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Cameron: Thanks for coming today. This is Disruptive Startups. This is probably the
biggest group we've run today. This is the sixth one. I'd like to send out a special
thanks to Laura, Constance and Katrina for running everything. So if we could give them
a quick round of applause. Thanks so much. I just want to wish you guys a happy new year.
We're all about entrepreneurship here. This is a not-for-profit organization. It's run
for you guys. We don't charge. We're just trying to create an environment where Melbourne
entrepreneurs can come together and sort of share ideas on finance, product development,
staffing, HR, sales, marketing, whatever it is. Obviously if you've got any questions
at the end, have a chat to James or just ask a question Q&A. Try to ask questions that
help other people as well. So if you've got a question that's going to help the entire
audience, I'd love to hear it. I'd just like to welcome James. Thanks very much.
I think the way we'll run the interview is we'll just have a chat to James. Afterwards
we'll do a bit of Q&A, but the basis, I want to start with probably James' background,
but also how he sort of financed the business because that's a big issue for entrepreneurs.
They've got great ideas, they've probably got great execution, but they haven't got
the capital to raise and even to sustain what you sustained which is about how long?
James: Three years from starting to making money.
Cameron: Right, so you had a bit of backlog of capital.
James: Probably not enough. So didn't raise any money externally. So we're no VCs, no
angels, none of that. My background, my roll before this, I was
a partner in a professional services company. I joined a six person field for about four
years and we sold that out to public [inaudible 00:01:47] Australian company. When we sold
that what I'd been working on in that business, there was elements which was how we engaged
with this supply markets. We did a lot of buying on behalf of James, and Macquarie's
and Fairfaxes and things like that in terms of buying consultants and advisers on their
behalf and it was a disaster. We were sitting there Googling people and
running spread sheets and Access databases, and three versions of PeopleSoft and were
doing exactly what they were doing. We were probably a little more efficient at it. We
ran a lot of service records and that was good. We sold it to them and I basically said
we should automate this. They weren't interested in automating it. They quite liked it how
it was cause we could charge a lot of money for it, even though [inaudible 00:02:37].
I got a carve out in the acquisition of that company to say I could start something on
the side because it was non-conflicting. I did that and 18 months [inaudible 00:02:47].
So about six months into that I started designing this business which is called Magnetized Markets.
It's basically an online marketplace. It's been through lots of iterations so what it
is now is not what it was five years ago, in pretty much every respect. Basically we
are running in parallel for the first 12 months. I went after a month of work and designed
what I thought, and I'm not a developer at all, but I understand data and logic. I took
up half my house. I just white papered the house, drew it out and then just wheeled through
as many developers I could find until I found someone that I liked and half my salary went
to him. I went to work and he developed. It got to a point where we were about three
weeks off going live. We're golden, this thing will be nuts and I quit my job and didn't
go nuts. There was two and a half years before we made any money, any substantial money;
a few grand here, a few grand there. So I had a bit of money, out of selling the business.
I had some savings and it was [inaudible 00:04:07], very, very long.
Cameron: This total regard to something you didn't need and just reduce expenses.
James: Well there was no reduce cause we never had them. We just didn't get to do a lot of
stuff. We never had advertised. We never did any marketing that cost money. It was a lot
of just going out and pressing the flesh. We got some great engagement . People loved
the technology. It's just that the commercial model we were running didn't work. That was
the lesson for us. I guess that was one of the big things for me. It's fine to look at
a market dynamic which is how few organizations buy from thousands of consultants out there
and how do you work out who the expert is. Our concept was, you know, this whole concept
of search is overrun now. It's too diluted. What if we could create an attraction based
marketplace. Instead of me go looking for what I want, I can actually build a little
honey pot and attract from the market the three or four people I should be talking to.
So that was the fundamental concept. Lovely concept. People loved using it 'cause it was
really good but how to get people to pay for it was a nightmare.
We went through five different iterations of the technology. Five different commercial
platforms. Everyone of those had everything rom one to 10 different variations . We were
pivoting, and pivoting and pivoting until we got a model that work.
Cameron: There're two things that I really want to explore from an entrepreneurial perspective
within finance. One is you have to have a bit of bankroll for that two, three years,
but also when you start acquiring customers, that's the other aspect I find real interesting
because entrepreneurs, that's where the funding of the application comes from and you keep
developing from there. In terms of your ATV, your average transaction value, was it high
or low? Pretty high given your customers, wasn't it?
James: No. Initially it was like, our first commercial model was like 20 bucks, 60 bucks,
100 bucks of buying size [crosstalk 00:06:00], It's a volume game
Cameron: Pretty large. James: We're maybe making $100 a month, $2000
a month when you've got three staff working fulltime and you've got business expenses.
That doesn't go very far. I was ostensibly paying their salaries and I'm lucky to have
some really smart really capable people that wanted to play. They were getting paid , I
don't know, 10%. 20% of what they could command in the market. They could've probably earned
some pretty good coin. Probably the first six months everyone hurt. Once we started
getting a bit more money in then I guess, you're always the last one to get paid if
you're a founder. Cameron: Yeah, sure, that's why it's hard
to keep really good people in the early stage. I think we talked about before, trying to
convince people of this dream that's inside of your head; and you're one guy by yourself.
I presume. Is that the case? James: Yes. I guess the first 18 months. I'd
engaged a developer but it was very much on a contract basis. That's not entirely accurate.
The dynamic was very much a contract. We [inaudible 00:07:11] through 30 or 40 developers. It
was too hard. They were coming in with these 100,000, 150,000 and that was on alpha. We
weren't even getting beta by then. I was out with my girlfriend and her girlfriends
were talking about, I don't know, maybe guys and how hard it was and one of them comes
out with the idea about, just come up with the five attributes you want and put it out
there and that night at about two in the morning I was sitting there, "I'll try anything".
So I just came up with like, "what are the five words I want" and I started Googling
this string and randomly came up with this bloke and pinged him through some archaic
website. Cameron: eLandce.
James: No. I'd never even heard of it. He's awesome. He came in. He's an [inaudible 00:08:05],
so really good commercial background. Kind of run it at a board level and [inaudible
00:08:09] I just want to go on and develop. The best general developer I've ever come
across. He came in and looked at it and said I reckon it's going to cost "X" and he said
[inaudible 00:08:19] could I have a cup of tea and he walked up and down for half an
hour and came back and said "are you trying to run a marketplace that would do this, this
and this?" I said "pretty much". He said, "alright, I'll do it for half if you [inaudible
00:08:31]. Cameron: We just got a quick question. Put
your hand up if you're an entrepreneur. We've got a few, haven't we. Just leave your hand
up if you still have a company. I guess the thing I'm real interested in is the turning
point when you hit that hockey stick graff, when you've become really profitable and you
get that energy, you get that culture, that commitment. Real revenue start hitting and
you just go on fire What was the sort of turning point for you within the company? Sorry to
cut you off. From when you went from that two or three year period of no profits or
very low profits until you just went bam straight up.
James: I think there's two steps that are really important and I didn't appreciate this
until probably recently. There's the point at which you're not really making any money
so to be honest it's stressful and it's hard, but you kind of pull the pin and walk away
and there's no big deal because we were running a transactional model. There were kind of
no long term commitments. The big spin for us was that people loved
the technology that we had. They wanted to license it, they didn't want to pay to use
it on a transactional basis. So suddenly we went and approached some groups and we showed
them what we thought was possible. They looked at it and said "that's ideal; needs to have
this, this and this." I got them to fund the last bit of development and we were running
a balance sheet; our financial projections were two to three weeks ahead. We were so
close to not surviving for so long. For them to give us a little lump of money to pay for
us for six months to finish this off was awesome. That was survival money.
Then we signed our first contract and then there's this interesting space which last
for us at about 12 months were we were suddenly making money. For the first time we were also
making commitments. We were signing these licenses and contracts with organizations
and it's like great "we've got cash" but it's not actually enough cash to run the business
profitably, but we now have to run the business. We can't pull the pin. We've got a 12 month
commitment or a 24 month commitment and they can walk away, but we can't. Suddenly it was
like almost a run for [inaudible 00:10:43] and back because having a little bit of money
was more stressful than having none for a commercial obligation point of view.
Suddenly it's like I can't just give up. I have to deliver on this contract or I have
to just trash my name. That was really hard. Then when we got to the point where suddenly
we were making enough money that we were getting paid and that just became a volume game. That
just became getting enough customers and getting enough coverage and enough spread.
Cameron: So that's just lead generation; putting them through he pipeline, conversion, optimizing
and watching your margins. Obviously cause you're SASS your margins are quite good. Because
your scaling and you get economies of scale. Once a product's built it s really just getting
it out on the market place. User your acquisition to the lowest price and just putting them
through the funnel, maximizing value for the customer.
James: We took a few punts, but we're startups so why wouldn't we? One was we tried to buy
market share. We didn't charge premiums in going in acquiring plots. Our major clients
now are paying 10 times more then they were three years ago quite happily. We're charging
more now than we thought we could but we charging less than we thought we could to acquire clients.
The other thing which we did was we're not on a traditional transaction, find a client,
sell something them, find another client, sell something to them. Our strategy was to
go in on really key influential organizations and then work through them. The way it works
in summary, in government you've got all these government agencies and you've got to pick
a body that does some purchasing on behalf of everyone. So we went and said, we will
gut ourselves on pricing to get the top guy because then what we ended up doing; we'd
do one sale and then there's 150 organizations that are using the software even thought they
haven't bought it and then it became a case of going now we've got 150 people we can go
and talk to and say you're already using it for this 10% of your purchasing what about
your other 90%? So then we really drove an upgrade platform.
That took about 12 months to kick in really and get value. Now it's fantastic. Now we
get quarter forms. We don't have sales processing So we now get organizations contacting us
just saying "can we please upgrade now?" Cameron: It's all streamlined.
James: Yeah, it's all streamlined, but it's also just that they've had this exposure and
it's now just part of how they operate. It's like giving them a mobile phone for international
calls, but they still have to use a [inaudible 00:13:10] line for local dialing and at some
point they go can't we just use this call phone for everything? That was kind of the
strategy we were running with which was high risk.
Cameron: Absolutely. So one to 10 in terms of what you could've charged in the end, was
it a mistake not to charge them early on or was it branding and marketplace positioning
thing back then to acquire the customer and then charge more later on?
James: I don't know. Could we have charged more early on? Maybe we could've. I guess
partly we didn't know the value of it. People come up with you site there and we just launched
a new product on Monday. It's our first new major platform since we've actually had a
viable company and even that you know, you can go and you can do the math and you can
do all of the things that you'd learn to do in an MBA about how to price something and
then it just comes down to what would they pay. At that point in time we were no one
with an idea that was controversial; far from proven and it was risky for them. For us then
to slap a big price tag on it; I wasn't confident that we could slap a big price tag on it and
we needed them. If we didn't get them we were going to shut up shop. I actually started
looking for a job at one point. We were half way through. So it's been around five years.
About two and a half years in I started getting interviews 'cause I was like, "we can't keep
going." Cameron: Wow. So where is it all out now.
What's sort of the next step. You're looking to keep developing new products; new markets,
geographically expanding. James: Where's it at now?
Cameron: Yeah. James: I love it now. We're at this really
fun phase now We've got about 350 enterprise clients. We managed about $450 million worth
of purchasing in the last 12 months. We've just got listed in the Deloitte fast 500.
We won most of the innovation awards in the industry in the last 12 months . So we've
suddenly gone from no one to just a really nice position to be in. We're still fresh
enough that people [crosstalk 00:15:23] Cameron: We'll just scroll down. It's like
half page full of awards. I'm like Okay. So you have a few. There was Smart Startup. There
was Deloitte Fast 50 which is [inaudible 00:15:31]. Fast 500 , yeah.
James: I think we're 107th overall. Cameron: [inaudible 00:15:38] as well? Did
you apply for these or they came to you for what you were doing in the marketplace?
James: You try to go apply for them. It's marketing for sure.
Cameron: I can't remember where it was, [inaudible 00:15:57] was telling me about the founder
of [inaudible 00:15:57] and he said that there's a 30 under 30. Like really well known white
entrepreneurial companies. James: We've got one here.
Cameron: Oh there we go. What are you working on?
Audience: One of two educational business I work on. One is I'm in tutoring high school
diploma [inaudible 00:16:15]. Another one I worked on this guy, New [inaudible 00:16:23];
it's in helping high school students get [inaudible 00:16:25].
Cameron: I don't know if I can finish this story now. We found a lot of the companies
in the 30 under 30; they went bankrupt. I just thought it was interesting that so many
awards James: If you're going to apply for them you've
got to be selective in which ones you go for. So I think there's ones that we went for in
the early days that I wouldn't go for now because by association then brand we want
to be under now. It's being selective in that. You don't want too many awards.
Cameron: It's good positioning. James: Well for us it's a 1%. People look
at us. They look at our idea and maybe not quite so much now but up until six or nine
months ago there's people saying, "I kind of like it but we're Australian, we're pretty
risk adverse. We're pretty scared. We like to be third. So it's a case of saying what
are the other things that can build confidence in someone to say "I'm not making a silly
decision." Yes its seems like a good idea. Yes it's a right price point. Yes, I've spoken
to a customer and they've won these awards and suddenly there's all this external validation;
that this is a reasonable thing to be doing. Cameron: We really got to keep that in mind
as well. What pushes someone to buy a product. We meet a lot of customers throughout. We
have lunch with them and they have a great concept that could really change how the industry's
working but do people want to change it? If they implement this system and It screws up
their job and they get fired or the risk or perception of risk do they really want to
take that risk for something that's going to save them X amount of time?
James: I think that's such a massive issue and that was a really hard one for us. You
look at the companies, the ones that the startup press love to talk about from zero to 50 million
in six months or something crazy. We're not those guys. N But we've also got contracts
that go out 13 years. We've got massive stability of income but we're not through the roof sexy
in terms of this crazy hockey stick. What you're pointing out there this whole idea
of is there something thou think is better versus something they want.
I get approached quite a lot by people and I basically count how many times they use
the word "should". They should do this, and they should do this and they should do this
and then they should do this and it's like do they want to? Because if they don't, you're
pushing it uphill and one of the challenges we had was when we went out, I thought we
were going to do a sales process. We were not in a sales process. We were in an education
process. The twelve months we were lucky that we got our first two clients ad they had enough
vision to see what was possible. It was just going and speaking to people. There was no
sale at the end as an expectation. It was educate them about what was possible and then
I have to go and think about it and question it. Over time they move. If you just want
to make money, go and do something that three other people have already proven works and
just do it slightly better. If you actually want to be disruptive walk in for the long
haul because its slow. People or slow to judge and I think you know that it's a really challenging
space to e in. Cameron: I just find it really fascinating
that it's education because that's one of the scariest things I think a lot of startups
and particularly disruptive startups have to face. Is that people don't go on typing
to Google search that kind of product because it hasn't existed before. The status quo is
to do it via paper or manually or to deal with these esoteric systems that all interlinked
through Microsoft spreadsheet which is not the greatest way to do things and people don't
type that into Google. People do type some things into Google, but not that product.
when you're faced with educating the entire marketplace with hundreds of touch points
is really long drawn out sales cycles. You inflate your costs and reduce your revenues
and customer acquisition. Content strategy is a really good way to deal with that from
my perspective. We use it a lot with Abstar. Just educating the marketplace, building that
relationship where people know you, like you and trust you. I think as an entrepreneur
you need to be really careful. It's a balance between what they need and what they want.
If you try to tell people what they need, they're not going to buy from you. But they'll
by it straight away if it's what they want. That's why if you look at marketing agencies
there's all these companies that do CRS, and that's because your key words, people understand
very quickly number one position get me the most clicks but if you look at some of he
more complex, more difficult to understand marketing tools out there like your [inaudible
00:21:18] content marketing RTB. These are really complex marketing systems that no one
knows about so no one buys them. So the marketing agencies for those things are about one to
10 for the SEO companies. If you're working on a startup, this is just my opinion entirely,
be real careful. You're struck the balance between what people want and what they need
otherwise you're fighting an uphill battle with education. Is that about what you're
saying? James: I think some of it is, but I think
the nature of the people in the room in terms of startups. There's a difference between
beginning a new business, but launching a new business has a whole lot of challenges
around it. Maybe it's my language, but when I hear startup I thinking people that are
trying to mess with the program. I'm hearing people that are trying to do something that
maybe it's more of an idea as opposed to I'm going to set up the fifth carpet shop in carpet
street. It's a very different psyche. I think it is
important to get a sense of where do you fit on the vines and do you even fit? Do people
see that It's an issue? It's been interesting for us. This second platform that we're put
out. We're now lucky. We've got an awesome relationship with our clients. Amazing engagement
from our client's point of view. We just went back to them and said, "what aren't we doing
that you think we could do that would be really good for you guys? We got a bunch of stuff.
We looked at it and went I don't even know what half of that is. I don't want to do that.
I don't understand that. Now we got these five things here. We think we can really nail
that. We went and got them to prioritize it. The one I wanted to win came last. We got
really good feedback because if we hadn't gone and [inaudible 00:22:57] at it I was
totally sunk in on and going and building this particular concept.
What they came back with was a really familiar problem to them that in a way it's been done
historically 90% of the market is not addressing because the solutions are really expensive.
It's basically like how they manage a contract. Cameron: That's really a smart way to do things
I think. With some customers we're working on a product. I can't talk about it. I'm under
NDA. So I can't talk about their product, but I can talk about their process. They would
take the screen and the prototypes, the UX would have been designed for them, how their
application and product would look I the final stages before it was guilt and they would
take it to their target market and they would do a presentation and say how do you feel
about that? Would you be comfortable paying this price.
Then they get the marketplace validation and if they were to go forward from there it would
be on the basis that the feedback was strong ad good and people willing to pay that price
point and implement that system. That's a pre-sales sort of tool. A lot of entrepreneurs
say this is exactly what the marketplace wants. We're going to build it and throw it out there
and nothing happens. Then they pivot, pivot and pivot But if you have the environment
where you can actually go up to the customer and ask them "is this what you want?" and
actually interview them you might find that your perspective of what they want is really
different from what they actually want. You've got to marry those two together.
James: I think the hard thing is getting the questions right. We did a really great user
experience [inaudible 00:24:25] in our first year. There's a book, I don't know if you
guys are into [inaudible 00:24:29]. It's been around for years called "Don't Make Me Think".
It gives you just basically an A to Zed on how to run UI testing. I did it. My old man
is nearly 80. I got a bunch of his friends in and we said we'll buy you some beers and
pizzas and see if a bunch of 80-year-old blokes who don't like computers can use it. I got
friends who are teachers, friends who are builders. Friends who are lawyers. So we did
all that, but it was the wrong question. We ended up with a system that was just beautiful
to use but we didn't ask them if they'd pay for it. We got all these people to do it in
this kind of "if we can get them to use it", then someone sitting in an office an use it
for sure and we were right on that front. But what we didn't do was go and ask the hard
questions of the people in the office who we were going to be selling it to and ask
them what they'd pay for it. Family and friends are the worst. I've got
some very close people in my life who are my target audience in that initial product;
not now. They were like "this is great Jamie, go for it, I believe in you. If you think
it could work, I trust you." Eighteen months later I'm like, why don't you use it? They
were like, "it's a great idea but it's not really for me. It's like I wish you'd said
that to me 18 months ago not So part of it is asking the wright questions
and sometimes not being the one to ask the questions cause I know for me I get so invested
in wanting a certain outcome. Julianne looks at me with this big grin. I know sometimes
I can facilitate a discussion to get somewhere near the answer that I want. You don't want
to do that when you're trying to find out if you're about to jump into a whole. I think
sometimes getting someone else to run that process for you is enormously powerful and
you don't have to pay someone 410,000 as a consultant. Most of you have a friend you
could get to do it. Get someone else to do it who doesn't really care.
Cameron: Get objective information. James: Yeah, someone who's actually gonna
not try and facilitate it or facipulate it. Cameron: It reminds you of the Simpsons and
there's this episode where Mr. Burns and he wanted to sue someone and he had about 20
lawyers in the room , presumably on some huge amount of money wearing these full expensive
suits and he's like "I want to sue this person" Is it a good idea. Yes, yes. And He says are
you all yes men and they say yes, yes. You need to be careful you don't get confirmation
bias within yourself or from other people and you need to get objective information
on the product you're building because you could be just one pivot away from six figures,
seven figures per year. It's pretty incredible because once you hit
that nail on the head it's amazing how quickly things can go if you're in the right position
and you leverage in the right way and I've seen it happen. I just think that's a really
interesting thing. Perspective. Not being emotionally committed to one particular product
or outcome and actually say I need to be objective on how I develop this in the marketplace.
James: Which is really hard. That's part of the craziness of running a startup is you've
got to do all these inconsistent things. On one hand you have to detach emotionally. On
the other hand your greatest asset is your passion and your emotion. It's not this linear
process if you go this is really going to be detached and not really care and make this
successful and make money. No, you also have to believe and be passionate and see stuff
that other people aren't seeing keep going when people are telling you, you walked away
from a really good salary to a really dumb idea. What are you doing? Often there isn't
any rationality to it, to why you're going. If you just doing it because you're passionate
and you don't have some rationality coming than you're just a crazy wantrepreneur that's
going to go bankrupt. For me that's part of the challenge of the balance; how to keep
both of those parts of yourself as a founder but more broadly you as a company balancing
the passion and the belief with . . . We've killed five platforms. Absolute, complete
packaged up, in some cases, award winning [inaudible 00:28:23].
I think I was really blunt from the beginning. If you're not willing to let stuff go, this
isn't going to work. And we don't agree. One of Rob's, he's the main developers for us,
one of his catch lines for us is "if we agree all of the time, one of us doesn't need to
be here" Cameron: Was he pointing at you?
James: Yes, so I think there's that balance. For us it was go out, be passionate, run but
then be willing to look at the facts and go, you know what, it's not working; so kill it
or shelve it or ice it or do something. We jus shut down two weeks ago what was our second
platform as the last of the platforms we'll be putting out on the market. They're hard
decisions to make. Cameron: A lot of pivots. Fives platforms.
That's incredible. James: Five completely independent platforms.
At least the first two, we were tweaking those way more than they needed to be tweaked
Cameron: Bells and whistles. James: Yeah and just I guess it was also a
learning journey for us. It was our first full tech fly as a startup; so it was a learning
journey for us. I guess I knew that so it wasn't beating us up. It's like yeah we tried
stuff, didn't work, chalk it up. Okay. Cameron: I just want to slip away from that
at the moment and I'm rally fascinated by this idea of having a good idea and having
great execution. I've met a lot of people with really good concepts. Few people with
really bad concepts and a lot of people who can executive some stuff well, they might
be really good with finance. They might be really good with people skills. They might
be great with marketing, but they lack that really well rounded personality to drive each
one of those fronts. What can you say in terms of your experience because obviously when
you work at a desk job you sort of focus like a laser beam on one part. You become an expert
of that one thing, like a surgeon. When you're an entrepreneur you're such a generalist.
How does that effected you. Has it been all about vision and idea or has it been about
your execution; how effectively you've done that?
James: I would say we've got a good idea and we've executed really, really well. I'm saying
our idea is good but I think we're genius. We're not brilliant in our concept, but we've
just executed it really well. I guess for me I was really conscious at the beginning.
I wanted to build a company. I didn't want to be self-employed. Day one, so what are
all the functions of a company? And you know there's legal, there's finance, there's HR,
there's all of the different marking, there's sales, there's development. When you're one
person you've got to accept that you're completing all of those functions and when you can engage
other people to come into the business then you can work out bits they're going to take.
You can't just run a business without them. For me the business always had at least an
awareness of all of the functions. Some of them was like, "we're not doing anything in
HR" but there was an awareness of it. Then there's recognizing your gaps.
Firstly I can't develop so that's clearly a gap. I'm awful on the finance front. I get
it. I can structure deals. I can do all of that, but I mean bills on time? I don't even
pay my electricity bill on time. My admin is awful. So one of those things was if we're
actually going to function one of the unsexy things that has to happen is we need to be
really tight on our admin. A good lesson or me in that when we sold our last business
we actually increased the multiple of exit based on our counting principles. We went
to the whole negotiation got into to this value and now let's look at how through the
accounting is and how well it's going to integrate into your financial processes and how little
commercial risks there is to you. That was worth a significant amount of money. That's
deal structure. You go through an work out a price and then you get adding new bits to
it about where there's more value. That taught me a very good lesson.
The second lesson I got on that front was when we got bored we then found out that they
had paid us this much; they actually had a bucket of money that was this much and they
wanted us to go spend the rest of it in acquiring other companies. I was like awesome. Suddenly
we're on the other side of the desk because we're the subject matter expertise. We went
out said they've got an awesome product. They've got a great grand. These guys are going to
be good in the market. We counted several companies that we thought were awesome. Six
of them never made it to a decision because from a due diligence point of view their books
were sloppy. Cameron: We're talking about [inaudible 00:33:05]
acquisitions here. Now is this Magnetized Markets or is this a previous company.
James: No this is when we sold my previous company which was how partly I funded it.
Cameron: That's one thing a lot of people don't think about is exits. We've got a consultant
here, David, that actually talks about structuring deals to exit. I know a bit about M&A myself
and generally you don't want to be someone who wants to sell. Like if I'm buying your
company, you don't want to say "Buy me". You don't want to do that. You want to say "no
thank you" because you never want to buy something someone wants to sell. You want to play a
bit of hard to get even over 12 months because these guys they usually hire business brokers.
A business broker will find a number of targets that they want to acquire either for geographic
position, strategic, for patents or they want to hire the staff because of their talent.
You might be any one or a number of those one things and y can lose a lot of money.
They'll low ball you basically. Over time they'll up their price as they acquire all
the targets. If you are a good company and you know it, you want to keep the company
yourself. If you want to sell, then you'll come across as desperate and your valuation
will go down. I know of a company that sold for 5 mil; they
could have sold for 25 mil. That's a $20 million mistake. It's very easy to do. I just wanted
to add that in. James: I think what you're talking about there
is the nuances of trying to do a deal which is at the end of the journey. I think the
thing which to me was black and white was on day one we're all in the business for that
process. It's not going up to people saying "he, buy me". We're a startup and we had no
revenue and we had standard operating procedures. We had documented accounting principles. We
had a lot of stuff. You go through and you can download them off wherever. Download the
due diligence process and start preparing for it.
David, when he joined us, you look at his job description and he's been with us for
four years. His job description jus says make sure we pass DD. That's it That's his total
JD. It means that when someone comes in to look at us, and we might not even sell, I
love . . Cameron: I almost got caught up in the acronyms
there so due diligence DD and JD job description, yeah.
James: Basically we can make sure that when someone came in and looked at us that can
say this is not dependent on Jamie or on Julian or Rob or David, This is actually a business.
But you have to do that in the beginning. Cameron: That's kind of the e-myth where you
want to standardize all the processes. That's real interesting. From y perspective I didn't
have a huge amount of questions left. I just want to open up the forum to any one to ask
question today. Anyone in particular want to raise your hand and jump up there; anyone
working on things they want a bit about marketing styles, particularly in the SASS arena. Here
we go, Simon. Simon: I have a few questions. With the guy
you got on originally for 10% how did you come to a 10% number. Is that something you
discussed or you just said 10% or did you value the company or popped it out of the
air. James: To be honest I was pretty lose on equity.
I a big believer in equity. I know how much it means to me. I think it's important. It
was also the only leverage I had 'cause I couldn't pay proper salaries. It was interesting.
I guess there were different points where I could have thought, in 12 months time we're
going to be good and we get to 12 months time and we're not. I think we should keep going
and I want you to keep going so I'll give you some more equity so I'm actually going
to be looking at it for a couple of years there. It was interesting at about the three
year mark once we realized actually I think this is going to happen we actually sat down
and ran the numbers and what were the opportunity costs; we did it properly and we were actually
accurate to one or two percent. I was really happy with; but to be honest the 10% piece,
in my head, I sort of thought 20 to 25%. He came up with 10%. Oh now I've got more in
the bucket of IT that I can give to the people or I can give to him over time as I need to
reincentivise him. I hope he doesn't watch this video.
Audience You mentioned that you pivoted five times before you got to the business model
that you are at. What made you get to that model. Was it speaking to customers and [inaudible
00:37:43] validating your questions with them or was it something else.
James: There was some caucus. The first one was called Expert Magnum and it was his idea
of attracting expertise from the market. People loved it, It just didn't make money.
We got approached by one of the guys who said "I think your concept's brilliant, I don't
know anything about consulting". I'd love to do what you're doing in my industry. We
said great and he actually asked if he could buy some [inaudible 00:38:09] and do it himself.
I said that's crazy. Whose going to answer the phones. Who's going to do this. Come and
join us. Tip some money in, which was great because we were struggling. It wasn't thousands
of dollars. He also had some skills that were powerful for us. So we ran with that. That
one was called "I find Supplies". We launched that at this conference which was all about
heavy industry supplies. No, it was called Supply Magnum. Ninety-four percent of people
that walked up to us thought we sold magnets. That was kind of devastating. We never made
a single cent off that. We were phoning people up saying, "there's a sales opportunity for
you, it's worth $60,000. I'll give you the sales [inaudible 00:38:58] for free. You're
the only one we're giving it to." It was so out of sync with how that industry was operating.
You just have to deal with it. It was rough some of the information and the
feedback we got. I think it was partly about steely resolve ad partly about being a bit
thick and just keeping going. There was enough positive feedback from users. It was just
the commercial model. Ultimately we went to someone and we said, what about this? They
came back and said we love, but we want more control. We don't want to use some external
website. If you license it, we're in. Audience So what I hear is that there was
flexibility all through when you were speaking to your customers.
James: The reality is if we rest on our laurels we'll get smashed by one of the big kids.
We are now I a position where we are up against some of the big kids, very big. We just have
to be aster than them. That's the number one thing we've got is being fast and being creative
and not being constrained by how it's always been done. Does that answer your question.
Audience: You did. Audience: Christian, so you said that one
of the main stumbling points was there was a moment when you were doing small deals and
your *** wasn't really on the line yet and people started asking for 12 months and 24
months contracts, right? Here's my question what shifted. A lot of people I imagine can
get to that point, and the content of that might get them to back off. What shifted.
Was a big shift for you or was it a natural flow of three.
James: For us it was partly survival and it was partly about, this will work. They want
it. They really like it. They want to pay for it. There was an element of survival.
No one else was offering us money. Other people had offered us money to do things that we
didn't agree with, but this was consistent The line to the strategy and the concept and
the philosophy and the technology. It wasn't until we really signed them that suddenly
it was like, Christ, we need another five customers 'cause this one customer that's
just an obligation right now, that's actually no freedom. This is not financial freedom.
This is a fully paid obligation. Audience Did that take a personal shift thought,
for you? To pitch through? James: It was definitely a personal shift.
I had lunch today with a bunch of the other co-founders and was asking them what's been
he hardest bit and a lot of them, for them, was not having money was really hard and this
and that; clearly that's a share experience. I think the thing that's unique if you structure
it in a way where you're an original founder and you bring other people on is carrying
the responsibility that they've put their trust in you. For me there was my own financial
scenario, but then there was also feeling responsible for the fact that these other
people had risked their scenarios. It got to the point where I knew where their kid's
school fees were due. We would balance our payments to try a and make sure. . . like
I don't want to know that. That was too stressful. So I'm very happy now that I have no idea
when they school fees are due. Did that answer your question.
Audience You mentioned that you're working with [inaudible 00:42:36] people who are risk adverse, especially
government. You said that it was less than 1%. Was there anything else to counter that?
That's a bit of a challenge in Australia. James: There's a few things going on. Actually
having empathy with the scenario they're in. They might be risk adverse. They're not trying
to be a pain in the ***. I personally think that most people want to do the right thing.
For us it was sure I want you to ump on board, but that's risky for you, so what can I do
to help you manage your risk. I'm a massive fan of advocating to them. Call it a pilot,
even if it's not a pilot because then if it doesn't work for you, you don't lose face.
I'll say that to them. Let's make this work for you, both personally, for your group,
for your division, for your agency, whatever it is. To me that's not some fancy sales thing.
I mean it. I don't want people having been burned [inaudible 00:43:34].
To me it's like having empathy for the scenario they're coming from. Our first client, a guy
called Brian, brilliant, quite harsh when he's not happy, but that's what you want in
a customer, but he was also willing to give me some rope. His introduction to our second
and third customers. Those three are three of our biggest customers now. He introduced
me and said "this is James, I think I've told you what we're doing with him, we're pretty
happy, we're going to keep going, the only thing I'd say is unlike my IT guys he wills
ay no to you and he says it surprisingly often". I thought was the most crap introduction.
What I didn't appreciate until afterwards was he basically said if he says yes, he can
do it. It was actually in a backhanded kind of way
a fantastic endorsement. That's part of it. The other part of it is I guess the brand.
We were laughing today about some of those anecdotal stories of when I think bank. I
remember being at an ATM and emptying the account and standing there and handing out
$20 notes until it was gone. However long it lasts. Let's hope we find some more soon.
Another one that came up though is speaking at a conference and it was the first conference
I'd spoken at. The conference, very conservative. All government. I stepped away from the lectern
and they thought I was this crazy dynamic speaker. Got up those really, really successful
presentation; pivotal for us as a company. When out for diner with 30 or 40 of them.
We're walking back at the end of this first day of the conference and we get to this intersection.
There's like 20 people still there and they're all turning. I say, oh folks I'll see you
tomorrow, I'm heading that way. They were like "aren't you staying at the conference
the center?" I'm like no, no, no I'm just staying on the other side of the park. And
someone said you're not at the YHA are you? I didn't say anything and someone else goes,
on no, no, no and they name some other hotel which is super bling and they went he's probably
staying there and I said good night folks. Part of it was also that bit about I've been
deceptive in our position. I've never made out that we're anything other than we are,
but I've never necessarily highlighted it. I spent a lot of time catching trains and
buses and waking up with really pissed 17-year-old, 20-year-old English blokes with too much underarm
spray and back packers, getting up seven in the morning putting on a suit and tie feeling
like a complete loser and going off and meeting pretty senior people and just talking to them
about what we're there to talk about. It's not relevant where I slept.
If they had know that, I reckon I would have run. I don't know, it's interesting.
Cameron: Welcome to startups really. YHA and business suites.
James: Brutal. It's interesting. I guess there are agencies that try to position themselves
being about innovation. One of them ran a tender early on for us and said it was the
only one of any of the same two that are good for us. There was the first one. That's awesome.
We can nail that. Criteria number one is three years of profitable books.
Audience Is this a government agency. James: Yeah. I finally said look, we don't
have three years of profitable books. It was frustrating 'cause the conversation I had
with them. I said to them, let me get this right. Do you want to know if we're going
to be around in three years time Or do you want to know if we have three years of books?
You can have someone who's profitable and go out of business and you can have someone
who's not profitable with five million cash in the bank and a burn rate o 50,000 a month.
They're clearly going to be here and you're saying that doesn't count. They're answer
was yes, it doesn't count. Sometimes you just hit brick walls and you just got to go on
to something else. Audience At what stage did you decide to bring
on new staff and how did you go about that? James: Great question. I found it really hard
to find people who I guess were in a position to be able to be part of a startup and who
also had the skills and had the motivation and I liked them. I won't pretend for a second
that was easy./ Sometimes it's been a little bit serendipitous. Certainly finding Rob our
developer was completely ridiculous. Another guy, Mark, he was the brother of a friend
of mine and he'd been off in a retrenchment and he was pretty over what he was doing.
He had a background as a marketing project manager. I thought, awesome, he knows about
marketing, I don't know anything about marketing. We met up, He's like great. He joined us.
Turns out he doesn't know anything about marketing either but he's incredibly patient and he's
just great with people so from a customer service point of view he's been brilliant.
To be frank those first couple years it was really challenging because we didn't really
have that many customers to service. He was awesome and he was nailing it. But at first
it was tough. He just wanted to be there and he had skills I could see would be applicable
and I kind of couldn't let him go because we would have a gap. Julianne I already knew.
It's kind of been pretty lose and its' been a challenge. We only started actually doing
recruitment this year, like hiring staff. That's an interesting process. It's an interesting
process finding people who want the reality of being part of a small company, not just
the. . . I guess in the last few years it's become quite cool to be in a startup but sometimes
the reality is not as bling as it sounds. . . you know you actually are going to have
to tidy up the meeting room when you finish and you're going to do your own dishes and
you're going do a whole lot of other stuff you haven't thought of. As a matter of fact
you're going to have to work out to do it and then just do it.
So I've only got one person in your organization with a JD. That's a special kind of group
of people that are happy to operate that way. Audience I had some experience with my previous
business and just think back to reflect on basically a year in or so, do you regret at
all of not getting extra funding or venture capital to relay some of that claim.
James: Not for a second. Part of that is because I know it would mean pegging an investor that
would have let us make some of the pivots that we made. We made some pretty brutal kills
on some technologies that people were saying this is great and we're saying "it's not going
to work, kill it, move on." I don't know if we would have had the freedom
to be as dramatic in some of our decision making as we were. I guess it's like hindsight
is 20/20. Now we've come out the other end of it. We own 100% of the business as the
original founders. We've not cracked our first acquisition offer. There's the founders. Now
there's a collective. There's the founders. It's great now. I tried to raise capital and
I was awful at it. Audience Where from?
James: I guess we were approached by one of the VC firms 'cause they picked up on the
idea we were running the got me to go in and pitch one of the investor target groups and
I think I just baffled them. I just got in there and had 20 minutes and I just told them
all my good ideas. They just sat there and went what. Like are those things exciting
that I still don't know where you're actually going with this. I was a classic subject matter
expertise with three too many coffees and a [inaudible 00:52:17] enthusiasm.
Once I worked at the formula of pitching which is pretty straight forward when you think
about it. It's usually just dumb it down to the point where you feel slightly insulted
and then dumb it down about four more times. I'm not the kind of guy that's going to put
out a spreadsheet and read the numbers and market decline. I'm just not. If I don't 100%
believe that I'm going to deliver that number and I would ask my mum to mortgage my house
on it, I'm not going to pitch it to any investors. I've seen investors who've told me straight
up, I love everything about what's going on, the people, the team you have is incredible,
this that is great but you just don't seem hungry enough and angry enough about the numbers
you're going to hit. It's like well, but we've always exceeded our targets, quite dramatically
in some cases. The problem is if you go and escalate these massive forecast revenue you
also escalate these massive forecast costs and its' really easy to spend money and you
find yourself having spent money on a belief of an accelerated revenue stream that doesn't
materialize. We are very committed to trial and cost structures. Earn the money then spend
it. We don't run a credit line. Audience You mentioned early on that you're
an lean and you didn't pay for marketing. Do you pay for marketing now?
James: We've tried a few different things. I know there's probably a lot of marketing
people here. The only people I've asked to [inaudible 00:54:00] the business have been
people who we originally brought on in a marketing role. One of my frustrations was a lot of
marketing people that we worked with I think were just working with the wrong people. We're
really into this like really conceptual stuff and it wasn't immediate enough. You can't
go in and do it like [inaudible 00:54:15]; and let's do a brand strategy that's going
to put you in good holding in five years time. I need some money next month and I need you
to take some accountability for that, don't just tell me that their brand. That was one
of the challenges that we had. Having said that, we've got some great marketing advice
and it's made an enormous difference to us. We do a lot of it ourselves. We'll go and
get a 5Ds and get advice from people but then probably do the legwork ourselves.
We're paying someone now to do that sort of work. That's relative new. We're doing our
first true marketing champagne at the moment which is novel. It's interesting because I
actually don't know if it's going to work in our market. I think there's a big difference
between selling and marketing. The old idiom: You don't sell what you can market and don't
market what you can sell. It takes a little while to work out. I think what's going to
work is. Templating; you must do SEO. SEO is completely meaningless to my business because
no one Goggles what we do. SEO is brilliant for a lot of businesses. It's just about working
out what works I think. Cameron: We might just take one more question
'cause I know people are probably getting sore feel in the back. You've got a hand up
there. If you just want to stand up and ask your question.
Audience [inaudible 00:55:51] James: We use eLance and 99designs fairly
extensively. I would say we off task some sort of transactional staff that our risk
profile is really low. We haven't taken our development offshore. I'm not against it,
we just haven't. I think part of that is maybe deficiency on my part to do really good specs.
I like sitting down wit my developers and mapping it out. Having said that, if I was
working with developers who had an offshore function maybe it would work, but we haven't
gone that path ourselves. I'd love to use it more if it offered us some benefits, but
we probably not geared up for it in terms of the people we've got. It's incredible what
you can do. I know there're a lot of people doing it very successfully. It's been around
long enough, people will learn the challenges and how to address them.
Cameron: Cool. I'll leave it at that guys. Let's give a round of applause for James.
I just want to thank ABSTA for hosting the place. They basically resources this party
and give us this space. There's some drinks just behind Katrina where the camera is and
also you're welcome to go upstairs. There's some more snacks there if there's not enough
space around here. Thanks guys.