Alex Pitt (pictured above, far right) is the co-founder and director of growth at Mustard Seed, a VC fund that seeks to enable the creation of world-class businesses that generate positive and sustainable outcomes.
Mustard Seed invests in high-growth impact startups that want to change the world and, as they grow, so does their impact. A few of the fund’s companies include what3words, Tech Nation Upscale 5.0 alumnus Olio, and Mush.
Alex has held a string of roles, including the senior vice present of sales at Mubdulladah in Abu Dhabi. He also worked as project lead with the Boston Consulting Group (BCG) in New York, Chicago and Dubai, in addition to spending time as an investment banking analyst with Goldman Sachs in London. Oh, and he has a degree from LSE and Stanford – so, all in all, he knows a thing or two about raising capital.
Alex recently took the time to answer questions fielded from members of our Founders’ Network community, answering queries on everything from raising a first funding round to securing follow-on funding, and why the word ‘exit’ is banned at Mustard Seed’s meetings. Read on for his responses, below.
1. What does an investor look for when doing follow-on investing?
We look for quite similar things to when we’re making an initial investment. We typically lead Seed rounds – we have 30 portfolio companies now that we’ve invested in at Seed stage. For us, that’s businesses that are one-to-two years old, but no more. We’ll invest between £200,000-£500,000, and our decision as to whether we follow on from that into their Series A and Series B rounds is driven by the same kind of analysis.
For example, has the business performed to its expectation? And do we think the founders are the right leadership for the business and the size of the market opportunity? We then make a decision on follow-on rounds; the first option is to lead that round; the second is pro-rata (maintaining our ownership stake), and the third is that we won’t follow our money.
If we don’t follow on – which we’ve done one or two times, but no more than that – it has a significant impact on the round. That’s because, if we’ve been the lead investor at seed stage and we choose not to follow on, then it sends a very mixed negative signal to the market and potential co-investors, so we take that decision really seriously.
2. How do you measure social impact?
We define a social purpose, which is basically two-to-three sentences that get embedded in the articles of the company, which is part of our due diligence; so how founders think about that is really important. Having it legal enshrined in the article is also key for us.
We will have two or three impact metrics for every business that we invest in, and those impact metrics will be specific to the company in the sector. For example, we’ve got six companies now tackling food waste in different ways. We would have two or three metrics around co2 emission reductions and dollars of food waste saved, which will then get reported by companies to us at least every quarter – ideally once per month.
Metrics will be different for our healthcare companies – around improved patient outcomes or lives saved – and they’ll be different for our education businesses. We can aggregate the metrics out by sector, so we can sum up the co2 emission reduction across the six food waste companies (for example), but we can’t compare across sectors.
In terms of satisfying that social purpose requirement, coming back to those three sentences, as long as the company’s ultimate vision and the purpose at its core is about providing that service to a wider audience and people lower down the income stack, then we might look to support it.
We invested in what3words because of the power of what they were doing to address the 4 billion people in the world who don’t have a physical address. In many ways, they don’t exist because of that and can’t receive aid, mail, vote and other things. But, monetizing 4 billion people on low incomes in small African countries is really difficult, and that’s very much part of their longer-term plan.
But in the short term, the team at what3words are more focused on commercial partnerships with car companies, logistics companies and postal services in developed markets. Although that’s not why we invested, we totally understand that it is a necessary part of getting them to that ultimate objective.
3. Is it more important for a business to focus on dominating an industry and getting great traction with a clear monetisation model, or focusing on shorter-term revenue and profit?
I wouldn’t say either one or the other to be honest. I think that getting a path to short-term revenue is really important; that been said, we are very patient investors, and we know that for many kinds of businesses it will be at least 10 years before we see any kind of monetisation opportunity. Often companies are created to take over a new market in very new areas where there aren’t really incumbents so, in a sense, they are creating the market. Measuring the types and quantities of food been thrown away in commercial kitchens is a very new thing to be doing, for example. And so, I would say that both of those things should really go together – and one shouldn’t be at the expense of the other.
4. What kind of things are you looking for when startups send you a pitch deck?
Sometimes slide decks and emails that come to us are way too long and have way too much detail. I’d much rather they’re simple – 10 to 15 slides max and a sent with a really crisp email. I’d also rather a founder be out hustling and trying to build a business than spending all their time writing slides and long emails as everyone’s busy. I wouldn’t feel like you need to write terms of work. You need a good financial model, but three or four tabs in Excel can be just fine for that.
It also depends on the characteristics of the business and what they’re looking to do. We’re not necessarily looking for high growth from day one. We have three companies that are in the very early stages in clinical trials where getting approval from a regulatory perspective might take at least another five years. Whereas we might have a B2C company which is focused on building social networks.
Mush is a great example of that – it’s focused on building communities of mums, and they’ve been intensely focused on the product and user experience, and we’ve seen really strong growth in their user metrics and now they’re at the point three or four years in where they’re really focused in switching revenue streams. Not focusing on the revenue side until now has been the right thing to do.
5. What’s your most interesting investment today and why did you choose it?
We get variants of that question a lot. It’s really hard as we have 30 companies out of 4,500 business plans a year in our inbox. We have to say no to almost every business plan that comes through, which is painful for us and we’ve missed some amazing opportunities. We like to think that the 10-15 investments that we’re making every year are all special in their different ways. Much like if you have more than one child you won’t have a favourite, and we don’t have a favourite investment either.
6. What’s the best way to go about contacting you (or VCs in general)? Can you go in cold?
You can definitely go in cold – we get back to everyone. It sometimes takes longer than we would like because of the volume that we’re getting and having a small team. A personal (or loose) referral certainly helps. An example of a strong referral could be an existing investor in your company who gets in touch with us. That could be someone who you have worked with who is putting in £50,000 – £100,000, has strong validation and believes in you as a founder.
Alternatively, one of the existing founders that we’ve invested in might get to know a business and recommend its founder because they’re working in the same co-working space and know each other really well. For example, we know a founder from a food waste business who knows that space very well and has recommended quite a few other businesses from it that he thinks are doing well.
The more thoughtful an approach is when contacting VCs, the better. If you don’t have a strong referral, make the approach clear that your company has spent time thinking about the kinds of investments that we make, what your core societal purpose is and how that would be measured. Also, make sure all of the elements of their business plan are well covered with no gaps. There are typically six or seven things we’d typically be looking for in one. Within reason, being persistent is another; if you reach out and a VC hasn’t replied within three weeks, then following up again is probably warranted.
7. What are the characteristics that you look for in a business plan?
It depends on who you speak to in terms of the order these things should be in; for me, one is the big social-environmental challenge that’s being solved. What’s the size of the opportunity, and what’s the business model around it? It’s coming back to that social purpose that I mentioned before that will then eventually be in the articles of the company; include a leading statement and slide around that.
Another is the team that’s building it – seeing a team take shape is really important. Founders should think about who they would bring on as part of their initial team once the funding has been raised – for example, a CTO, commercial director or financial director, in addition to two or three advisors. Board members can be helpful, but sometimes a formal board isn’t necessary for at least the first year or two; Mustard Seed didn’t have one until about a year and a half ago, so we had three years without a formal board.
Another characteristic is to have real clarity around how much capital is being raised and what for. You’d be surprised at how many businesses come to us without any detail around that. If the raise target is £500,000, then why is it that? Is it a figure based on a business projection – and what are the funds going to be used for? Don’t break it down into minute detail, but include four or five key line items that will be useful over the first 12-18 months. That’s really important.
When I meet founders I’m often asked what we can do that would be helpful beyond funding. If we progress with an entrepreneur, something that will always be part of our due diligence is if we can make a useful introduction to a potential customer of a business. That’s hopefully helpful to founders, and it’s also helpful for us as we get due diligence feedback from that conversation.
8. What do you like to hear when startups are asked what they will spend the investment money on?
Typically it’s things like their people, customer acquisition, marketing and tech. The proportion of money that is allocated towards office space, tech, legal, accounting, people, and all of the other elements will vary depending on their business, business model and sector. But just having had the thought around that is really important.
Obviously the valuation of raises is another consideration. We’re quite reasonable around that – we’ve invested in companies valued anywhere from £0.5 million to £4 million that are basically at the same stage, and a lot of that will be driven by factors such as how competitive the round is. It’s really important for us that founders are appropriately incentivized as we wouldn’t want them to be diluted initially below, let’s say, 20% of the business each. If they were, we’d be really worried about their long term commitment to making it a success.
9. What return on investment do you look for in your fund across the portfolio? And what return on investment do you look for from individual companies?
Typically we look for really strong commercial terms. So for us, that’s 20 per cent plus IRR (internal rate of return) on the fund. We look for any one company to be able to return the entire fund. We wouldn’t be making an investment in any company where thought we wouldn’t make at least ten times our initial investment.
The timeframe over which we would look to monetize will vary a lot depending on what the company is doing. Something that’s going through a long clinical trial might take 10+ years, whereas sometimes something that has a much shorter path to cash flow might have an exit opportunity within 3-5 years.
I used the word ‘exit’ just then, but we actually ban it in our team meetings. We think the word is much too short term and transactional – we want to be backing founders that aren’t thinking about getting out in the first 3-5 years, even if they don’t necessarily want to be doing it for the rest of their careers. There has to be a labour of love in that sense. I think that there should be some thinking give around who the likely buyer would be – I wouldn’t ignore it completely – but I wouldn’t want to see a real focus on that for the first 3-5 years of the business.
10. Based on your experience, what tends to be the characteristics of companies you invest in?
I think probably the only common denominator of success is the quality and calibre of founders, to be honest – their integrity, their persistence and their willingness to listen to perspectives from others; and their ability to build a team of complementary skillset sand profiles around them. That for me is the most important thing. If I look at our worst one or two investments out of the portfolio, it really comes down to having invested too quickly in our early year or two in business plans that we were excited about but hadn’t spent enough time with the founders. They weren’t the right founders in those cases.
11. What are the main metrics (or KPI) differences required between seed-stage and Series A stage?
For seed, there’ll be a lot of metrics, but there’ll be a lot of zeros in all those lines. Thinking about what the key metrics for the success of the business are going to be is really important, and the more proactive the founder is around that the better.
Ask what are the key line items of the profit/loss statements, and what are two or three of the impact metrics that are going to be measured reported. As we’re investing in the first year or two of the company’s life, a lot of those are going to be zero. And when it comes to a follow-on round decision, then obviously we will have expected meaningful progress and delivery, if not exceeding the budget on all of those elements. That will obviously include revenue and at some point a path to break even and profitability that will include delivery on the social environment impact metrics.
We’ve always used this phrase ‘lockstep’ – looking for a commercial and social return that fundamentally reinforces each other so that we would expect a strong correlation between progress on the social and financial metrics.
12. Does it make a difference when seeking investment if you have been on an accelerator?
I think that’s hard to generalise. There’s been a proliferation of accelerators in five years since we started Mustard Seed, and I think there are some great and some not so great ones. We were Investor in Residence at Wayra’s Telefonica accelerator for three years, which was a great relationship but we’re in less close touch with them now.
Do your due diligence because typically for an accelerator you’re going to be giving away a share of your business. If there’s an equity-free one then great – but that’s quite unusual. I think a couple of the universities in London do that, where you’re given space and access to the network without giving away any of your business, but most will take 5-10%. If that’s what’s being given away, there needs to be some serious value-add coming back from that. And I think it’s really important to do full DD on the people running the accelerator and on other companies that are both in that accelerator at the time and have gone through it.
Any accelerator ideally should be able to show at least two or three success stories of businesses that have gone through historically and what they’ve achieved since then, which could (but doesn’t necessarily need to) include an exit.
13. What advice do you have for founders who are just getting started on their funding round?
Develop some sort of written content – I think things become much more real when you write them down. It doesn’t have to be on slides, it can be in an email or a Word document initially, and that then becomes three or four slides and eventually 15 slides.
Having a core group of three to five advisors and mentors, like a company has a board. That can include one or two prospective co-founders or team members and it might include two or three prospective board members. Each of those informal advisory board members brings a different perspective and skillset, so make sure you get their input on the business plan. Ideally, it’s helpful if at least one of those individuals has some experience of fundraising.
These need to be really deep, intimate, and old relationships of people that you know and who ideally are putting some of their own money into a business. For us, if a founder or founders are in their 20s and relatively young and out of university, I wouldn’t expect them to have built up a professional network that allows them to raise capital. But if somebody’s in their mid-30s to 60s it would be a red flag if both individuals hadn’t been able to generate any meaningful capital from previous colleagues, bosses and family.
And I’d be really careful. It’s always hard to generalise – there are some really excellent people, but there are also a lot of fairly unimpressive ones that are helping companies raise money and are sort of brokers in that sense. I can’t think of any case where we’ve invested in a company that has a broker or advisor working with them. That’s usually because we’re investing through personal references.
If you’re going to work with someone who’s helping you raise money, it could very well be worth it but make sure that you’re doing full due diligence on that individual or firm and their track record, and be really careful about giving away too much of your company without knowing exactly what you’re getting.
14. What are your thoughts on solo founders, with advisors, who are looking to build a team?
In my own case, I can’t imagine doing Mustard Seed without my cofounder Henry. I wouldn’t have been able to do it because I just don’t have the skillset and knowledge that he has in many different areas. And hopefully he would say the same thing about me. I think it’s about having complementary skillsets and profiles, but it might very well be that you don’t need to have a cofounder. If you are a sole founder, the importance of really good advisory board members is even more acute and it’s important to get those relationships right.
15. Referring to the family and friends round, if a founder is from a disadvantaged background and has raised £5k (for example), should they instead choose an alternative route such as crowdfunding?
That’s a really important question and I’m glad it’s been raised. No, I think the other way – we completely understand that in some cases, given people’s personal circumstances, it won’t be possible to have that friends and family capital. Crowdfunding definitely is something to explore; we’ve had very successful crowdfunding raises with five or six of our companies where we will put in money and then the crowd invests a certain amount alongside. In those cases, a company come to us having already having generated the interest and that would be really great.
There are lots of pools of grant funding available as well. It’s quite hard to navigate, I think; Innovate UK, for example, has a big pool of government funding that quite a few of our companies have leveraged. More generally, there’s grants and prizes. There are quite deep pockets of money in big corporates and foundations around specific themes. That takes quite a bit of desk research, but if your business is focused on mental health or a particular area of that, for example, then it’s definitely worth three or four hours of desk research trying to find a mental health charity or corporate where you can apply for a prize. There are other ways to find funds beyond personal networks.
16. Is it possible to get investment without going down the SEIS route (because a company was registered more than 10 years ago)?
I think it’s definitely possible. SEIS and EIS are really attractive – we sort of built our business initially on the back of it. It’s less relevant for us now, and our new fund that we’re raising is not an EIS/SEIS one – but we’ve done six EIS/SEIS-managed accounts, sort of mini funds – and the tax-saving was a significant driver of our ability to raise those. But companies can be successful without it. I’ve heard that a company can reincorporate to regain eligibility up to seven years after losing it, but that was an off-hand comment made to me and I’ve never looked at how possible that actually is.
17. What are you excited about in the next decade, in terms of investment and where the industry is headed?
We’re starting to feel like we’re at a point now where we can invest the time to actually think about where we want to be investing. We get inundated with business plans, which is an amazing problem to have, but we’re too reactive to business plans that come to us through referrals. We’d love to spend time with our recent team who joined us to do the kind of work that Mark Zomes of Winnow did for two years before starting his company.
Mark was writing for two years about food waste. He dissected the trillion dollars of food waste globally and decided that when he started the business he wanted to be in the commercial kitchen as that’s where he thought he could make the biggest return on his investment in his company.
Mental health is similarly a massive problem and has starting to be talked about properly in recent months. We’d love to do something meaningful in terms of investment, but where do we even start understanding the issue and business models that can be successful? That takes a lot of time, but we’d love to go through that exercise in the next year or so.
18. The majority of angels and CPCs only invest in B2B. What do you think that’s the case and what would be your advice to a B2C startup tackling a large B2C market?
We invest in B2B and B2C, so definitely come to us. We see valuable businesses that can be created in both areas, so I don’t have any advice other than trying to find investors that invest in those models. Business models evolve and become hybrid over time and Mush, which was mentioned earlier, is a great example of that. They’re primarily B2C and have a massive network of young mums, which is their core B2C target base, and they’re going to start with premium subscriptions. At the same time they’re looking at partnerships with corporates and sponsors, so there’s a B2B element to it as well.
19. What advice do you have for companies who don’t have the funds to offer huge salaries when hiring tech talent?
The answer is going to be very specific to the kinds of roles that you’re looking to hire. Hiring for a technology department will be driven by very different factors than hiring for a finance director. In my experience, hiring through a personal network is the best way.
When we made one or two hiring mistakes in our first couple of years at Mustard Seed, it was for similar reasons as to when we made investment mistakes. With our investment mistakes, we were overexcited by business plans and didn’t spend enough time with founders. With our hiring mistakes, we got over-impressed by CVs and didn’t get to know people well enough.
Look into your network and get really strong referrals. Some people might be scared of working with friends, but for me, it’s a great thing. If you can find a way to make it work with a friend then you probably have a much greater chance of being successful because you have that base level of trust and understanding.
20. How important is positive unit economics at an early stage?
It’s fairly important and depends again on the business model. It’s hard for me to generalise without knowing too much about the specific business.
Finding the path to positive unit economics and revenue as soon as possible is really quite important in almost all businesses with the possible exception of something that’s going through clinical trials where you just can’t generate any revenue until you’ve got clearance from a regulatory perspective. Most other businesses should be able to generate some cash flow in the short term. It’s about finding a way to make that business generate cash flow.
If I think about our own experience at Mustard Seed, when we started in February 2015, we asked: “Okay, how can we start making some money?”. We thought the only way is to charge our friends that were co-investing with us informally, charging them an annual fee to do that. And they all said yes. We couldn’t have gone straight to a fund in year one.
Only two or three years later when we went through the whole FDA process did we think about creating proper kind of GP (General Partners) or LP (Limited Partners) funds with management fees and performance fees, getting customers to pay for pilots. All these kinds of things are really important for early-stage businesses.
, East of England
, North East
, North West
, Northern Ireland
, South East
, South West