By Michael Niddam, Co-Founder and Managing Director of Kamet Ventures
As startups and investors face uncertain times, venture builders offer a model for innovation that leaves high-risk hunches at the door.
The Coronavirus pandemic has disrupted the startup ecosystem, knocking valuations, delaying fundraising, and creating an atmosphere of uncertainty for founders and investors alike.
Amidst the chaos, society has looked to scientific reasoning and innovation as a source of calm and reassurance. The startup ecosystem could benefit from this same stance, placing stability above risk as a way of emerging from the pandemic and beginning to tackle some of the challenges left in its wake.
Innovation and entrepreneurship are often portrayed as an art rather than science, with maverick visionaries placing big bets and landing even bigger cheques.
You needn’t look much further than WeWork as a cautionary tale of how badly this can turn out when the underlying fundamentals aren’t there. However, a more measured application of the innovative spirit has helped some founders navigate the last three months of financial and logistical challenges.
Sensible pivots have helped them chart a course through the crisis as they have capitalised on opportunities to offer solutions to unprecedented problems. For example, Careology, a cancer support app, recently launched a Covid-19 symptom tracker while Hexigone, a chemical manufacturing startup focused on creating anti-corrosion coatings for buildings swapped to manufacturing sanitiser full-time.
And while pivots and enterprising methods of making lemonade out of lemons might be lauded in today’s environment, investors are also recognising it may not be the time for high-risk activity as they double down on their existing portfolio and take extra caution before making any new investments.
This can be seen across the industry with established companies like Monzo taking a 40 per cent hit in its latest fundraise and GoCardless engaging in extreme cost-cutting and essentially realigning its whole strategy in response to Covid-19.
Because the pandemic turned out to be beyond the realms of even the most pessimistic worst-case-scenario planning, it has meant that many struggling startups with disrupted supply chains and cash flow problems face an existential threat. As a result, we are likely to see a surplus of accomplished entrepreneurs on the market, with the ambition to do something new but potentially inhibited by the difficult climate for starting a business.
That’s why venture builders – with their scientific approach to identifying problems and creating, growing, and de-risking viable businesses around the solutions to those problems – could be just the medicine the industry needs to recover from Covid-19.
How does a venture builder work?
Venture builders have been around in various guises for more than 20 years, with a presence in all corners of the world from South America to Australia. They might look a bit like the more familiar incubator or accelerator, but are in fact quite a different animal.
The crucial distinction is that where an entrepreneur brings a business to an incubator or accelerator to receive the support they need to take it to the next level, venture builders themselves bring the business ideas to the table and then find suitable entrepreneurs to lead and grow them.
The process typically involves three stages: conception, design, and build. The first stage tends to be more scientific than creative, incorporating extensive consultations and troubleshooting together with experts and academics who have deep knowledge of the industry and, often.
It involves analysing which opportunity spaces can be taken advantage of, as well as the positioning, efficacy, and scalability of potential solutions. It requires months of exploring possible ideas and “killing” startups without proper market fit before they are even born, thereby de-risking the launch process. They then invite entrepreneurs to come on board with their business-growing skillset to turn the best ideas into viable fast-growth companies, until they end up with a portfolio of companies that begin to have a similar relationship with the builder as a startup would have with an investor.
Most venture builders will have a narrow focus on areas where they feel they can make the greatest impact. PolyMath Ventures in Colombia, for example, is building transformative SaaS companies across Latin America, while Caprikon in Hong Kong focuses exclusively on education technology.
Our own focus at Kamet Ventures is the healthcare and insurance sectors. In order to demonstrate the efficacy of their idea, startups in these industries require a lot of resources, as well as knowledge of the complex environment and its regulations.
De-risking entrepreneurship and investment
For most entrepreneurs, the past few months have been marked by isolation from team members, a lack of resources for innovation, and a generally challenging environment both in terms of running and succeeding as a business. In uncertain times, joining a venture builder massively de-risks the whole startup process for an entrepreneur.
That’s why venture builders, which are renowned for vast networks of strategists, thinkers and problem solvers, are likely to come to the fore as we emerge from the pandemic.
Those entrepreneurs who are selected, get a ready-made business idea validated by experts in the field, instant seed money from the venture builder’s fund, and significant resources to help grow the business without the distracting time and resource commitment of going through an accelerator programme.
Moreover, the businesses venture builders tackle often aim to solve the problems of tomorrow and are, as such, ahead of the curve. One example from our own portfolio is Anorak, a digital platform that has democratised access to life insurance, income protection, and critical illness cover and significantly simplified a market that has traditionally had high barriers to entry and strict regulation. In the past quarter they have seen a defined increase in interest as the reality of Covid-19 became clearer – a bit morbid, but possibly not surprising.
Venture builders will also be pushed to centre stage because of the appeal of the companies they create to investors. As the market recovers, investors are likely to favour businesses that can demonstrate stability and efficacy alongside bravery and ambition. Such a low failure rate as a result of a forensic validation process and a wider network of expert support make them lower-risk investments with potentially very high returns.
Venture builders and Covid-19
Venture builders have some of the best minds in their sectors trying to tease out the highest-impact solutions to the most urgent challenges. In fact, unbeknown to many, the offspring of a venture builder is actually at the bleeding edge of the fight against Covid-19. Moderna, the publicly-listed life sciences company which came out of US builder Flagship Pioneering, has just finalised its phase three trials for a Covid-19 vaccine.
Adjusting to life after Coronavirus, with new problems to solve in every corner of business and society, will provide fertile ground for venture building teams to innovate. I have no doubt that they will rise to this new challenge and, in the years ahead, we will get to know many more success stories born from this model.