Six evolutions – what have we learned from failure?

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How BlueChilli has evolved over six years to where it is today.

BlueChilli works with entrepreneurs by building the technology to launch their business and invests cash to help them along the way, for a fixed equity position of 15%.  But it wasn’t always this way.

The startup ecosystem preaches the virtues of failing fast and failing often – as a way to cushion the blow of what is invariably a common occurrence. But in reality, it’s about acknowledging that in order to be disruptive, you’re going to break stuff. And this is OK when you learn from your failures, a process (shared to me by Phil Morle quoting Ross Gerring), of “Flearning” – Failing coupled with Learning.

So what have we ‘flearned’ at BlueChilli?

We’ve been doing this now for six years and launched over 100 startups, raised over $160M, assisted three exits including one IPO, which at the date of writing is now worth over $500M. But along the way we got things wrong.

Let me take you through our evolutions and what we learnt along the way.

Evolution One – Seb is the tech co-founder

Our original thesis in 2010 was that we could act as technical co-founders. I actually developed the code of the first group of startups, based on my experience through two of my previous startups (1 successful albeit small exit, 1 partial-exit) and ten years as a practicing weapons engineer.

These had mixed results; of the original six – only one is still around today. My time, it would seem, is best not spent coding!

Sitting alone in our new empty office the day after it opened.

Evolution Two – No cost, all Equity

Our second evolution was that we could earn equity through development and I raised capital to build a tech team. Our model was zero cash, all equity deals where we didn’t charge anything for development.

We mainly provided development services and established the “periodic table of development” as a methodology to codify what needed to get done. The problem here is that our tech builds were massive as we were not adept at building lean – and to be brutally honest we were overly excited to build big projects. This was totally the wrong approach on many fronts, but worse was the amount of equity we thought we required to offset this risk.

Similar to what other programs were doing at the time we were asking for 30% equity (another great Australian program at the time was taking 50%) – however this meant that after a few rounds of raising funds, our founders did not have enough for themselves.

Despite this, our founders were awesome and were able to raise funds quickly, however we weren’t good at keeping our development budgets in check, more often building waaaay too much by not focusing on customer needs compounded by our founders having an “unlimited budget”.  We needed to address both of these issues.

The old periodic table of development

Evolution Three – Cost recovery + lower equity

The hypothesis for the third evolution was that we could offer better service to our founders by helping them with the business side (not just the tech), and on the tech we could reduce our risk by charging startups cost-price for development and fund everything through venture capital investment. To help, we established our Entrepreneur in Residence team and launched our 156 methodology. We also launched the BlueChilli Venture Fund which was designed to invest alongside our successful startups, reducing the risk for startups to raise capital.

This worked well, but our 156 process was expensive for us to run (it had 5 full time staff).

And while it was a little lower, our equity was negotiated on a case-by-case and although we did some deals at 3% and 5%, it averaged around 18% and we required the startup to provide the initial funding.

Not withstanding our hours were on spec (i.e. at cost) – our development budgets were still between $50-80k.

BlueChilli team x-mas 2012

Evolution Four – Low cash investment + cost recovery + lower equity + smaller builds

Our next hypothesis was to introduce corporate partners in to the mix, where we shared our Entrepreneur in Residence knowledge and 156 process with them, which indirectly helped us address those costs. We focused on providing value to our corporates and made early introductions to our startups, helping them with traction. Our realisation here was that startups who start with corporate partners (product-market fit) are more likely to be successful and this would provide us with clarity on what tech was required to be built – lowering the development scope.

We also introduced product management into the mix, and had a strong focus on leaner developments aided largely by the significant investment in our platforms and frameworks.  Our average development cost was now down to about $30k-40k, half what it used to be.

Equity was still on a case-by-case basis, and averaged at 17%.

Importantly our fund had now started investing in later stage companies, with $200k typically being invested at seed rounds.

Evolution Five – Large cash investment + cost price development for low equity

Our next hypothesis was that we could add value to our corporate partners and startups in cohort-focused programs with good marketing. This would help our partners get much greater value and help us with a deeper engagement with their innovation teams. It also provided our startups with good insights in to solving the problems with our partners, and therefore we reduce the risk of product-market fit. Our corporate partners loved us and we kept getting repeat work.

We upped the amount of cash provided to each startup to $75-$100k, but this came with an unforeseen issue.

On one side, our Entrepreneur in Residence team were providing advice and guidance at no charge, but on the other side, our engineering development team were still billing at an hourly rate. It was crazy, here we were being both mentor and service provider under the same roof. However, the 20 companies we invested in this model are some of our most successful, with lower failure rates and higher capital raising rates, so something was working. Importantly, the quality of our products increased and we invested heavily in our product management team, experimenting with a retainer model along the way. But we needed a way to address this culture imbalance.

Evolution Six – Today. Cash investment + Free Development for low equity

Our current hypothesis is that our engineering is much more valuable when there’s no “time-watching” on each hour as we now provide it for free. As one of our product mangers recounted “I was able to pull together 3 people and hold a strategy session with the founder without worrying about getting their budget approval – we accomplished more in that 3 hours than we otherwise would have in weeks”.

Rather than providing $100k cash to each startup, we instead provide a lower amount and do all the product development for free within a time-boxed 12 week window.

The current version is $100k as a mixture of cash and team in exchange for 15% (with CityConnect this was $25k investment + our team). This is split between our VC partners (5%) and the BlueChilli team (10%).

The hypothesis here is that the alignment between the Entrepreneur in Residence and product teams will enable all of us to be focused on the success of the startup and there’s no question on what’s important. And so far, so good.

To give you an idea of how serious we take this, we have completely revamped our internal team structure to be aligned with our founders, focusing on the four barriers for startup success (based on the four main reasons why startups fail). Our Entrepreneur in Residence and Product teams now work under the same umbrella and with the same measure for success (“did the startup launch?”).

Excited BlueChilli team photo
BC team has evolved too, but we keep our sense of humor

Our failures & our learnings

So to recap, our failures and therefore learnings were:

  • Seb tried to build every startup, which we (well, I) learned was not scaleable!
  • We provided the tech for free which we learned the equity position we needed to offset this was too high (30%)
  • As we didn’t have discipline in developing lean products, by introducing a cost recovery rate to each hour and dropping our equity position, we learned this introduced a misalignment of relationships.
  • We tried to get better alignment by implementing an Entrepreneur in Residence team but we learned this was very expensive.
  • We introduced cohort programs, increased the up front cash and stopped “selling” to startups. But we learned our founders were being pulled in different directions, so
  • We now provide cash and offer 12 weeks product development complimentary, have stabilised our equity position at 15% and now have everyone in the company aligned with the goals of the founder.

The biggest reason why startups come to BlueChilli is because of our award-winning development team and internationally recognised startup training program.

But we didn’t get here overnight; it has been through a process of ‘flearning’ that we now have an amazing program backed by phenomenal people.

The best thing however has been how we get to work with such amazing entrepreneurs – we truly are working hard to remove all barriers for entrepreneurs to kick ass.

BlueChilli team 2017