86. Innovations in Business Modeling

Nick: So every everyone working in Dovetail both have a salary but they also basically own a stake in a portfolio of fast growing technology companies that we're working with. So it really creates a much closer alignment with everyone on our team and with our clients.

Becky: So this is, and you said it's fast growing startups. So if somebody has a great idea and already has a little bit of traction, they come and they pitch you? How do people find you? Or how do you find these companies?

Nick: We actually started originally in New Zealand. Then we expanded into Australia and set up offices in Sydney and Melbourne. So in the early days we had actually some quite good early success. We had some companies that we'd work with that became quite successful. In the initial stages a lot of that work came in through word of mouth, came in through our personal networks, came in through just kind of people that knew what we'd been doing in our industry. And then as the company has expanded, we've started sort of increasing our brand awareness in this part of the world. And now we stand to grow into the US, which is kind of the next, I guess, bigger market for us to start tackling.

Becky: Oh, so interesting. So it started with, if I'm following here you started helping a few companies, decided to build these as a business. And then you started getting basically referrals and these companies will come and pitch to you and you're like, "Yeah, that company's interesting. We should invest in it," and you help them grow. And then it was like that, but you didn't really have like an accelerator or anything like that.

Nick: No, not initially. Companies basically would come to us and pitch their idea and we would look at it on its merits, much like a typical accelerator or VC would. We're quite picky with the clients we take onboard. Picking the right clients is really a huge importance to us. And also our whole model is predicated on longterm partnerships. So we're really looking for clients that that can become great longterm partners that we can work with for three, four, five years, and really help them grow from a small company all the way through to international expansion.

Becky: And how did it start?

Nick: My co-founder and I, we actually met in high school. We were both trying to back test various strategies in the stock market.

Becky: This is after you already went to college and everything.

Nick: No, this is high school. We were 16. And we were both at home, but without telling anyone, we'd be like writing computer programs, trying to find random relationships in the stock market and the foreign exchange market. And we're trying to create strategies around this. And then I found out that this guy Ash was doing exactly the same thing. And we're like, "This is bizarre, right? We need to be working together on this." So we, we started working together on these various trading systems, and ultimately we went to university, both of us together. I studied Computer Science and Economics. And then while we're actually at university, we raised a bunch of venture capital and started a payment and ticketing company that actually grew quite large in New Zealand. A couple of years later, we ended up selling that first company that we started.

Nick: And then we're kind of playing around with, "Well, what are we doing next? We want to do something interesting. Well, what's the next idea?" So we kind of were playing around with a couple of different options. We're really kind of looking for a few different things. We were looking for something that we could really work on for the next 30 or 40 years. We wanted something that could be the longterm challenge, which was like, "What can we do if we really put our mindset for the next 30, 40 years on one idea?" We wanted something we could never ever get bored of, something that would just continuously be interesting as the company grew. We wanted something that was more anti-fragile than your sort of typical startup. A lot of VC backed startups, you essentially have all your eggs in one basket and there's often no way around it. We were kind of looking for a model where we could have more diversification and it be, I guess, more antifragile as the company grew.

Nick: So that's kind of when we came up with this Dovetail model, which is where we would work with multiple companies, helping grow those companies into much larger companies and take an ownership stake in many of them. And it just kind of perfectly matched our sort of two main interests, which were entrepreneurship and investing. And it felt like something that just, I mean, could never get boring because there's new, interesting projects coming and so things are always changing. So that's kind of how it started. And then it's kind of grown from there.

Becky: It's like, I feel like only someone that has already launched something that is successful realizes that the next thing they need to work on is something that they will probably work on for the next 40 years. Like a lot of people think of a good idea and they start a business and then they realize that they've been at it for 10 years. And they're like, "Oh my gosh. If you had told me that I was going to work on this product for 10 years, I'm not sure I would have started."

Nick: Yeah. Exactly. It takes longer. It's harder work. It's more stressful. It's everything. But also the thing I really like about, about just starting from day one with a longterm goal is it actually changes the way you look at the firm. It allows you to make longer term investments, it allows you to sometimes even grow slightly slower if you just want to set the company up like perfectly from the start. And it also allows you to, I mean, there were certain people that we wanted to join the company. And when the company was a bit too small, they didn't really want to join. So we just kept pursuing for three years and then managed to get them on board. But if you have a four year exit plan, then you're not going to really bother with any of that. So it just allows you to kind of think really far ahead, I think.

Becky: And those companies that you're helping, you mentioned that you want to help them grow in the longterm. When they say that in the longterm, they're talking about over a four year period as well, or what is their plan generally?

Nick: I mean, our goal is to work with them for the long term and to work with them for as long as we're still adding value. Our biggest clients we're still working with now, and there's no plans to end it as long as we keep impressing them that we're worth working with. Initially we'll come into a company and it depends a little bit what size the company is at, but sometimes for, say, smaller companies that are well-funded or raised this amount of money and that are maybe nontechnical, what they really want in the beginning is someone to help them build and manage a world class product development team while they kind of focus on sales and marketing and building a team and really growing the business. There's so much more to starting a company than just the technology and I think oftentimes the founders that are freed up to spend a little bit more time on the other parts of growing the business, they can deliver phenomenal results.

Nick: So we'll come in and initially take that, work with them on building a world class team that can handle the product. And then as the company grows, we will actually help them start hiring in their internal capabilities, start hiring in their own team and then work with them in a hybrid model. And then again, as the company continues to grow, we just have to continue to prove every single month that, that we're adding value. And we don't lock our clients into anything which can be stressful, because we have to continuously prove our worth, but that's kind of the model. And I think it works for the longterm.

Becky: I imagine this would be different for every single one of your customers, but how do you usually prove that you're adding value?

Nick: In the early days when a customer comes in and starts working with us, we try to always sequence our engagements so that we can, especially for the client, so they can start working with us in quite a small way with relatively little risk. And so then we have two months where we could really try prove ourselves. Once we get that trust on the basis of the client, then we will basically build out a sequence of milestones and start hitting those together and then at a certain point, the client can just see that when we're knocking out work, that's that lots of people are downloading, that they're rating highly, that we're helping them get results. And there's no pain in the process for them. And then as the company grows, I guess they're always just comparing. They're just looking at what kind of changes.

Nick: How can we help their internal existing team deliver better? We don't want to be just a kind of dumb development shop that gets drawings from the clients like, "Do this." We're trying to deliver a lot of value over and above that, where we become a part of the client's company. Now we're all sitting in Slack together. We're just working in one big team. So it's not super clear who's in one company or the other. We treat each other like we were in the same company.

Becky: From all the different companies that you've helped, which ones are your favorite, biggest, I don't know how you say, winners? Which ones would be the examples that you were to pick to inspire other entrepreneurs to be like, "Oh my gosh, I should definitely do drop what." One day somebody told me in entrepreneurship, the way to do is you start something while you have a job and then one day you have to pick between the thing and the job. And it's like, what would be like those stories that will make somebody be like, "Okay, I am working on the thing and I'm giving up the job"?

Nick: Yeah. So I think what our most successful project has been a company called Afterpay. So Afterpay is a FinTech company that came out of Australia. We started working with them, I think, in January 2017. Basically they allow you to basically like, say, go online and buy a dress or some shoes or even an airfare and then pay it off interest free over multiple payments. So rather than putting it on your credit card and having to pay money to the bank, you can just buy with Afterpay. You still get the good straight away, but it's interest free. So it's kind of like modern laybying, right?

Becky: Yeah. How do they make money?

Nick: They actually charge to the retailer, the merchant, a small fee and the merchants, they do this because they've seen their sales just increase by enormous amounts. So when we started working with them in Australia, they were quite a small company. They were based in Sydney. And you could also only use Afterpay at that stage to buy things online. So you could use it for eCommerce. Our first project with them, we initially started, we helped them basically build out a mobile strategy that allowed people to go into a store and they could buy something and they could use their cell phone as a payment device, so they'd buy it on Afterpay. So suddenly it opened up, not just eCommerce, but the whole world of retail to Afterpay.

Becky: Oh, wow.

Nick: Yeah, it was a super fun staff to working with them. And within 48 hours of launching that app, it went to the number one in the App Store. And Afterpay just really started absolutely taking off. And in Australia, it just grew everywhere. If you went into a shopping mall, there was an Afterpay poster in every second window. It started getting a lot of traction and then their web platform was basically starting to, it was getting a lot more traffic than it had originally been designed for. So then we came in and we basically helped them build out their web platform in a way that could handle a lot more traffic as the company continued to grow. And the other thing we wanted to try and help them do was, was really turn Afterpay into a shopping destination in itself rather than just a payment gateway. And today in Australia Afterpay is actually the second largest referrer of traffic in the whole country, second only to Google.

Becky: Oh, wow.

Nick: So it's become more than a payment mechanism. It drives a lot of traffic to retailers and is really helping them increase their sales. And so then we helped them grow into New Zealand, into the UK, and into the US. And they haven't been in the US for that long, but already over 9 million customers in the US have joined. It's got over 5 million monthly active users. I think they have about 50,000 merchants that have signed up. So it's looking pretty promising. It's taking off like wildfire in the US as well. They're now, I think, an $18 billion company and we've been with them from while they were still a relatively small Australian company. So it's been an awesome journey. And it's exactly that the type of client that we're looking for on a daily basis. Right? So now our goal is just to kind of try replicate this as many times as we can.

Becky: And so you're talking about this is a type of company. How do you pick the right companies? How do you, because I mean, I can't imagine how many pitches you get in a week.

Nick: Yeah, we, we get quite a few. I mean, we have an investing framework where we sort of look for a range of different factors. I mean, some of them are the same things that I guess a lot of VCs are looking for. We're looking for a really strong founding team, people that have succeeded in the past, people that have been able to do a lot of interesting successful things in their past, and generally people that have sort of a lot of expertise in a certain area. One of the things that we really like is people that have a huge amount of domain expertise in something. We actually often like things that are not purely software, so something where there's either difficult barriers to entry or another thing that we like is sometimes we get founders coming to us with relatively obscure industries that we don't really know much about initially, but then we start looking into the industry and it turns out that it's enormous and that there are not tons of really modern companies operating in that industry.

Nick: Basically, we want something where we don't think that four young guys or girls sitting at WeWork can kind of come in and compete with us. It needs to be something a little bit special. And then we also like founders that kind of done well in just raising money because it's kind of the first test is can they sell this idea before they start selling it to customers, although we like to see them do that as well earlier, early in the piece, but can they at least sell it to investors?

Becky: So you mentioned that what you're looking in the founding team is a strong founding team, people that have done many interesting things successfully. How about people that have done many interesting things and failed?

Nick: I still think that's a lot better than having not tried. You learn a huge amount from failure and it also shows a certain willingness to take risk. So for us, it's actually not that important how successful the previous company has been from their perspective. I mean, obviously we'd like it to be successful. Everyone would, but if they've gone out and tried and managed to do something interesting and impressive and learnt a lot of lessons along the way, that's still really interesting to us. One of the things we were really like are value propositions that are sort of relatively simple. We see sometimes when someone has to spend 30 minutes explaining to us why something's a good idea, then we're not quite sure that customers are going to realize why it's a good idea.

Nick: I think so often actually the best ideas are the simplest ones, something that you could just can imagine yourself really wanting to use it as if it existed or something that you can imagine there's a certain person that in this target market, some kind of niche, you just imagine that, "Yeah, of course, if this existed, they would definitely use it." So something, again, like a relatively simple value proposition. Something that's really important for us is something that can work at a small scale initially. There's a lot of founders and just there's a lot of ideas that work really well. I mean, you can imagine these ideas as billion dollar companies and they would be incredible. They would be such cool products. Everyone would want to use them, but what's harder to imagine with some of these ideas is how the hell could they work with 100 customers.

Nick: There's no value for the first customer to sign up. There's almost no value for the second customer. It doesn't work when the company's 10, 100, 1,000, even 10,000 people. It only works when the company is really large. And for those types of ideas, how do you get to a really large company, if you can't go through the early stages and have a strong value proposition at that stage. We see quite a lot of ideas that work as large companies, but not as small companies. And therefore it just makes them really hard to actually implement and take that data from nothing to something that's big. I mean, some of the things in our investment platform and investment framework, it's kind of similar to what VCs are looking at. Some things are maybe a little bit different, but the one thing that's that really is different from us and a typical VC is that a typical VC often doesn't actually have that much data to work from and that much experience of working with a founder.

Nick: Whereas we will start working with a founder. We might start making small investments in the beginning, but then as we work with the founder really in a really close relationship over months and sometimes years, we get to know that company really well. And we get to know it better as we work with them for longer, we sort of see how they handle setbacks, how good they are managing a team, what kind of culture they're building. If they say they're going to do something, how do they follow through with it? So as we work with someone, as we work with these companies for longer and longer, we can start making bigger and bigger investments into them and just really feel confident that we really do understand these companies and these founders.

Becky: So you're not only invested monetarily, but it sounds like you're also kind of emotionally invested, right, because you get to know these people and everything? And at what point, once the company, let's say we just talked about a success story, like Afterpay, but I'm pretty sure that there's also stories that have sad endings. And if you're so invested also emotionally, at what point do you make that decision of like, "Well, no, actually this probably is not a good moment to keep dropping money in this thing"? Have you been in that situation before?

Nick: We haven't actually yet, but-

Becky: Oh, that's so good.

Nick: But no, look, there 100% will. It's just a matter of when, but we haven't actually yet. I mean, the companies that we're involved with, we're never the only investor. So there would always be opportunity for these companies to raise with their other investors, if we decided that we no longer wanted to participate.

Becky: And how do you choose this winners? So you talk about the founding team. What if you get a bunch of them that check all the boxes, they have the right founding team, the idea's interesting. How do you pick?

Nick: Yeah, so some of this factors are kind of mechanical and, and quantifiable, and then there is also just an aspect of it that's, I guess, gut feel or intuition. Sometimes you just come across where you just think it's the right idea and the right founder, you just can't imagine how this couldn't work. You know there's still a large chance that it won't work, but it just seems like this is a really high probability bit that that is worth taking.

Becky: And with all this involvement that you have, I'm assuming that there's a lot of legal, tax and operational complications and different aspects. Can you talk a little bit about that?

Nick: Yeah. Particularly because of the way we're structured, we have a portfolio of multiple companies that we're investing into at the same time. And those investments are shared across our team. We have a dynamic pool of investments and in our dynamic pool of that represents the team and we kind of have to manage the investments across the tour. So it's taken quite a bit of work getting the legal structure set up. There's also tax considerations and there's various complexities of how do we create a model that kind of incentivizes the things that we're looking to achieve, but makes sure that we don't have any unintended consequences? We don't create any incentives that we didn't want. And then lastly, there are different ways of structuring these types of investments. And each of the different models actually sets on a different point, sort of under continuum between of risk and reward.

Nick: We will actually use different investment strategies and models to try to build a portfolio that kind of has different risk profiles so that when we mix it all together, we kind of end up at the, at the overall portfolio risk profile that we're looking for. Kind of like I mentioned earlier, we're looking to create, to see what we can do, what kind of company can we build over the next 40 years? And kind of an important part of that is making sure that we structure the company in a way where we can withstand unexpected events over the next 40 years and not blow ourselves up. So we are super cautious about how we kind of structure and manage risk across our company and our investments.

Becky: So what are your favorite lessons that you've learned through this journey?

Nick: One of the things that I think is really important and actually often kind of under appreciated in our industry is just the importance of sales and marketing, especially in startups. The technology is really important, there's no doubt about it, but we see a lot of young companies that are strong in the technology side, but they really haven't put as much effort into how they're going to sell this product, how they're going to market it. It's kind of been an after thought. It's page seven of the pitch deck, but really without sales and marketing, you're not going to build the traction that you need. You're not going to get enough customers to get the feedback from them to raise further investment. I mean, in some ways, it's kind of annoying. I wish you could just build an awesome product and go from there. But that sales and marketing really is hugely important.

Nick: And I think quite often I would actually pick a founder that has a really strong domain expertise and is brilliant at selling that expertise, but maybe knows slightly miss about technology. I'd often pick that person as an investment over someone that's really strong with technology, but is much less interested in how they're going to create a commercial business out of this or how they're going to sell it, how they're going market it because it kind of affects a lot of the decisions that they make further down the line. It affects how they spend their investment money, what the composition of their team is. And it's just critical when you're a startup, you're just trying to get to the next stage. So yeah, but that's something we look at a lot and then the something else that's, I guess, relatively well known, but just doesn't make it not the important thing is, is how good are founders at attracting and retaining incredibly bright people.

Nick: What kind of people do they surround themselves by and how good are they at selling the vision and bringing in the types of people that they're going to need for them to be successful? If we see clients that are really good at, at bringing in the right types of co-founders or the right types of technical and commercial and salespeople from day one, then I think it just increases the chance of them succeeding in the future.

Becky: Yeah. I'm here in the Bay Area and I feel that I've been in too many events and pitch competitions and things like that, where monetization is an afterthought. A lot of people just focus so much in user acquisition when a lot of the times what they're building is actually a feature of something else and not actually a product that will be monetized, that people are willing to pay cold hard cash.

Nick: Yeah, exactly. And especially it's difficult in the beginning because I mean, it's harder for startups, but it's at least different because often they don't have large marketing budgets. They have to be really clever about how they're going to get their first 10,000, 100,000 customers. That in itself is a huge challenge for a startup. So therefore you really need as much creative thinking around that area as you do on how do we build a product that's better than the existing competitors in the market or different enough that it has its own unique value proposition? So yeah, we really want to see more than just one page in the the slide deck for how they can actually grow the company. This is something we care quite a lot about.

Becky: Yeah. But I love the model of Dovetail, how you invest in companies, you help them grow and you profit share across the company. How does it work, when for example... So it's profit sharing.

Nick: It's not profit sharing. They actually own shares in the companies that we work with.

Becky: Oh, and if they leave your company, they still hold those shares.

Nick: So they actually own fractional shares, but we have a vesting schedule in Dovetail. If they've been here for a couple of years, then they'll continue to own the share that they built up while they were here for a certain amount of time until ultimately if some of those companies don't exit in that timeframe, then those shares will be taken back. So basically we want people to have part in the upside of the value that they've created while they're at Dovetail, and ultimately we'd love them to stay for the long term. If they leave, and there's still an exit or something within a couple of years, then they have the rights to the upside that comes from that.

Becky: This is really, really, really cool. Which is the latest company that you added to the portfolio?

Nick: Right now, we are building another FinTech in Australia. It's actually called Marmalade. It's helping companies get access to working capital quicker. So a lot of companies are struggling with working capital, especially now because of Covid, but actually it was a huge problem even before where they will make a sale and then often companies they'll make a sale and they'll have to pay for cost of goods in that sale, but often they won't actually get their money for sometimes 30, sometimes 60, sometimes even 90 days. And that leg between making a sale and actually getting paid just causes a huge amount of pain for a lot of companies. So Marmalade's a really exciting new FinTech coming out of Australia that we're involved in building as it's coming in to tackle that problem.

Becky: And you said that you are now considering expanding into the US, right?

Nick: Yeah. It's really the next path for Dovetail. We actually have quite a large client in the US right now, it's another FinTech. They haven't even launched their product yet, which we're building with them, but they're already evaluated at over a billion dollars.

Becky: Very cool. Are you going to be hiring people in the US to help you with your investments?

Nick: Yeah, certainly we're-

Becky: To all those listeners that might be interested in applying.

Nick: Well, we would have been more active. It's a slightly strange time, obviously, as you're aware right now. So it's a little bit, we're sort of just taking it month by month and seeing how the whole coronavirus thing is rolling out in the US. Hopefully things will return more to normal and the next, well, who can really predict when that will happen, but we're pausing a little bit until there's a little bit more certainty on how that goes.

Becky: And if you were to give any advice to somebody who's considering this model, what would you do?

Nick: I would start by going a little bit slower, just ease yourself into it. There's lots of different ways of structuring it. There's different models of structuring these investments and your involvement and they all have different risk levels. Some methods are sort of extremely risky, but have a huge amount of upside, others are much safer about have less upside. It's really important that you kind of get familiar with these different models and know how to kind of create a blend of them to get the risk profile that you're looking for. And it's also just important to realize that suddenly your business results become much closer tied to the performance of the companies that you're working with than, say, an agency. So the model really requires a lot of discipline. It requires a lot of understanding of investments, of investing and investing strategy.

Nick: And I think it requires that you actually have an interest in it. It needs to be a kind of core capability, and you need to understand the risks and fully understand your kind of risk profile and have good financial models in place. So I would kind of suggest that you, I guess, start small, and then get more aggressive as you get more comfortable with what's the right kind of financial and operational structures that you need to make this work because there's more upside in this than a typical model, but there's also more risk. So it's really important that you manage those two things correctly.

Becky: Great. Well, Nick, this was fascinating. I learned a lot and it was so great talking with you. Thank you so much for being in this episode.

Nick: Yeah. Great to meet you and thanks for having me.