Sebastian Mueller is the co-founder of MING Labs, a digital business builder with offices across three continents. They help companies with their digital transformation and occasionally build their own startups.
About this episode:
What are the benefits of venture builder teams? What does the growth and scale of such teams look like? How to balance client consulting with venture building? Stay tuned to find the answers to these and many other questions in this episode.
Website URL https://minglabs.com/
Sebastian's LinkedIn https://sg.linkedin.com/in/smueller1512
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Andries De Vos: What do you think are the advantages of a venture builder compared to an accelerator or an incubator?
Sebastian Mueller: If you have an accelerator program, you're essentially trying to provide certain structures and railings for entrepreneurs to go through in terms of programming, in terms of mentors, at what point they would exit the program, usually in terms of a pitch to investors and release. And you either take equity or you don't - there are different approaches.
It's all very hands-off, it's just guiding that kind of thing rather than actually doing the job. So, for us, that is something where I don't think we are just adding a ton of value, because we can provide the things that we typically do with the form of the program, courses and such, but the real value that we provide is work, our experience with the work. I believe that an entrepreneur who has no capabilities in terms of either business design, UX design or actual software engineering, if they are given money to allocate and might not have a ton of experience in the field, they will most likely not get the best part of that investment by not being able to scale it right or perhaps also not working with the right people, who can really meet their needs.
I think for us, the view is what is the most capital efficient. I think we're bringing a very high level of capital efficiency that every investor really needs to appreciate, because we have built over 300 digital products, a ton of ventures on top of that, so we really know what we're doing. And we're bringing in that capital efficiency. This comes through doing the actual work and not the mentorship. Whereas then, of course, there are certain pieces of guidance that an accelerator would give you and we too provide in the process, we have a bit of a network, of course, to introduce our ventures as well, but the action value is when we touch the work and when we really produce a solid digital product, a solid digital business. Without that, I think we'd be too far away from the outcome.
The maximum is then also all around, I suppose, what your funding model is.
We don't want to raise money, we want to be self-funded, which means we are in charge, we're in control of our own destiny.
This, very naturally, is the upper limit of how big we can get at a company and at any point in time. And therefore, also within the balance that we have between the extra client work and the venture building work, how much we're actually able to take on that at any point in time- for me, that's more of the ceiling. I'm not sure that would be a very natural ceiling. But when I look at the minimum, I think depending on what capabilities you're looking at providing, there is always a certain minimum team size that you need in order to be efficient. And again, depending on the funding model, right? If you set out to be a pure venture builder, you don't want to do any client work, you might come from the practice but now you've made your money and you just want to set up a nice little studio, do a couple of ventures a year, but you don't really need to make the money right at that point of time. I think that minimum setup is to be able to manage two or three founder relationships at a time.
Andries De Vos: What do you think is the right scale for a venture builder, the size of the team, the size of the operation?
Sebastian Mueller: If you're really looking to build proper enterprise-grade software very quickly, you're talking about 15-20 people or you take the route of actually finding a partner that you become the manager of, in which case you want to scale up the management capacity that you have, form strong partnerships, but then not have the engineers, which then reduces partially your efficiency. It is still possible to balance the fixed cost and the variable cost.
I think there's a ton of considerations there. And I'm not sure that there's a really great recommendation in terms of how big it should be. I think depending on how you determine those different variables for yourself, different setups can work.
Andries De Vos: Imagine if you'd focus only on professional services and not on venture building. How different would your growth have looked like? How much more margin do you think you would have made?
Sebastian Mueller: As an agency, when you’re saying we're going to take on the ventures, you're not going to want to expand your baseline capacity to take on venture work. You're going to want to look at this as a situation where you have a couple of good clients here, but there is an interesting opportunity and I would have the capacity already in house, so let me pick that up. Let me convert some of the margins into equity.
We always tried to cover our costs, at least it doesn't end up very negatively, operationally for our Profit and Loss, but we do leave profit on the table. Sure, within three years, nobody exits and nobody pays dividends, nobody returns anything. Definitely, in this three-year window, you're leaving money on the table, which is also potentially the detriment of your gross. If you said, hey, all I want to do is make this agency big and then sell it, this is not something you're going to want to do because the biggest best way to do that is just do the corporate work, get the high margins, hire more people, blow it up and then flip it to Accenture or McKinsey. This is not the strategy there.
This strategy is only for people, who either have no exit plans or have some potential exit plans very far in the future, like 10 years out or so. And then, what you're essentially doing is de-risking the core business model, because even the agency model is not without risk, you have a lot of people on the payroll, and basically the more you grow, the faster you're going to have to sell. So, you're in a hamster wheel.
Andries De Vos: At the heart of your business model, you’re a professional service firm that offers venture building service of cost, how do you make your venture builder model and activity less risky and more stable for your overall business?
Sebastian Mueller: Professional services business is not a rocket ship, like a technology company that scales like crazy, it's a bit more linear in the way it scales.
You have alternative business models to mix to make that a bit more stable and a bit more attractive. As a venture, you potentially have a nice outcome, five to seven to ten years down the road, or it could become an interesting business that might just return dividends. We don't have any pressure to exit, different from VCs.
Other model that I've seen is - people becoming partially product studios, where they don't only sell projects to clients, but they might productize an idea. They have, for example, a SaaS kind of revenue that just comes in every month or every year. There are different ways to multiply your income streams, which in a way is good for the scalability of the kind of business that we're in, because otherwise, if you're only going to scale based on people, it is very linear and you are stuck on a certain trajectory, you can never escape from that. At the same time, it is derisking your basic business model, not putting all your eggs in one basket. You don't want to be stuck with contracts with way too many people on your payroll and nothing else to do.
Andries De Vos: Absolutely. So if you would have a back-of-the-napkin calculation or unit economics on a pure-play 100% agency versus a hybrid play agency venture building and you would have to tell that a VC or a founder that wants to set up an agency venture builder, what would be the economics that you would write down on a napkin?
Sebastian Mueller: Looking for a project as such is a project margin of somewhere between 40% to 50%, so that on an individual job you make enough money, and then maybe the company gives you an operating margin of 20-25%. There are people who make more than that, I think many make way less than that. If you're doing well, your jobs are somewhere 40 to 50% margin and then your company's at somewhere between 20 to 25%. Then, the question is how much of that are you willing to trade-off? Now starting to say, okay, I will do 70% of that, but then I'll do 30% that gives me no margin but also makes me no losses. I'm basically starting to draw that down. And then, I'm more in the range of 15% operating margin which, especially if you're not leveraged, is still fine.
But if you're drawing down too much and if you're going more towards like 40% and 50% venture building, you're reducing your margin to 10% or even less, you're putting quite a lot of risk in the business. The structure can become quite challenging, especially if you're reliant on credit lines. The loans at a company size are easily at 6% but rather 8% interest, depending on the country - if you look at China, maybe even 10 to 12%. Your cost of capital suddenly becomes significantly higher or even too close to your actual operating margin, then you just expose yourself very much to downturns.
As soon as the corporate work dries up, the client doesn't pay for a while, it just becomes a huge issue.
Personally, we are very comfortable with doing around 20% venture building work more or less than that, but not significantly more than that, because for the overall health of the business, the growth trajectory that we have in mind is to be completely self-funded. I think this gives us the peace of mind to sleep at night.
Andries De Vos: Have you considered at some point to potentially build your own kind of SaaS products 100%, like lifestyle products, instead of venture backable products, simple utilities that can generate 1-2 million a year and build a bunch of those?
Sebastian Mueller: We have thought about it, we've tried once or twice. We usually end up with years in the enterprise space, and then in order to do that properly, you'd really have to have a project manager, sales. We never really had any ideas for low-hanging fruit, as we might call them. It sounds like you could just launch and put it there, and somehow it will mostly just sell itself, but you'd actually need a proper product organization. We just don't have to, so we gave up on that. Not to say it could never happen, but we just so far haven't had any of those kinds of ideas where we'd say that this is easy to do on the side.
Andries De Vos: Absolutely, but I sometimes wonder for businesses like ours, the approach of the low-hanging fruits could be powerful. If you conceive of let's say 20-30 low-hanging fruit ideas and you capitalize it as part of the margin, in this case, let's say there’s a 25% operating margin and you're willing to drop that to 15 to 20 as a company. So you capitalize, say, 5% of the operating margin as an experiment for a year or two, don't you think you could get some of those low-hanging fruits to profitability?
Sebastian Mueller: I think for us, it would be a distraction. I don't think at the stage where we're at we have the focus to expand, because we have a very clear growth roadmap on the enterprise side in terms of services, revenue and profitability. And we are open for the venture side. For us now, opening a third line would be more of a distraction than we would actually be able to get out of it, just because we wouldn't really have the management capacity to put attention into it. In the end, I think it is still a business that is revolving around my partners and me. Everything that we touch needs our attention. At the moment, we just wouldn't have that. This is not to say that if we did it, and if you pay attention to it, it wouldn't be successful.
Andries De Vos: How do you incentivize your team? Because it seems like the way you structure it, it's really much more of a bonus scheme.
Sebastian Mueller: Magic coins - it's a sort of shadow equity. Basically, you don't have direct options. You don't have shares, you don't have any legal responsibilities. The idea was that anybody working at the company and also depending on the years in the company and their seniority, would maybe once a quarter or once a year be awarded a certain amount of those virtual coins. Then over that pool of all the coin holders, once you have a larger distribution, for example, from a venture exit, you would distribute 10-15% of that exit. As an example, the idea is if we get $50 million from a venture that exits, we take 5 million and distribute it, for example, over the whole pool of magic coin holder, in proportion to the holdings, to the overall issued magic coins.
Andries De Vos: So I know it's now kind of still an idea stage, but what will be the challenge to implement this? What's holding you back other than just maybe thinking about the design?
Sebastian Mueller: The main challenge for us is the different jurisdictions that we're in and making it work in a way that fits all of those. When you look across China, Germany and Singapore, we are growing, having some remote workers in other countries and just becoming increasingly an overhead on working out the legal side of things of these agreements, to make sure that they are structured in a way that is similar, fair and equitable. We just put a pin on since we really don't see any exits in the very near-term future. It is something on the roadmap, but for now, yeah, we're putting that on ice.