We continue our insightful conversation with Hugh Mason, the co-founder and CEO of JFDI, a Singapore-based accelerator that has built over 70 startups since 2012.
In this episode we will cover the problems of the VC market, current trends, methodologies of running an accelerator and much more. Stay tuned.
Website URL: http://www.jfdi.asia/
Hugh's LinkedIn: https://sg.linkedin.com/in/hughmason
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Andries De Vos: If you sketched out the business plan for a venture studio, what would it look like? You have already mentioned that it would be more narrow-focused and it would give access to the first customers. What other things would be in your recipe book?
Hugh Mason: I'll give you an example. Here in Singapore, several years ago, I met a wonderful guy, who only invests in games development and all he does is casual games, these dinky little puzzly things, and the prime market for those in the West is housewives at home, who are bored. The kids haven't come home from school, they've done some washing or so, and they would play a game as a treat. They will do it through their set up box on their TV or through their mobile phone, and they end up paying to play that game.
That guy had totally understood that vertical. He knew the psychology of his customers, he knew when they played and how much they paid, he had distribution channels to get to those people. So when people came to him with potential casual game ideas, he was able to say: "I will do this if you make these changes, here's the terms of the deal, take it or leave it." And when people came in, he would act like a traditional publisher, really. I think in some ways a venture studio could be something like that, where you take ideas that have come from outside and you're a specialist with access to distribution and finance.
Another way is the way that many feature film studios work: they have independent film producers who develop a slate of scripts, raise a couple million dollars, spend it on development of 7-8 film scripts, connect these scripts with star talent through their contacts with agencies — directors and leading actors — and then go to the studio. They present this package and say:“ I've got a great script, with a great actor that's prepared to do it and a great director that's prepared to do it, will you take this on? We'll share the backend of the value that's created and in return, you put up the capital and you organize the distribution.”
Another model to do would be what film studios also do, which is to say because we know the market, because we have the metrics, the technical skills and resources in house to make things, then why don't we come up with projects internally? And then we will hire a director to direct the film, in this case it is a Chief Executive who will run the business. The interesting thing about that model is that to drive the business is the critical thing, you need to find someone who is motivated to drive the business but is not so entrepreneurial that they will get bored and go off to run another thing. So, you need to find people who are entrepreneurial and disciplined and prepared to work when they don't know the majority of the business in the early stage, potentially someone who could get it going from nothing to something and, of course, that's the Rocket Internet model.
Andries De Vos: What is it you think that is wrong with the VC market today that venture builders have understood?
Hugh Mason: Venture capital is widely recognized to have some serious challenges. There was a fascinating report by Kauffman Foundation a few years ago, called "We have met the enemy and it is us". It revealed, if you look at the statistics, the dirty secret of venture capital is that the vast majority of funds — I'm talking like 80% here — actually make a loss. If you put your money into a venture business, you get less back than you put into. There's a chunk of them, maybe 10-15% that will give you your money back with a little bit of extra, but not much more, and then there's a tiny number of VC firms which make outsize returns. Because they have that brand name and everyone wants to be associated with that brand name, of course they attract the best companies moving forward. It's a curious thing, if you actually look at psychology of all of this. There's been some great analysis done on portfolio construction in VC firms, if you do the equivalent of a tracker fund in public businesses, if you just randomly invest in a thousand startups, you can show that the results will be remarkably similar to what most VCs achieve.
This is the human need to believe that there is star talent out there that can pick winners. And then there's the whole story of adding value, nurturing, which some VCs do and the majority don't. All of this is stuff that has been well-documented and well-discussed elsewhere. What can venture studios bring to the mix?
I won't name the fund, but I will say it is an extremely large Singaporean fund that everybody's heard of. I was having discussions with a very large fund that makes tens of millions of dollars size investments and above, and they feel they are cut out of the stages of startup growth where value is created. They feel yes, they can write very large checks, but by the time they come to the party, they're not making that great of a return on their investments.
Just recently, when one of our very first investees was bought by Intuit, what I think is interesting is that in the early stages of development, when people put money into JFDI, the multiple we got on our initial investment was like 100x on that investment — a hundred times of what we put in. The folks from our investor pool, who then invested a couple rounds later, made a good return, but it was absolutely nothing like 100x, even though it was a multiple amount of what they put in. When you draw that kind of curve, a hockey stick curve evaluation growth in a startup, it is really true that the returns are fantastic if you can get in at the beginning and avoid getting screwed by later investors in terms of dilution, if you can get in early and with a reasonable deal with the founders who've got some integrity.
That means that for a later stage fund, like the one I was just thinking about, the problem they've got is by the time they come to the party, the band's already onto his last song. That fund told me confidentially they were setting up a venture studio internally. And I wonder whether this is going to be the case, whether we'll see corporates do something similar. The pros and cons of that is another discussion.
The simple answer to your question is that venture studios allow people who have access to money to get into deals with discipline and structure earlier than they would've otherwise and therefore enjoy more evaluation growth. The real thing they've got to hide if they're going to do that is their own egos.
Being a VC does not mean you know everything about starting and growing businesses. It means you know a lot about raising money from LPs, term sheets and all that stuff. It's great, we need that skill set, but it's got nothing to do with building value and a company, unless you've been a founder yourself.
Perhaps the ideal structure would be something like a venture studio with people in it, who know how to create and grow value, closely coupled to a fund which has an arms-length relations with the folk who are doing the company building, because like everybody, if you're the one doing the company building, you're going to believe all your projects are brilliant. You need to have a robust discussion with investors. So, even if it's your own fund, my hunch is that probably even people making final investment decisions need to be separated from the actual building process.
Andries De Vos: I see more and more corporates, innovation teams reaching out to us as well to explore the possibility of creating a venture studio. These trends are indeed emerging and it's exciting, but, at the same time, I would argue that the risk culture of those teams as well as their background may not be compatible with being entrepreneurs. If you take that line of thinking to the next level and imagine that you see VC as a product with a roadmap -V:1, V:2, etc, what are the versions that we have now and that will come in the future? What are the trends that you see?
Hugh Mason: One of the things I hear a lot here in Asia from partners and family offices that want to invest in VCs is that it is a tough call for people to lock up their money for 10 years in a fund run by someone they haven't worked with before, who then invests it in businesses that have got nothing to do with the investor’ group of family businesses, where their children don't get to learn from experience. If you're brand-new in VC and you're setting up a Southeast Asian office, then maybe you'll get some LPs to invest. But it's a very tough call to keep asking people to invest in it. There is a matching function that VCs perform.
In the old days, it used to be performed by those angel groups. 10-15 years ago the only way for startups to meet business angels was to go to a monthly cabaret, where a bunch of guys would be sitting and having dinner and drinks, and the startups would kind of go on stage and lap dance for them and then, occasionally, they'd write a check.
I think VCs similarly act as a magnet, drawing together money and talent. The question is whether the fund is the only way to do that. On the angels' end of things, I think it's interesting that we've seen things like syndicates forming an angels' list, where you have an experienced investor that people believe in and trust, who says I found a great investment here, who wants to come in with me? And because they've got a bunch of followers on Angellist, those people will all come around and effectively set up a VC fund. But it's a VC fund for just one investment and the lead investor that runs that will have to carry everyone's money and all usual things that a VC would do. Everyone can see where the money is going, make a decision right now - there it is, go!
You think whether you actually need all this structure of a fund, is it actually necessary to act as a magnet? If it really is about talent, if that's what investors want to follow, then you can do that as an individual.
The other thing I think is really interesting is the way we're starting to see some private marketplaces emerging now. For instance, here in Singapore we have a business from Estonia, called Funderbeam, which is a private exchange that accredited investors can join. And they can invest directly into early stage businesses. The challenge with it at the moment is that there's not so much market volume, not so much trading, so the investment in all that is liquid, that means that the transparency of pricing that you get from a public market isn't there yet. But as an idea, I find it really interesting.
If I was launching JFDI all over again, I think now that we've got a brand name and everybody knows what an accelerator is, there is an argument that maybe we should just put up an exchange trading fund that's sort of linked to JFDI on something like Funderbeam, raise the money that way and then deploy it to support early-stage startups. Maybe that's what we should do. Then at least our LPs investing in the accelerator could have a way of getting in and out.
We'd have to put much more energy into the storytelling around the performance of the startups and there would have to be someone doing market making, but maybe that's all possible. Often, in finance particularly, as it's one of the conservative industries, there are different flavors of product people come up with, but it's rare that we get a brand-new paradigm.
VCs are what they are, they date from the 1950s. Would you create VC funds in the same way today if you were inventing them from scratch? Probably not, in the same way you wouldn’t invent retail and shopping malls in the same way now that we can do e-commerce. I'm watching this, and I am a spectator not a VC, I'm an individual investor who used to run an accelerator. I am fascinated to see in which direction this goes.
Andries De Vos: With all the know-how that you've acquired over the years, do you think there is an opportunity to almost codify those know-hows and the methodologies of running an accelerator? Or you consider this a very limited added value?
Hugh Mason: When JFDI Asia stopped running its own active acceleration process and we entered this harvest mood to focus on supporting our portfolio and moving it toward liquidity, that's what we've been doing since 2015, one of the things we looked at was if we could offer accelerator as a service. Funnily enough, a company actually pitched this to me the other day. I was looking at setting up an impact accelerator, working with a large corporate venture. I found that there is a business in Europe, a fantastic software platform that's got everything you want to run an accelerator they've coded into a system. There's two or three out there now, I think. The mechanics of running an accelerator are relatively well-understood.
The other thing that's happened since we started JFDI is that some fantastic academics have done a great job to start documenting accelerators, identifying success factors. There's a great book by Mike Wright & Israel Drori called “Accelerators”, and it presents an analysis of what it takes to make an accelerator work. There's a wonderful researcher in the U.S. called Susan Cohen who's done a great job on what goes in accelerators and why they succeed, and how we can measure their success.
The know-how is open source now, the spirit of the startup accelerator was always about making this stuff open source. I think if I were going to do it again, I would focus less on the mechanics of running the accelerator and more on achieving distribution for startups and achieving more liquidity for investors.
Andries De Vos: What are some of the most interesting models you've seen, specifically in the accelerator and venture building space right now?
Hugh Mason: It's fascinating to see different rifts on the same theme. You can see something like Entrepreneur First, it's been extremely successful in London, in particular. Matt and Alice had set it up and created an amazing climate where very smart people from top universities and technical people come together. It's basically a 3-month team forming operation, followed by an accelerator. I can't see anything magical about it other than the fantastic community that has grown around it.
I think that whole area of how you form teams is an interesting one. The second area I find very interesting, I joined On Deck, which is a virtual accelerator, and while I was in quarantine as I had COVID-19 and I was stuck in a hospital, I wondered what it would be like to be in an accelerator. I got lots of friends in Europe and I got businesses there and in Asia, but I never got a business in Silicon Valley myself. Because of COVID-19, I could join the accelerator that had gone virtual and doing it online would cost far less than getting a flight to America. It turned out to be absolutely fantastic. What On Deck did brilliantly was to curate people. Going back to the point I made earlier about the quality of people coming into the accelerator, the thing that On Deck did fantastically was to get amazing people together. The conversations I've had were great. To be honest, I'm very happy to have paid that and more just for the people I've met.
Now that we have a sort of framework around how you build startups and now that we've got some common mentor models and shared language, it seems to me that the physicality of an accelerator is still important for team formation, but it's less important when you're trying to help companies and support their growth.
I don't think you need to be face to face with a mentor. I'm mentoring a wonderful eye surgeon for the moment, for example, who's left eye surgery and is setting up a very exciting business and I really look forward to our conversations as a mentor, because it's so stimulating to talk with someone intelligent and passionate. It's great that we don't have to be together. We can share business models, I can share articles and stuff I've collected that is useful for our conversation, and she shares stuff with me about eye surgery which I find fascinating because my mum had cataracts in her eyes.
A huge function of the accelerator or venture builder is to create a community. I wrote my master's thesis on what an accelerator is, back in 2011-2012. It wasn't clear at that time what an accelerator is. The thesis is called “Guilds for Geeks”, and the conclusion I came up with is that an accelerator is like a medieval guild where you bring together masters and apprentices, and the craft of entrepreneurship is handed down from generation to generation, through on-the-job training. Until recently, that had to be done face-to-face, but I don't think it has to be done that way in the future. You can have a community of mind without having a community of place. That's fantastic because it means that really talented people, wherever they are, can reach out and connect with other people.
I'm working at the moment with a Swiss-based accelerator called Seedstars and also with GSMA (Global System for Mobile Communications). They run some fantastic programs across the very developing parts of Southeast Asia.
Recently, I've been mentoring teams in Papua New Guinea and Samoa. The most interesting discussions there have been with great people, as smart as anyone on this call, they just haven't had the chance to travel and to connect. There were two conversations that really inspired me. One was with a wonderful woman in Papua New Guinea, who had an idea for slaughter as a service. In her country, buying a live chicken at the market is the way that you buy your meat. You carry the chicken home, you chop its head off and then you cook it for your family — it's fantastic fresh meat. She came up with an idea of a service, when you can use your mobile phone to order chicken, and when it's delivered you can slaughter it in your backyard.
What I loved about that is that it's a business model we actually know how to do, but it was applied in a culturally relevant context. Later on in that same session of mentoring startups, a guy actually came up to me with a ring about the size of your head — a piece of string with shells threaded on it. He brought me the traditional shell money, and you can still buy things around the Pacific islands with shells like this. This dude was pitching me a blockchain business and it wasn't one of those bullshit blockchain businesses, where it's all crypto and faith in the future. It was a really solid idea. And it was amazing: here's this guy, whose parents were using shell money, and how he's pitching me a technology business. He was able, through the internet, to get access to all the same whitepapers and ideas. I thought that was so inspiring.
For me, the most exciting thing about the future of venture studios and accelerators is that wherever talent is, people will be able to connect, form teams, get together and get mentored.
I'm passionate about this because, especially in the mess that we're in because of COVID-19, entrepreneurship is a tool kit for creating possibilities in mess, in ambiguity.
Entrepreneurs come forward there is a total mess, when there are cracks in the society, and they fill the cracks and they fix things. That's exactly what we need right now, that's the “just fucking do it” spirit, which made us unite and set up an accelerator.
The reason I'm still passionate about entrepreneurship and teaching it, mentoring in it and doing it for the rest of my life is that I believe that entrepreneurship fundamentally creates the future.
The exciting thing about accelerators and venture studios for the future is that now we don't have to be in the same space and we don't require too much money to do it either. You can run an accelerator in Papua New Guinea and make a success!