In an exclusive interview with GBI Magazine, Built Ventures’ CEO Alistair Marsden explains the pre-seed investing strategy and discusses the venture building approach to investing.
Marsden explains why Built Ventures chose their strategy, justifies why he is a strong advocate for venture builders and venture studios, and provides us with real-world examples of this approach succeeding in the VC market.
Q: Can you give us an outline of what Built Ventures does?
Built Ventures runs an SEIS and EIS investment vehicle that invests in UK Tech start-ups. The Fund invests exclusively in companies that come out of venture builders or studios. I want people to look into the Venture Building model as I think it is a really interesting approach to investing.
I’m not saying we’re the best thing out there but we are a different option with a different approach. It’s very popular in the States, very popular throughout Europe because of the returns it gets on investments, but some people are wary of it as it’s so different.
Q: Can you explain what pre-seed investing means and why you chose that strategy?
Most (not all) venture capitalists go out to the open market in search of a company which they believe will deliver a return on their fund and they’ll give some level of support depending on where that investor’s expertise comes from. The problem with that is you’re generally investing into existing start-ups, each one with its own embedded problems, or “debts”.
Depending on the size of your fund, as soon as you invest in an existing company with a seed stage valuation, you need that company to skyrocket up to 200-500 million, or if the initial valuation is higher, then what everybody talks about as unicorn status. Unfortunately, only 0.00006% of start-ups make it to unicorn status. So the risk that you have is that the pool is really small. Also, 80% of tech start-ups in Europe exit for £50 million or less.
That is a risk that is outside our control and therefore a strategy that is too risky for us, especially in the UK. If you use the ‘80% exits for 50 million or less’ rule, and you try to exit when a company is at 50 million or less, that seems like a sensible approach. But to do that, you need to go very early and going early comes with its own unique set of risks.
From a very high macro level, it largely comes down to two risks. The first is human risk, and the other is market timing, which ultimately is capital efficiency. Can the team execute on the strategy, continually and not falter when times get tough, and, can you survive for long enough with the cash that you have until the market is ready for you? Those two things usually kill early-stage start-ups. But both of those are factors you can address and attempt to mitigate.
It’s a completely different mindset in that, if we make sure we’ve got a team that can deliver, and there is capital efficiency that can allow the Start-Up to wait until the market timing is correct, then you don’t need to somehow pick the 0.00006% of start-ups that make it to unicorn status. You can instead invest early enough that you can get the returns needed at a £50m exit.
Q: You’re a strong advocate for Venture builders and Venture studios. Why is that?
In a traditional start-up, you have a group of individuals that get together to solve a problem in the right market. If for whatever reason it doesn’t work out, all that knowledge is lost and the lessons they learnt have gone. However, with a venture building model, you have every capability that you might need to start and run a company from an idea all the way through to exit and all the knowledge is retained and grown upon.
The idea comes in, it goes through a very structured process to qualify whether the problem, the market and the founder are right to work with the static team. If they are, they go through a gated investment and methodology process and set milestones and goals to achieve with the team.
In traditional venture capital, if a founder managed to create a company where they’re turning over half a million and they’ve got a team of people, which most venture capitalists want; it is a very small market that would be excited and able to function on a £250k investment round. There are very few people who can afford to do that.
However, there are a significant number of frustrated professionals who are experts in their field, extremely well connected and passionate about solving a failure in their sector. These people are currently failed by the majority of the VC space, but that should not be the reason they are not allowed to solve their problem and advance their sector. They might not fit the typical startup founder mold and be able to launch a company by themselves, but they are perfect people to have as a sector-cofounder.
So, the venture studio model finds those individuals and addresses those early stage risks, and therefore you get more efficiency layered on top. That addresses all our issues with trying to find companies which are at the earliest stage.
Q: Lastly, do you have any real-world examples where this is played out?
A few years ago, the Fund Built Ventures runs, invested in a leading health tech company that wanted to correct an ongoing issue, which led to a lot of people wanting to leave the sector, but the initial idea wasn’t getting any traction within the market. As a collective group Built Ventures and its core venture building partner were a few days away from suggesting this particular company had no further life. However, due to the structure and expertise within the venture building team, an individual suggested that they have one more working session with the founder. They believed there might be a different way of approaching it!
That individual went out to the market to see if they could break in through a different door and was ultimately successful. That company is now doing extremely well and is just shy of about 10 million valuation. That’s a good example of where the Venture Builder leaned on its principles and utilised their experience.
We’ve also dealt with a regulatory tech business which was starting to make some good connections, but the product needed to get to market very quickly. In response, the Venture Studio spun up another team to complement the existing development team and got the product to market very quickly.
This meant the start-up didn’t need to scale up so quickly that it broke culture or was stuck with increased overheads and impacting its cash flow. If it couldn’t scale up as quickly, it would have missed its market opportunity. That company is still in its early stages, but it’s got some very good contracts with leading brands within that sector.
To find out more about Built Ventures EIS fund, access your complimentary of the EIS Annual Report 2024 here
