There's a whole range.

Now, we don't have one lens that we look at for each company. I think each company has a certain lens. And, the KPIs (key performance indicators) for each of those companies will be rather different. But the ultimate goal is how do we bring together people, talent and capital to change things? And, so that's what we are sort of excited about. And, we're seeing a lot of these kind(s) of companies show up across the world. So that's our focus as Katapult.

Abhijeet: So Katapult has a very explicit aim towards impact and investing in companies on that aspect. But as founders and as Startup teams, if they meet investors which may not explicitly have the word ‘Impact’ that's important for them, is it something that they should still, in your opinion, keep in mind? Because maybe it's subconsciously becoming more important for other investors or maybe not?

Philip: I think having it again, some of the companies we see when we come to invest in them or they go through a program may come in not even having an idea of what the impact is. And, so through our program there is a particular focus beyond just the finance and the scaling, is ‘impact’. So they can start to see themselves and what their impact and role would be on society where they are in their markets. And, so that to us, is where we add the additionality that Katapult (can) provide to these companies. As I mentioned earlier, there's a growing (expectation), not just from policy and regulation but even from the consumers and the citizens around the world. (They) are sort of driving and steering the brands that they buy, purchase from, their financial institutions. So there's a way towards this impact. So the sense of profit at all costs is no longer in-vogue, I would say. But it's more demand from consumers. And, one we look at is even from insurance, how do you get insurance from your growers who are growing your cocoa and your coffee, from brands? Those are the kinds of things that we're seeing. And, so I think for a Startup knowing that as they get into this space what they're doing is what's the purpose beyond just the profit. What's the purpose of the organisation that you're starting out?

Abhijeet: Thanks for that. So Steve, I think with Neighbourly, they were very clear from the beginning about their purpose and about their impact. Perhaps it would be great to get that confirmation from you. Maybe I'm wrong? But what about other Startups? Is it something that's important for them or should be important for them?

Steve: I think the rise of the responsible business agenda has helped to make sure that whether you're an impact focused organisation like Neighbourly is. So obviously we very much are putting local impact at the heart of responsible business. That's not to say it's right for everyone. It's about how do you make sure that in the way that you take the decisions as to how you run your business, you are doing it in the best interest of all stakeholders. By that what I mean is it's not just your shareholders but it's going to be your employees, it's going to be the communities where you operate. It's going to be your suppliers, it's going to be the planet. And, that wider stakeholder capitalism narrative is starting to play out. And, I think it's more about how do you work out what's the right way to do that. And that's why Neighbourly is one of the UK's founding ‘B Corporations’. We're also signed up the United Nations Global Compact and it's those sorts of frameworks that can help steer a founder as to what are the areas I need to be concentrating on and focusing on to make sure I'm running my business in a responsible way.

And, the fact is, it's good for business. You attract the right staff. You retain staff. I mean these are massive costs that you can't get wrong. And, long term the ability to be able to grow a business sustainably means you're going to be here for years. And, I feel like it's all too easy to burn out and fade away if you just literally put your ‘pedal to metal’ and want to just try and make money at all costs. The reality is you need people around you and do the right thing. You'll keep that talent. You'll win business because of who you are and how you run that business rather than it literally just being about that quarterly bottom line and the incremental growth. So when it comes to impact, there obviously are businesses that are taking it to the next level. I know investors who actually ask their executives to look at remuneration alongside delivering a certain level of impact as well. And, I'm a fan of that idea because it means that you've got skin in the game to make sure you're doing it the right way.

But I think now it's not about impact investing in perhaps the old sense of how it was defined. As probably on the different way of putting it, probably the fluffier end of the investor spectrum. This is very real.  

What should Startups and Investors keep in mind during the process of exiting

Abhijeet: So as they say, if you find the right match, you are in the right relationship. Between the startup and the investor. But sometimes, it's time to move on and that's the process of exiting. So perhaps to conclude our discussion, I'd also like to discuss what are the things to keep in mind if the relationship is going well, what would be the right kind of exit?

So Philip, I'll start with you. In your opinion, as the investor.

Philip: Earlier on, I mentioned the relationship between a Startup and an investor is almost like a marriage. The only difference, right, with this one is, it's not till death do us part, right? So this one here, everyone coming on needs to set clearly, where they get on the bus or the ship. And, know where they get off. And, some of them, some investors, for them, they'll know that this is the price or this is the point at which I get off. And, for some of those will be: I get off at Series A or Series B. Or, some others will get on. Some of you will get new passengers who say, I'll go all the way to the IPO. And again, that's a journey where each one needs to know where they get on and off. But it's clearly setting those expectations that happens to know when we get to our north, at which point the investor gets on or off. Even sometimes the entrepreneur. This is it. And, from the beginning those mechanisms need to be clearly stated. And, so that's why I think it's quite critical. Because also some investors know that this is where my value addition comes to an end.

For instance, (on) our side, where we are ‘early stage’, we typically go up to Series B. In some of the companies. And, the best that I've seen in early stage investors are those who have networks that are able, as I mentioned, say all right I get off here. But I know who can come on at this point here and I pass on. So that was quite clear in terms of agreeing what the process is for exiting and knowing where each one gets on and gets off.

Abhijeet: So if I understand correctly, one of the elements is to have that clear expectation setting between the two. But the second thing, which is also interesting, what you mentioned Philip, is that also helping them (the Startups) with the advice and the introductions. If it's your time as the investor to get off the bus. With new passengers who might be getting on the bus at that stage. And Steve, what would you say is your opinion, especially, for Startups.

Steve: Philip has captured it. It's communication, it's timing, it's planning. You get those three things right and there's no reason why the relevant passengers can get on and off the bus at the right time. And, it's all pretty seamless as long as everyone understands their role along the way. Again, no one likes surprises on either side of the board table. But certainly from my perspective, again, these things take time. And if you were going to be running a fundraising process going into Series B, I'd be courting people twelve months out. The best time to raise money is when you don't need it. And, to that end, I've always found that if you've got those early conversations going and you know that there are potentially going to be investors that have been on your cap table for a while and want to get off, they want to know what's coming. They want to be able to prepare as well. So have a plan. And, while as the saying goes, no plan survives, first contact the enemy. If you've got a plan, you can change it. If you've not got a plan then you're back to your boat and analogy and just not having a tiller.

So to that end, I think I've always found that if you are on track, you've got a plan, you've got the milestones you need to hit. Everyone knows their role. It's an easy relationship to continue to manage over time.

Abhijeet: Great. So I hope from our discussions, our viewers have got some useful tips (on) what to keep in mind in the relationship and the journey between Startups and investors. To all our viewers, I hope you found the discussion useful and if you'd like to listen in to our future episodes, make sure you subscribe. And, you get notified when our new episode drops. And, you get to listen to wonderful stories such as this one in the future on other topics related to Startups of Today for the Impact of Tomorrow. 

I'd like to thank my two guests, Steve and Philip, for coming in and sharing their stories. Thank you very much.

Steve: Thank you.

Philip: Thank you very much for having us.