Podcast Series with Leigh O’Neill: Building better small businesses
In this fourth episode, Leigh O’Neill chats to Scale Investors CEO Laura McKenzie- Scale was set up to solve the problem that female entrepreneurs are those who really struggle to receive funding from the venture community. Together, they chat earnestly about entrepreneurship and the venture capital community in Australia.
Leigh O’Neill: Hello, I’m Leigh O’Neill, I’m executive general manager for business direct and small business for NAB. Welcome to my podcast series, Building Better Small Businesses.
Entrepreneurship and innovation have become buzz words in society today, and particularly recently in Australia, with the belief that a healthy start-up sector is critical to fostering a new wave of growth for our Australian economy. In fact, our recent research at NAB suggests that around one in three Australians would like to own their own business, with young Australians the most aspirational. In fact, half of young Australians would like to be entrepreneurs. We’ve got a huge community of budding entrepreneurs eager to get their ideas off the ground. Or have we? And part of their struggle is receiving funding from the venture community. Is that really what’s holding us back in growing our entrepreneurial spirit?
I’m delighted to be joined today by somebody that I personally admire and that I’ve had the fortune of knowing for a number of years now. Laura McKenzie is the CEO and director of Scale Investors. Scale was set up to solve the problem that female entrepreneurs are those who really struggle to receive funding from the venture community. Their purpose is to connect entrepreneurs with investors who not only invest in these businesses but help with the due diligence process, sit on the boards of these companies and surround entrepreneurs with mentors and investor networks with the belief that it’s this additional support that helps these businesses succeed.
I’m going to ask Laura in a minute to talk us more through the journey of Scale but, first of all, I wonder if Laura – and hello, welcome.
Laura McKenzie: Thank you, Leigh. It’s a pleasure to be here.
Leigh O’Neill: You might be able to help the scene for the entrepreneurial community in Australia. Now, I read recently that last year more than $1 billion was raised by funds in Australia to service this market. That feels a little bit to me like an overnight success, and if I reflect on the conversations we’ve been having over the last five years or more now, it feels like the industry has taken quite a long time to reach that point.
Laura McKenzie: It may well seem that way. In fact, there are a number of entrepreneurs who are in the press now who really have been working on their business for five, six, seven, often more than 10 years, and all of a sudden they’re start-ups just because they’re scaling all of a sudden.
There’s actually been a venture capital industry in Australia for about the last 20 years, and it’s been quite cyclical. The last large amount of funding came into the space in 2007 which, in hindsight, was a very challenging time because in 2008 and 2009 it was very hard to grow businesses. To recruit staff was expensive. To bring customers on board took longer, and so a lot of those businesses underperformed and consequently the funds underperformed. And so the superannuation industry stayed out of the market really for almost a decade, and it’s only been in the last 12 months that they’ve come back, and some very large funds. Brandon has raised $200 million. There’s four superannuation funds invested in that business. You have Blackbird at $200 million, AirTree ventures at $250 million, and both of them have very significant inputs from the superannuation industry. Other funds such as Square Peg and OneVentures, r&mpersand, a few others round that up to more than $1 billion in the last year, and those funds will be deployed over the next 10 years. So, you know, we’re really looking at least $100 million going to work each year, but there’s an increasing number of private investors who are also looking at this space. So I think the real dollar value invested in this sector is probably closer to double that.
Leigh O’Neill: Inspiring for any entrepreneurs out there listening to this podcast, and I hope inspiring for investors in more individuals and funds now see merit in supporting entrepreneurship. 2013 is the year that you founded Scale. I wonder if you could talk me through that journey of how you decided actually one of the answers in supporting this sector was starting a fund yourself.
Laura McKenzie: So my background was in venture capital, and I was one of the few women who was a professional investor in this space. And I realised that a fraction of the deal opportunities that we saw to invest in had women on the founding team and, in fact, I had never been involved in investing in a business that had a female founder, and I thought this was alarming and surprising, and the more research that I did the more I discovered that this was a common problem. 96% of the investment community globally is male. And so it’s, therefore, no surprise that less than 9% of those that have been successful in raising capital have been women.
So, we did quite a lot of research, myself and my co-founders, Susan Oliver, Carol Schwartz and Annette Kimmitt, and really discovered that actually there’s a strong economic argument for focusing on investing in female entrepreneurs, for both men and women investing in female entrepreneurs, and we have about 110 members, 23 of whom are male, and they’re absolutely welcomed as part of the community because it’s about having a diverse perspective around the table.
There’s an increasing body of research that says actually women make better investors, and so as an entrepreneur you probably want to have a woman on your capped table. So we hope to generate great returns while also making social change, and we wouldn’t be in this unless we believed that there was a strong economic argument for doing it.
Leigh O’Neill: So I’d love to come back, in a minute, as to why it is you think that less women are funded and choose to become entrepreneurs but, first of all, I understand that, yes, the female investor slant is a certainly a differentiate for scale, but also it’s your search for disruptive technologies. Why did you think that was a point of differentiation in this market?
Laura McKenzie: Well, look, I think any business that is looking to scale today is leveraging technology, and I think all investors are technology investors. I think often women, when they’re pitching or pitch themselves as a fashion business or a financial services business, that, by the way happens to be using technology, whereas often men when they pitch will say, “I’m a technology business and I’m focused on financial services.”
But I think, you know, we’re all intelligent enough to look through that, and we’ve had nearly 800 female entrepreneurs we’ve had conversations with, we have over 100 investors and there’s a lot going on in this space.
Leigh O’Neill: Do you think it’s harder to find female entrepreneurs to have conversations with than it is to find male entrepreneurs to have conversations with?
Laura McKenzie: Look, certainly in terms of the numbers of businesses that are started each year – in particular I know the statistics for Victoria. I know there’s more businesses registered each year by women than there are men. Often women tend to start life style businesses. We’re really looking to invest in high-growth, scalable businesses, and I think the more women we have as role models who have been successful in doing that. For example, like, Collis Ta’eed at Envato. There are some wonderful women who are angels within the Scale network. Lindsey Cattermole had a very successful technology business that she sold, and a number of our investors are entrepreneurs. Lisa Galbraith would be another who recently sold Cleardocs, and I think we do tend to invest in people like us. And – or people we once were or maybe people we wish we were, and I think that very much is along gender lines. I don’t know about you, Leigh, but certainly more of my professional network are women, and so I think that helps in making those connections.
Leigh O’Neill: Well, that’s a conversation we have very often at NAB, being a strong proponent of diversity, but individuals naturally form their own networks, so it’s interesting how we counter that. And that would be relevant for you and the investors you look to attract. I wonder if you could talk to us about the support that your investors provide to the businesses as well as the upfront money.
Laura McKenzie: Yeah. Um, look, I think some of the biggest challenges for anyone in establishing a business is in attracting other people to your vision, and that really talks to recruitment of the best talent, and so we’ve provided quite significant assistance in helping to identify new recruits for the companies we’ve invested in. And the second is in securing customers. And in particular securing marquee or brand – brand name customers, which will attract other customers to your business, and so we’ll often go along with the entrepreneur to a meeting. We’ll find out who the decision maker is and often within our network we know that person quite well. So really trying to help with, you know, some additional endorsement of the entrepreneur.
Leigh O’Neill: So, that network of credible resource sounds like one of the challenges that start-up entrepreneurs might have. What other challenges do you commonly see with the entrepreneurs that you’re in conversation with?
Laura McKenzie: We’ve just had a week of investor forums where the entrepreneurs pitch to us, and we do that every couple of months, and we have about 70% of our investors attend those in person. So it’s a great opportunity to hear from the entrepreneur. But one of the things we’re really testing is how well is the entrepreneur listening to us, as potential investors in the questions that we’re asking. And for us that’s a really great proxy for how well they’re listening to their customers. I think one of the biggest challenges an entrepreneur faces is knowing when to pivot your model.
Leigh O’Neill: I think that’s not just entrepreneurs. I’m going to say all businesses have that challenge, and listening to customers is a really clear direction of how you pivot that model, so that sounds like a really valuable piece of advice to any entrepreneurs out there. Truly listen to your potential investors. Would that be fair?
Laura McKenzie: Yeah, and I think you’re right, it goes for any type of business.
Leigh O’Neill: Yeah.
Laura McKenzie: Including a bank.
Leigh O’Neill: Yeah. So we talk about the growth of this sector and the budding entrepreneurship in Australia. In your opinion, and you have a great oversight of this as an industry and, you know, you would look globally, how entrepreneurial do you think Australia is?
Laura McKenzie: We have a wonderful reputation for great research. We’re a terrible reputation for commercialisation, but I also think, as a country we could do a lot better at marketing ourselves. You know, in the last year I’ve been in the US, in the UK and in Israel, and some of the entrepreneurship that’s happening in Australia and ideas that are being developed are real kind of world-changers, and I think we need to be much more confident in our – in marketing Australia as a destination and in marketing our ideas. And I think one of the best things that Australian large companies can do to support our entrepreneurial community is to buy from them. You know, you can start off with a pilot. If it works, you can scale. Often we do see, you know, the procurement policies of large companies require a significant balance sheet and liability insurance, which start-ups aren’t going to have, to have proven your idea offshore, you know, and I think we can really be early adopters of technology that’s been created here.
Leigh O’Neill: Well, that leads me very perfectly to my next question which is, from your viewpoint, how do you think the corporates and the big businesses in Australia can draw insight from the entrepreneurial community to become more innovative?
Laura McKenzie: I think there are some really interesting concepts around corporate innovation and working with labs, either inside of your organisation or externally, to, you know, work in an agile way, do fast design sprints and really test and either succeed or fail, tweak it and succeed or fail. And it used to really move much more quickly and in smaller collaborative cross-functional teams, break out of the silos and really that’s, I think, how innovation is going to happen in larger organisations.
Leigh O’Neill: So we have a function in NAB called NAB Labs, and what’s been so rewarding for me over the last, you know, two years since I’ve been working more closely with them is watching how the mindset is actually the key to driving innovation in other areas, and sometimes you don’t need a separate environment to drive that innovation. So I think that’s a great observation to hear from you. I wanted to go back on this global position for Australia because I think there’s a rhetoric that many of our entrepreneurs need to go abroad to get the funding they need to move from small, to scale up. Do you think that’s a fair reflection?
Laura McKenzie: Well, I think, as we were reflecting on earlier, there’s a billion-dollar plus of funds that’s been committed to invest in the sector over the next 10 years will help change that. There has certainly been talk in the past of where you’re looking to raise $15 million plus, there not being enough capital within the Australian sector and you having to seek funding from offshore, not necessarily going offshore to do that yourself, and I think what has started to happen is, you know, these offshore funds are interested in what’s happening in Australia so they’ll continue to look, but I think they’ll start to co-invest with local funds. So that will be great in terms of keeping the companies here, bringing more jobs here, but also keeping some of the rewards of where those companies scale here.
Leigh O’Neill: If you’re entrepreneur right now and you want to make yourself attractive or find these funds or become attractive to the potential injection of global interest, what’s your advice?
Laura McKenzie: So AVCAL, the Australian Venture Capital Association, has a list of all of the funds, look at when those funds were raised. They tend to be eight to 10 years in life and they tend to invest in new companies in the first half of their life. So have a think about whether there’s fresh capital to invest. But talk to your friends. Often the first round of capital comes from people that know you, that are prepared to invest ‘cause they love you and they want you to succeed. And look to work with – a lot of the universities have programs for you to test ideas. Maybe go along to a hackathon where on a Friday night you get to pitch your idea and try and have a team form around you, and on Sunday you’re pitching on what you’ve done over the last 48 hours, and it’s a great way to quickly test what you have in mind. And if you do well in that, then that’s a great sign to move on to the next step. If perhaps you struggle to attract people to your team when you’re pitching on the Friday night, that might be an indication that you may be need to think about a different way to communicate what you’re doing or perhaps change the idea slightly.
Leigh O’Neill: In a number of these conversations it’s been reflected back to me that investors invest in the individuals and the people over the idea. Do you think that’s fair?
Laura McKenzie: Absolutely. It is a people business, and often we will track what someone’s done in one business and look to invest in them in their next business. We recognise that the ideas might pivot and change and the people will learn from that.
Leigh O’Neill: So, Scale. I wonder if you could talk a bit more about how you’ve found companies to invest in and what the impact you think has been in those, and what’s your objectives over this coming year.
Laura McKenzie: Yes. So we’ve invested in a diverse group of companies, everything from visual search technology to drug discovery to water to battery packaging technology and influence the marketing, and those businesses have come to us through our networks, so often referred from within our Angel group itself. Through incubators and accelerators that may or not be focused on women, there’s a few organisations that are focused on women, like Springboard and Heads Over Heels, and that’s a great source of deal flow for us.
Leigh O’Neill: So deal flow is a word that’s used often in the entrepreneurial and innovation community. I wonder if you could give some context for an observer on what deal flow really means and, for you, how critical that is to the success of Scale.
Laura McKenzie: So we’ve spoken to about 800 female entrepreneurs. I would classify it as deal flows if I’ve had a conversation with them, we’ve had a look at their materials. About a third of those have formally applied to us, and we’ve invested in 10. We’ve invested just over $5 million in those 10 businesses, and all of them are looking to grow and will no doubt will be seeking more capital going forward, and there’s certainly capacity within our group to support them as they grow. And what we think is a great opportunity for people who don’t perhaps have the time to be Angel investors is to invest alongside Scale Angels in a fund. So we have a financial service licence and have set up what is called an early stage venture capital limited partnership. So that if you’re interested in investing in a diverse pool of female-led businesses, you would invest in the fund over a 10-year period, and that fund is a $20 million, $25 million fund. And we’ve raised a lot, but not all of it yet.
Leigh O’Neill: So I’d love to talk a bit more about that. In terms of raising funds, what are the characteristics and the behaviour traits you see in really successful investors?
Laura McKenzie: Someone has written a book about Warren Buffet which says “invest like a girl”. I think in this space you need to be patient. You also need to be collaborative, because you want to have the best heads around the table. And I think those are traits that, speaking very generally now, as a gender, women have in spades.
Leigh O’Neill: So investing like a girl is a motto that we’d stick to, is it?
Laura McKenzie: Absolutely.
Leigh O’Neill: So the entrepreneurs, let’s take them. What do you think is the great characteristics you’ve seen in your entrepreneurs
Laura McKenzie: They need to be ambitious. They also need to be incredibly resilient. When we talk about resilience we talk about emotional resilience because it’s a tough journey, intellectual resilience to learn where you need to pivot your model and when, and physical resilience because you need to look after yourself, and, Leigh, you and I have talked about the importance of wellbeing in entrepreneurs before. So those are really what we look for, and the last attribute would be trust. You know, you’re often seeking to raise capital from individuals or organisations who really don’t know you very well. They might have looked at your business for a couple of weeks or a couple of months, and that investment is likely to be held for three, four, five years. So there’s a huge amount of trust that we place in you to execute on your vision, and so I think resilience, trust and listening skills.
Leigh O’Neill: I think that’s just so interesting that you’ve cited those characteristics, Laura, because having known you for the last five years, those are characteristics that I have seen you display as you’ve grown Scale, and I’m sure you’ve had some tough times during that process. I wonder if you could talk to me a bit more through what’s kept you motivated throughout this journey.
Laura McKenzie: I think, Leigh, I just really believe in the economics of it, and it’s really important for productivity, not only within Australia but globally that we are leveraging 100% of the assets that a country has rather than just 50%. So it’s really important to bring women into the game, and I personally feel that as a first mover in this space, there’s an arbitrage opportunity for Scale to take a leading position in investing in female entrepreneurs.
Leigh O’Neill: What’s your perspective on this ongoing entrepreneurship in Australia?
Laura McKenzie: Well, I think the future of work really is the gig economy. I think within five years, 50% of us are going to have portfolio careers, and so 50% of us will be entrepreneurs of kind. Some of those entrepreneurs will have ideas that are investable, others won’t. But I think, you know, we have to become a country of entrepreneurs in order to survive in the future.
Leigh O’Neill: So we’ll have many budding entrepreneurs that listen to our conversation today, Laura. What would be your advice to them on how they go about approaching investors?
Laura McKenzie: So, do some research. Every investor is different. Within Scale we’ve got five archetypes of investors – non-exec directors, corporate intrapreneurs, partners at professional service firms, family officers and entrepreneurs, who have been successful and sold their businesses. So, do some research on the people that you’re looking to pitch to. Maybe try and find some people who have grown and sold businesses in your sector and work out from there. Try and find someone who can give you a soft introduction. And, look, we’re aware that the industry is – does appear very closed to the outside, so one of the things we do is we run open office hours once a month in Melbourne and once a month in Sydney. So if you want to approach Scale you’re very welcome to come along to those sessions, and that’s very much a forum to ask questions, understand more about the process in a non-judgemental way so that when you do apply to us you’re able to put together an application that gives you the best possible outcome.
Leigh O’Neill: So I would encourage any budding entrepreneurs out there to look up Scale. I have always been 100% impressed with the way that you approach the entrepreneurial business you are growing with a great entrepreneurial spirit, Laura. So thank you very much for joining me today. And wishing you the very best of luck yourself and the very best for Scale’s future.
Laura McKenzie: Thanks, Leigh.
Tune into our podcast from Leigh O’Neill, NAB’s Executive General Manager, Micro and Small Business. In each episode, she’ll be talking to innovators, owners and entrepreneurs about their experience, advice and insights into how to build a truly great small business.
In this third episode, Leigh O’Neill welcomes inner-Melbourne small business owner of niche food and wine bookstore ‘Books for Cooks’ Tim White. They talk candidly about buying and running a small business, including how to market a business online and how to differentiate your value proposition so that customers visit your business (and keep coming back).
Leigh O’Neill: Hello. I’m NAB’s Executive General Manager for Business Direct and Small Business, Leigh O’Neill. Welcome to my podcast series – Building Better Small Businesses. Today I’m fortunate to be joined in the NAB studio by Tim White, owner of Books for Cooks. Books for Cooks is Australia’s independent award-winning specialist culinary bookstore right in the heart of Melbourne. And it’s run by cooks and lovers of good food and good books, husband and wife team, Tim and Amanda. Tim is a former lawyer, passionate about wine, food and books. And has worked in restaurants, pubs and the food industry, as well as being an avid bibliophile and has a long interest in history, sociology, science and literature of food. His particular passions apparently – we may delve into these later – are European peasant food and wine. That is quite an introduction, Tim. Thank you very much for joining me here today.
Tim White: It’s a pleasure. Thank you for having me.
Leigh O’Neill: Books for Cooks sounds like quite a niche business, however I was amazed to read that you have over 40,000 book titles and books about cooking and food from as early as the late 18th century which seems like an incredible number of books written by something that is so common to us all as food. I wonder if you can tell me how the idea of starting a small business focused on Books for Cooks has evolved?
Tim White: Well, it truly is the world’s worst business plan. We had always joked between ourselves and with our friends that we loved books, we loved food, we loved cook books and we were collectors of cook books long before we thought about a small business, along those lines. So the idea was always that at some point I would be like Mr Bennett from Pride and Prejudice and have a lovely little leather bound chair in a library with books and I could have a muffin of the day next to the book of the day out the front and my wife would have a bakery come cafe next door that would be quite gentile and do the reverse. And so have a dish inspired by a particular book or a recipe from a book that she loved. And that was as far as the joke ever got. But one day, whilst in another life, we often would grab the Saturday paper and read it cover to cover. And there it was. There was a one-line ad, somewhere between the shipping notices and the liquidation of a container of furniture I think it was – cook book shop for sale with a phone number. And an hour later or so we had a very sore credit card and we owned a bookstore. It was, as I said, perhaps the world’s worst business plan in the sense we had funded it entirely on impulse debt. But we had bought something that was entirely aligned with our passions and interest. And it was incredible how quickly it consumed us and became what we do every day and we love every day.
Leigh O’Neill: So you see a line see a line that says, “Cook book shop for sale.” And an hour later you bought it. What have you bought?
Tim White: Well, that’s an interesting question. I must say the lawyers had instantly came on as soon as we realised we were really serious about it. We did not buy a business. We bought a business name and we bought some stock and some fittings. But we did not buy a legal entity per se beyond the business name. We didn’t buy a customer database. And, to be fair, this was a very old-fashioned bookstore that was really a hobby on the part of the owners who had other businesses. It was just tucked away in the corner of what they were all realising, they were realising all of their businesses because they were retiring with the looming advent of GST. So, again, we were probably quite lucky that as a negotiation it was one of the better times to buy something because people were looking to make that change. But what we bought was about 5,000 books, and about 80m of shelving. And the books ranged from, they looked like they had been run over to brand new that were imported from overseas. They were incredibly eclectic. There were no best sellers. There was no Jamie Oliver or Nigella stacked up. It was very much a labour of love along some very specific lines. And as a consequence we instantly sort of shelved it, re-sorted it, recleaned it and invested a lot of time in expanding that collection. From our point of view it was a really good start, a really good seed for what we wanted to do.
Leigh O’Neill: So it feels, and when I’m hearing you tell that story, you bought some stock and you bought some goodwill. I wonder if you could talk to me about how you actually then go around setting up a business around that? What were the challenges of establishing this small business?
Tim White: Well, there are a couple of different ones. The first thing – again, putting my lawyer hat on – you have to think about what structure you really want to be. If you’re going to be a serious bookstore you need to be trading as a retail business, moving a significant number of units daily. So you need to find yourself proper recording systems, proper computer systems. You need to make sure that your intellectual property that you’ve bought is properly protected. And then you need to make sure that you can establish trading accounts with the relevant publishers and parties. It’s no secret that the book trade is a little bit Byzantine and gentile. It’s not exclusive but it’s not something that is as easy as walking down the street or walking into a wholesaler and just grabbing some stock. It’s a far more symbiotic sort of relationship between publishers and wholesalers and book sellers. We all represent different faces of the same sort of coin. So from our point of view it was a fairly simple question. We decided to incorporate. And we would put the business name into the company’s name which would make things a lot simpler for us. Having Books For Cooks Propriety Limited, as well as Books for Cooks, a registered business name, gave us a lot more protection in relation to domain names, in relation to trademarks. Not that you can trademark Books for Cooks. It is the use of common words. It’s not something that’s easily trademarked. But you can Copyright it and you can certainly protect your brand around that. And it’s very alliterative. Although we often get called Books for Crooks which makes me want to open a murder mystery section. But we’re all on the same page. After we incorporated it was very much a question of starting to tick off all of the things we thought that made a good business. And I’ll admit freely that the words of the great Lobachevsky came straight to mind and that is plagiarise, plagiarise, let no-one else’s work evade your eyes because there are great businesses out there and you should look to them as benchmarks. So we instantly went and talked to as many of the book selling colleagues we have now and said that we’re thinking about opening a bookstore and they were really generous and told us lots of things. So whatever business you’re thinking about, I would say that’s a great way to go out and find out about it. And then look at the things that you really like. We have a couple of favourite bookstores and I actually blame Readings in Melbourne as the real root because of being a bibliophile. Because when I moved to university they were my local bookstore and 5,000 books later I had to buy a bookstore because it was getting out of hand. What they did at the time and what they do now are still benchmarks for me. And I look at everything they do and say, “That’s a good idea.” I don’t steal it but I would look at it and say how would that work if I was to adopt something similar in my business or why are they doing that? Is there something I can do that’s similar? Because I think there are great people out there, great businesses that are always clear and thinking about what they’re doing. So we did a lot of that. And we constantly do that. We love walking into bookstores and we’ll buy a book or two, chat to the owner and then we’ll look around and go, “Oh that’s nice. Maybe we could do that.”
Leigh O’Neill: So I’m sure learning from other businesses, and you’ve given me this great rosy picture of independent booksellers being really welcoming and willing to share ideas, and at the other side of your industry you have got huge publishing houses that you’re also dealing with. How do you come to run your small business and learn how to play into the big industry players?
Tim White: I’m going to refer to Jane Austen again. There’s a lovely scene where Bennett says, “I’m the daughter of a gentleman and you’re the son of a gentleman, therefore we are equal.” That’s just as she is about to launch into her tirade against the great art she’s about to inherit. But at that point it seems to me that’s true of any small business. I’m the CEO of my business. I also happen to have to be the fire warden, I’m also the person who sweeps up and cleans the bathrooms occasionally, but I’m the CEO of my business and I have to assume all of those positions and obligations and responsibilities and challenges. And in that sense I look at myself and I look at my colleagues or my equals in large businesses and there’s no difference. They may have more experience, they may have more reach, but we still have the same focus and the same intentions. I might even have my hands on the levers more quickly than they do. I think any small business that thinks that they’re just a micro or a small business and they don’t have a voice that shouldn’t be heard or they shouldn’t stand up and have a conversation with a big business or a big business person is making a mistake.
Leigh O’Neill: When we talk about hands on the levers, the key lever being customers, would that be fair?
Tim White: We trade very heavily on our reputation and we rely entirely on our customers for that. We don’t have a marketing budget. I do, it’s zero. Every dollar I spend on marketing I have to find from somewhere else. So we are very aware of the importance of our customers and customer service.
Leigh O’Neill: I’ve had the great fortune of going in your store and it’s one of the most warm and welcoming and you want to spend hours in there on the shelves.
Tim White: You’re welcome to.
Leigh O’Neill: Tell me how you balance that because it genuinely feels that sense of warmth with selling books, being able to pay the rent, running a business?
Tim White: We made a very deliberate decision when we started that we wanted our bookstore to resemble in many ways as possible our home. Hospitality, which is a part of our business, I suppose – we cater to hospitality. We provide people with the tools to be hospitable, to have a meal at a shared table based on a recipe or to give a gift or. So we’ve wanted to reflect how we would have people into our house. So when we present our books, the books that we choose are the books that we personally love and that we learn from our customers. We present them in a way, the way we want to have them in our own home. So we go to a lot of trouble to clean and cover using archival materials, providing a range, grouping them, and then even the aesthetic is very much the idea that you’d come and sit in our lounge room and read a book. So we didn’t ever want a commercial retail space. We’ve always studiously avoided that. The idea is hopefully we’re a venue where you can literally sit in a chair and you’re welcome to read all day.
Leigh O’Neill: And creating that atmosphere relies on people coming into the store and visiting them and then increasingly people are making purchases and doing retail online. How have you managed that in your world?
Tim White: Oh… We’ve always seen ourselves as a destination. So we are definitely marketing ourselves as a tourist destination because of the uniqueness of what we do. To put it in context – we are a true antiquarium book seller, as well as a new book seller, as well as a specialist book seller. But we’re extremely selective. We will not stock anything that is outside our area of expertise. So I’ve never sold Harry Potter, I will never sell Dan Brown, I will never sell a book on Malcolm Turnbull. Everything must be about food and wine. So it’s a very nice, neat brand proposition to make. And then when we can say because we go from 1780 to 2016, 2017, in terms of the range, and we go from home cooks and kid cooks to professionals, to molecular scientists, to people who want to become commercial producers of cheese or wine, we’re able to again focus that very narrowly. So we definitely see ourselves as a unique destination. And we did look closely at a few of the businesses that we thought were doing that very well. In Melbourne, Richmond Hills Cafe and Larder over the last 20 years has been a destination on Bridge Road because of their fromagerie, the Stephanie Alexander connection etc… And we looked at some of the ways that they leveraged that with Tourism Victoria, Destination Melbourne and a whole range of things like that. So on any given day we probably will see 10% to 15% of our customers will be tourists but they’ll be very bespoke destination tourists who heard there is a food and wine experience that they want to tap in to and they might buy a souvenir or have something sent home. Sometimes they’ll go away and then give us a call from overseas or interstate and we might post them something. So we certainly do that. But we have tried very hard to make it that people have to come to see what we have. Where on the other hand, we’re very aware that our big competition is effectively the big eRetail, the Amazons, the Book Depositories, etc. The difference that we can offer is one of expertise. And we see ourselves as a bespoke tailor almost. We actually try and have a conversation about the right book for you, how it might fit, what sort of things do you otherwise like. And there isn’t an alogarithm that can replace that at the moment. But we do have to have an eCommerce presence. Clicks and Bricks is definitely the future of retail. So we’ve struggled with that over the last 10 or 15 years.
Leigh O’Neill: Where do you go to get advice for that? Walking into an independent book seller is fairly self-explanatory as you’re walking down the high street where that is. How do you go and find advice if you want to expand online?
Tim White: That’s a really tricky question. I had the internet described to me once as the Wild West. You really, there is no law. There’s a little bit coming but things like Google Tax, etc, are hopefully levelling up the playing field, but you can build a website with people that you engage online that you don’t really know where they live or work and you never actually meet them. You can buy products that seem to do exactly what you want, only to find that in a year’s time that direction of technology has completely disappeared. So how do we find stuff? I do a lot of research. The internet is our best friend. I have to say as a business that was sort of started in 2000, if it wasn’t for the internet, we wouldn’t be where we are today. We certainly wouldn’t be able to offer the range of books or the range of information. So, yes, a lot of research. And then you filter through it and try and land on who to use. And then you’ve got to work out can you afford it? An eCommerce website can be as cheap as $1500 or as expensive as at least a small car, depending on what you want to get out of it. And bookstores are in a difficult spot because it’s really nice if you’re a small business doing a service, then you have a limited range of services that you offer and it’s easy to build a website using some of those tools that are out there, many of them free. When you’re offering a broader range of products, or you’re a designer or a clothing store, there’s still a good range of options like Shopify, etc, that do tie in quite well with POS Systems, etc. They probably max out at around 1500 to 2,000 units in terms of the commercial application. The problem with us is that we have about 45,000 singles and SKU’s keep growing so every day I buy more out of print and second hand books that I haven’t seen before and publishers publish more. So we started with five. We’re up to 46. And there will be more. I know that every day there will be more. So finding a product that we can afford, that we can scale, that ensures that we still have enough stock control, etc, it’s not as easy as you’d think.
Leigh O’Neill: What would be your number one tip for someone thinking about starting a small business with a deep-seated passion?\
Tim White: There’s a lot of things I would instantly say. They’re all competing and jostling in my mind, screaming to leap out to say, “Don’t do this, do that, don’t do this.” I think the most important thing to do is to allow yourself to actually have a real crack at what you want to do. And that means if you’re thinking about running a marathon, you eat properly, you prepare for it, you train. Running a small business is like a marathon. You don’t get out for a short sprint. You might have a little sprint at the start when you open it up, but once you’re in to it, it’s a long road. And so I think you need to actually make sure, in your own mind, that a) it’s something you really want to commit to and commit to for a while, and b) that you’re going to give yourself the tools that you need to get there. And sometimes those tools will be to self-educate, to do things yourself, and sometimes it’s a question of saying, “That’s not my skillset, that’s not what I do. I’m going to get someone else to look after that for me.” I think being critical of how you’re going to survive, how you personally are going to make that transition to a successful small business is perhaps the biggest tip and I think I would follow that up by saying, talk to anyone and everyone you can to inform those decisions and to give you more and more light about how you could make your business even better.
Leigh O’Neill: You’ve touched on it and I’ll let you have the two great tips there, Tim, because we often talk about how we want to empower our customers to build successful and sustainable small businesses and we really specifically call out sustainability because thinking about it as a marathon, rather than just a sprint, is really important. And I’m pleased to hear that you say that the sector is so much more receptive when you go and ask them questions than you thought they might have been. Because often in small businesses I see people really willing to share advice?
Tim White: I think generally, yes. It’s important to be sensitive to the idea this is you’ve walked into someone else’s small business and they are naturally, I think people naturally want to be generous and tell you about what they do and why they love it.
Leigh O’Neill: Well, I’d say if I needed to predict who it was I would come to you to ask. You clearly have a supremely thorough knowledge of your business and the industry. Thank you very much for taking the time to join me here today. I would encourage anybody who is visiting Melbourne or lives in Melbourne and if you haven’t been at Books for Cooks, please go and see a wonderful inclusive small business in action. Tim, best of luck for the future and best of luck for coming and joining me today.
Tim White: My pleasure. Thank you for having me.
Tune into our podcast from Leigh O’Neill, NAB’s Executive General Manager, Micro and Small Business. In each episode, she’ll be talking to innovators, owners and entrepreneurs about their experience, advice and insights into how to build a truly great small business.
In this second episode, Leigh O’Neill chats to entrepreneur Heidi Holmes, co-founder of Mentorloop. They talk candidly about Mentorloop’s start-up business journey and key insights and challenges around the evolution of an idea into a sustainable business.
Leigh O’Neill: Hello. I’m Leigh O’Neill. Executive general manager of business direct and small business for NAB. Welcome to my podcast series, building better small businesses. Mentors and business coaches are some of the most valuable resources an entrepreneur can tap into. At least, that’s what I hear from our customers and the sector when we are asking about what really makes a difference in growing your business. However, finding the right mentor can sometimes be a challenge. Someone who can be encouraging, but also provide constructive criticism when you need it. And this is where our entrepreneur Heidi Holmes comes into the picture. Looking for her own mentor led my guest Heidi and her close friend Lucy Lloyd to dream up their start-up Mentorloop. Welcome, Heidi.
Heidi Holmes: Thank you, Leigh.
Leigh O’Neill: Thank you very much for joining me here today. As a first step, before we get into the mechanics of being an entrepreneur, I wonder whether you can talk me through how you and Lucy came up with the idea of Mentorloop.
Heidi Holmes: Sure. So, Mentorloop really started from us both experiencing, I guess, challenges in finding our own mentors. With my previous start-up, Adage, which was a job board for mature age workers, when I went into that business by myself, I had left a corporate job, having worked at KPMG. And I guess start-up land was a pretty lonely place five years ago. So I was looking to connect with other entrepreneurs, other start-up founders, but found I didn’t have those type of individuals within my own personal network. So that sort of let us to uncovering, I guess, this initial problem around how do you create a meaningful connection with people outside your personal network.
Leigh O’Neill: And in terms of evolving that idea into a business, how did you go about doing that?
Heidi Holmes: So, that led us into doing a little bit further research into the space of mentoring and we went and met with organisations and universities. People who were already currently running mentor programs, to kind of uncover what was best practice in this space. And what we found is that actually a lot of organisations were lagging in terms of how they were implementing their mentor programs and that they were often using spreadsheets and emails in terms of the management of it and also only offering it to a select few people within their organisation. And at this point, my co-founder Lucy and I saw that we could potentially solve this problem through a digital application in terms of not only reducing the admin burden for organisations, but enabling mentoring to scale across organisations and so that mentoring is something that should be offered to all, rather than just a select few individuals.
Leigh O’Neill: And you found what seems like a problem that needed solving. Did you scan the market to see whether other people were out there and how crowded the space was before you started the business?
Heidi Holmes: Yeah. We actually see competition as a good thing in that it is an early sign of market validation, but maybe you can look at your competitors to see that there may be a different and a better way of doing something they’ve previously done. So, yes, there were sort of incumbents in this space, but we saw them as sort of an outdated approach to mentoring and that we could have our own take on what we saw as the, you know… As the space that was involving, evolving.
Leigh O’Neill: And so you saw a business idea. You decided to start a business. You’ve got a close friend that you are going to do it with. How do you go about evolving that and deciding who’s going to do what as you grow your business?
Heidi Holmes: Well, with any great business idea, it starts with designing a logo. (LAUGHS) We got that out of the way and a name. But in all seriousness, it actually was important to us to give our business a name because then it became a real living thing to us. So in coming up with the idea of Mentorloop, we then moved into, I guess, acknowledging our different roles in the business. So we treated it like a business from day one. And it was very important that we had, I guess, clear, defined roles in what were our responsibilities, and that ensured that we were able to, I guess, keep the business ticking along and moving towards achieving some early milestones. One of which was getting some early traction with potential customers in trialling our prototype. And also, you know, that development piece, which is definitely my co-founder Lucy’s experience and expertise in terms of product development. So engaging developers, briefing in, you know, our prototype products and then ensuring that customer feedback was coming back into the design of the product going forward.
Leigh O’Neill: So, it sounds like you’ve got quite different skill sets in what you brought to the business. Was that by design?
Heidi Holmes: No. I think… Lucy and I actually went to school together, so the relationship, I guess, is based on a lot of trust and knowing each other for a long time. But in terms of our skill sets, it just was a nice coincidence that we had, I guess, a clear delineation in that I’m sort of defined as front of house, so business development, marketing, sales, that side of things, and Lucy is sort of back of house, so managing product development roadmap, managing dealing with developers, which can sometimes be challenging. And also taking on customer feedback, so, you know, ensuring that the design of our product is fitting in with what our customers want and need.
Leigh O’Neill: And have you maintained a delineation between being business partners and being friends?
Heidi Holmes: It’s something we haven’t had to be too prescriptive about, which has been nice. You know, we’ve got a clear set of values within our business, even though you know it’s only a start-up at this stage. But we see that as important as we hire people and build out our team that how Lucy and I define what we want to achieve as a business, but how we want to run it and how we want to interact with people internally is very important to the future of Mentorloop, so when Lucy and I come to work, it is very much about business. But we still catch up, you know, socially with a group of girlfriends on the weekend as well and we don’t talk business at that point in time.
Leigh O’Neill: Do you make a very specific point not to talk business outside of the business, as it were?
Heidi Holmes: It just happens that way, I think. So I don’t… I don’t think we’ve had to make a conscious effort. I think we both sort of acknowledged that when the weekend comes around or in that sort of environment, neither of us really want to… (LAUGHS)
Leigh O’Neill: So I understand that Mentorloop has just recently attracted some investments, and I’d love to talk about that later, but before we talk about that, I wonder if you could share with me some of the experiences… The real foundations of setting up a business. I learnt on the way in here that you used our co-working space, The Village, as your home office. How important was it to you to be around other entrepreneurs and how did you build out your business model?
Heidi Holmes: I think I sort of alluded this to… To this before when I spoke about, you know, from day one we treated this as a business, and I think The Village was also key to that. It got us out of our home offices, it made us come into work every day, and it elevated us to really thinking about Mentorloop, not as a start-up, but as a proper functioning business. And I think then being around other people, sharing ideas, you know, Lucy and I have always said that for us, personally, some of the best mentors we’ve had are start-ups that have been six months or even 12 months just ahead of us, because it still real in their minds in terms of what they’ve just gone through. And that’s been a great source of, I guess, inspiration, but also advice in terms of how to navigate the start-up journey in terms of raising capital, you know, expanding your customer reach et cetera.
Leigh O’Neill: What you think the most common difficulties for start-ups are in those early months? When you get to that six-month mark what are you really facing into?
Heidi Holmes: Yeah, I think for us it really was around bringing on more customers. So we were able to get a few early pilot customers with Mentorloop, but then it’s moving beyond that initial traction and moving your business into showing that you can, you know, you can really increase monthly recurring revenue for us it was, so it was really looking at how to be ramp up sales? How do we tap into new customer channels that we haven’t previously sort of accessed? And always looking at a way to continue to grow the business. And that inevitably makes you more attractive to funding and it also makes you, you know, what we personally had desired to build, and that was, you know, a profitable, sustainable business.
Leigh O’Neill: How did you go about getting feedback from your customers? So, putting people on a pilot is one thing. How do you then feed that into the development of the model and the product?
Heidi Holmes: Yeah, early on, when you’ve only got a couple of customers, it’s very easy to manage that process. But inevitably, as you grow, what you find is that, you know, you are getting more feedback from your customers and, you know, the old saying we generally like to apply is that the customer is always right. But not necessarily as well. So you can find yourself, um… Having to become, you know, a negotiator and also you need to be very good at communicating expectations to your clients in terms of, you know, that not all feedback is necessarily going to be incorporated into the product development roadmap. But we very much, you know, set expectations at the start that this is a journey that we are taking with them because there are, with any start-up, that are going to be – particularly in an online sense – bugs that people have to work through. There’s going to be potentially frustrations for early customers. And so we’ve managed to maintain 100% retention with our early customers and I think that comes down to having, um, an open line of communication and dialogue with them throughout the process.
Leigh O’Neill: And how has that been… You’ve retained 100% of your customers. Has retaining those customers been the key to growth? Is it word of mouth that you grow through?
Heidi Holmes: Yes. I think definitely some of our customers have referred us on to…other customers. Particularly in the education space. And word of mouth is always, you know, a great form of marketing, but it doesn’t necessarily get you to scale, so we have had to look at other, you know, marketing and sales techniques, one of which is a recent media and PR campaign. As well, as some, I guess, you know, good old-fashioned sales tactics of direct marketing, improving SEO and SEM, so now starting to look, I guess, more strategically at how can we tap other online networks such as LinkedIn as well.
Leigh O’Neill: And you’re doing that yourselves? Or have you had to outsource to get scale?
Heidi Holmes: At this point in time, it is largely driven by us, and that’s just because as a start-up, you don’t have the luxury of, you know, a team of resources at your disposal. So you get good at, you know, faking it until you make it, pretty much. (LAUGHS)
Leigh O’Neill: So how do you decide when the next taking on of resources you’re…
Heidi Holmes: So, definitely the funding is validation, I guess, for now that we can go out and, I guess, be able to take on additional resources, and that was what we pitched to investors – that funding would be for the next growth phase. So around bringing development in-house, as well as sales and marketing to grow the business. So we saw that that investment that we were taking on was directly aligned to growing the business further. So what it’s enabled us to do is really fast track couple of key hires which will be taking place in the next 3 to 6 months.
Leigh O’Neill: And in terms of attracting investment – so, congratulations, because attracting the first round of investment is a real achievement.
Heidi Holmes: Thank you.
Leigh O’Neill: Talking about what you were going to do with that money sounded like it was a very important part of that process. How did you make yourselves attractive to investors? What did you feel was a real…?
Heidi Holmes: I think the feedback we had from investors was that at such an early stage, what they’re really investing in is you, as the founders. Because yes, we’ve got some initial customers, but it’s really not enough to sort of go off in terms of… There’s not a five-year track record there. They’re sort of going off 12 months of, you know, historical data. So what they’re investing in is the founders. And I think what appealed to a lot of our investors is the fact that we’d bootstrapped the application to-date. So, Lucy and I have both got skin in the game. We’ve invested our own money and time in getting the business to this, you know, point. And I think our investors sort of valued that contribution. For them, going forward, a lot of our investors actually just really like the idea as well. They could… They bought into the vision that we sort of have for Mentorloop as well because again, there’s not much to go on at such an early stage. They’re really looking at the team and where you’re going to take this thing and if you’re capable of being able to do that, and I think that’s what we were able to really sell to them.
Leigh O’Neill: I think the concept of investors investing in the person rather than purely the business idea is something that we hear time and again from the entrepreneurial community, particularly as I’m guessing your business vision has changed since you first sat in The Village and started out.
Heidi Holmes: Yes. It’s gone through sort of different iterations, both from a product developments sense, but also just in terms of the vision. But we feel like we’re starting to get, you know, really a clear picture of what that is now, going forward. And the key thing for us was sort of really defining that we are a B2B platform as opposed to, I guess, more broadly, trying to solve the problem at an individual level of connecting, you know, an entrepreneur, say, with another entrepreneur. For us, it really is about now focusing on selling Mentorloop into organisations to help them make mentoring more effective and then helping them make mentoring more effective for their people.
Leigh O’Neill: So, am I right in saying that you yourself left a corporate job to come and be involved and run a start-up?
Heidi Holmes: Yes. So, I am ex-KPMG. So I’ve got an accounting and marketing background. But essentially going into KPMG, I always saw one day that I wanted to run my own business and for me, you know, KPMG was a great place to start my career and, you know, build out a professional network as well. But it always was the goal for me to one day run my own business.
Leigh O’Neill: And how would you compare running your own business now with what you had in your head as that goal at the time?
Heidi Holmes: Uh… Yeah. I think it’s lived up to expectations. I worry about… Mentorloop has to be a success because I don’t think I could go back and work for a corporate again. I would be a terrible employee. Um, but it has… It has lived up to my expectations and I love it.
Leigh O’Neill: What do you love about it? I can hear in your voice.
Heidi Holmes: I think… It’s being able to be across all facets of the business. So, it’s not necessarily… You know, I’ve become passionate about mentoring, but when I started out, I was passionate about finding a problem and a solution. And I think… The difference that I see in working within your own business to a corporate is that you don’t necessarily get that diversification in your role. Whereas with a start-up, you know, you are working across accounts, customer service, sales, everything. Which I love. Yeah.
Leigh O’Neill: And it sounds like being well-connected within the entrepreneurial network in Australia is important. Getting ideas and sharing experiences. I wonder if you could describe the sector and how innovative and entrepreneurial you feel Australia is currently.
Heidi Holmes: Yes. So, I had my first start-up, Adage, which was five years ago. So, 2011. And I think back, you know, to that time, the start-up space was quite an immature and lonely space, whereas now there is a thriving community. There’s, you know, in terms of media, there is StartupSmart, Startup Daily. There’s lots of online publications where you can gain access to information. And I think as well through, you know, meet ups and community groups, there’s lots of events people can go to and network face-to-face with people as well. So I think definitely Australia, but in particular Melbourne has come a long way in the last five years. I still think where there’s potentially a disconnect is, um, you know, between corporates and start-ups as well. So I think there is… There’s an opportunity for greater collaboration between corporates and start-ups. I think that’s starting to happen. It’s just both are sort of feeling their way through that.
Leigh O’Neill: What do you think is the… Is that about corporate investing in start-ups or is that about solving customer problems together?
Heidi Holmes: I think it’s about solving customer problems together. I don’t view corporates as necessarily, you know, an investment partner. I don’t see that necessarily as their role. But I think definitely in bringing through real customer problems and using start-ups as a way that they could potentially solve them is, you know, that’s interesting. I also think, you know, taking on that role of piloting, you know, innovation that’s coming out of start-ups. I also see an opportunity there for, I guess, closer industry collaboration as well.
Leigh O’Neill: Challenging our thinking in another way, I read that you’ve become a B Corp. For our listeners, can you describe to me what a B Corp is and why you chose that for Mentorloop.
Yeah, so B Corp is a global movement and it is trying to encourage businesses to look at triple bottom line reporting. So really looking at your social and environmental impact as a business. For us, as a start-up, it made sense that, you know, from day dot we’ve got… We’re not a mature business. We’ve also got the luxury that we can mould our business without having sort of any, I guess, hangovers at this point in time. So for us, it was really a nice framework that we could apply to our business that, you know, we saw their values and mission really aligning to what we wanted to build as a business.
Leigh O’Neill: Yeah, no. I would agree. And I have the fortune of interacting with a number of customers who are B Corps and talk about that network and the value of that. How often do you find the need to go and find a mentor yourself? Do you have somebody that you use regularly?
Heidi Holmes: Yes, we do. Glenn Smith, who is an investor and also chairman of Mentorloop now, but that was not how the relationship started. It started much more informally in that he is a director of StartupAUS and I think going back to my original problem of trying to find a mentor, Glenn was someone I came about that was willing to give me advice, both with my existing… My first start-up, Adage, and then moving into Mentorloop and, inevitably, through building that relationship, became an investor within Mentorloop and also now our chairman, who we regularly go to for advice.
Leigh O’Neill: And so, as you go to think about the next stage of Mentorloop, how are you using your mentor and what is the next stage? What’s in the future for you?
Heidi Holmes: So, for us, it really is about global expansion now. So, we’ve got some traction in Australia and also outside of Australia. Now, but it really is about expanding our footprint into other markets. And also building out our product to align with customers’ expectations. And also to challenge their expectations going forward as well. So we’ve got some exciting things that we think are happening in terms of the product which we haven’t really seen in this space before. So we’re excited about putting that out there, but not just for Australian customers but for global customers.
Leigh O’Neill: What’s your biggest challenge in developing that? So, you talk about exciting ideas. How do you bring those to fruition?
Heidi Holmes: Yeah, so, you know, talent is definitely a challenge. So it’s about finding the right people to bring that all together. And it’s about funding it. So you’ve got to… Even though we’ve just raised, you know, a seed round, it is about managing, you know, your burn rate over the next 12 to 18 months and managing, you know, what’s coming in and what’s going out. You know, it’s no different to a bricks and mortar business. You’ve still got to manage cash flow. So we’ve got to get the balance right between making sure we’re putting features in the marketplace that people are prepared to pay for and that they value, and also, you know, that communications piece around bringing people on the journey with us, getting them to try and adapt to new things and that’s the ever-evolving challenge of being a start-up.
Leigh O’Neill: And does this keep you energised or keep you awake at night?
Heidi Holmes: Both. (LAUGH)
Leigh O’Neill: And so, when you’re not working on Mentorloop, how do you get some mental relief for yourself? What is time out for you, Heidi?
Heidi Holmes: Oh, time out is just really family time. I’ve got a small child and a husband who’s also like a small child, so… (LAUGHS) That’s sort of time out on the weekends. I used to sail. I don’t really do that anymore. No. It’s kind of just family time on weekends, which is nice.
Leigh O’Neill: Heidi, thank you very much for taking the time to come and teach us about Mentorloop and being a B Corp and the value of having a network of entrepreneurs to take your own guidance and mentorship from, and wishing you lots of luck in your global expansion of this really exciting proposition.
Heidi Holmes: Thank you very much for your time today, Leigh. Appreciate it.
Tune into our podcast from Leigh O’Neill, NAB’s Executive General Manager, Micro and Small Business. In each episode, she’ll be talking to innovators, owners and entrepreneurs about their experience, advice and insights into how to build a truly great small business.
In this first episode, Leigh O’Neill chats to Hugo Davidson, founder and CEO of Knog. They talk about Knog’s business journey and how crucial a constant innovation focus is for small business success.
Leigh O’Neill: Welcome to our podcast series Building Great Small Businesses, and today I’m privileged to be joined by Hugo Davidson – designer, innovator and founder of Knog.
Hugo Davidson: Hi, Leigh. Thanks for having me.
O’Neill: Hugo, I wonder if you could start by telling us a bit about the company.
Davidson: Background in industrial design and developing and consulting for a whole range of other companies. And understanding, really, the sort of products that they needed meant that we really got to a point where we needed to do, or we wanted to do that ourselves, so we wanted to take a lot of the learning that we’d had in manufacturing products and apply that in a very, very simple industry. So we chose the bike industry predominantly because it was not as competitive back then as it is today. It was full of generic Chinese products and we could see a niche where we could actually make a difference. So difference really can be considered as a level of innovation, I suppose. So we applied what we knew best, which was really a design philosophy, to this particular category of products and really, it meant that when we got…started releasing these products into the market that everyone looked at them and said that these aren’t typical of what we see in the industry. These are actually quite unique. And it was because we weren’t… We didn’t basically come from a biking background. We came from a design background.
O’Neill: So, Hugo, I think you’ve just struck on something really interesting there, which is when we talk about innovation, I think we often think of technology. It doesn’t sound to me like innovation, to you, means just technology.
Davidson: No, I mean, innovation, for us, is about creativity. It’s about making sure that the creativity can be applied effectively. So that can really be suitable for any aspect of the product development life cycle. So you need to be creative in the way that you can see the products, that you identify the categories and the differences. You need to be able to implement those strategies and actually put them in. And innovation can actually even be in the way you implement. You’re going to manufacture them locally or elsewhere. The distribution channel, the logistics. They are all aspects of what we try to approach, we try to deal with differently.
O’Neill: So can you maybe just give us and our listeners some context around creativity and innovation and putting into practice in a ‘building a business’ concept?
O’Neill: Because I think that’s sometimes a challenge for us, to think how creativity is translated into business outcomes.
Davidson: So one of our most successful products, which was developed, was a very, very simple bicycle light and it was basically a product that we called the Frog and it would have been developed 10 years ago. So at that point in time, we were developing a range of other products for a different company in a different category that was using silicon. Flexible silicons. And so we took the technology and the material technology and we applied that to a product that we were developing ourselves and came up with a very, very simple product which was completely unique. That, in itself, developed – with that, there was a whole range of branding and naming requirements that were considered. The overall approach meant that it became very successful. I think at this point we’ve probably sold over 3.5 million units of that particular product. And the sole, I suppose, significance of that material change spurred what other people would have seen as a unique for innovative approach to what is a very, very simple product. That gave us a point of difference in the market. It meant that when people were looking… Consumers were coming along and looking at our product versus the competition, it was an easy choice because there was something that was new. It was something that was fresh and they hadn’t seen it before. So it was all those aspects as far as the design process, the material choice in a category of products which people wouldn’t expect innovation. They wouldn’t expect to see significant difference.
O’Neill: So I think I’m hearing a really great story about creativity in the design of the product, and then I’m hearing a story of “we started 10 years ago and now 3.5 million”, which is pretty amazing number to have sold. Not necessarily an overnight success. I wonder if you can give me some context of who the “we” might have been to start with and how you’ve become so… How you start from being small to become inevitably quite big.
Davidson: We… Well, within our business we… Certainly there was a business partner. Malcolm McKechnie and myself. And we had a small team of people who were basically designers. We knew nothing about logistics. We knew nothing about supply chain management or distributors or the bike industry at all, actually, and we just wanted to develop products for ourselves, rather than for other people. So we wanted to move from consulting. And in doing that, we then looked at a whole range of opportunities that were there. So we looked at different categories of products and we were thinking about everything from sex toys to baby products. And in doing that, we would try to find a niche that there was… There was no… You know, we had an opportunity to really grow. One of the guys who worked for us actually had worked in the bike store for many, many years and said, “This is a category product which just doesn’t have any innovation. It’s always the same.” And so we left the sex toys on the living room floor…
O’Neill: My next question was going to be, “Is it important to develop a product that you’re passionate about?”, but I’m not going to ask that question now, Hugo.
Davidson: No. So we just found that that was a category that really had, you know, a lot of interest. It meant that we did a massive matrix on a wall, based on the sorts of customers that we might try and expect and their disposable income and the opportunities that surrounded those particular customers. And we found that there was a niche there that wasn’t being addressed, which was really about commuting cyclists. And so we targeted out products to those particular customers and it did take off. It was one of those things that… It allowed us to develop fresh products for a new market.
O’Neill: So it sounds like having a very targeted product for a customer group that you deeply understood was really important in the evolution of your company. Did you take advice during that course of that… You mentioned you and Malcolm, your business partner. Who else did you consult and take advice from when you were growing?
Davidson: Oh, we worked with a series of other companies, I suppose. We went to a number of trade fairs to do research and we met a number of companies internationally that helped us. Our first product that we developed, we went to a local bicycle distributor and they gave us the whole range of other contacts that we then went and approached. So within the first six months of deciding to make these products, I think I jumped on a plane and visited 10 countries to look at the distribution in those countries to try and find out whether in fact we had a business before we invested all that money. And everyone committed to buying and being interested in the product. For the trade fair, probably six months later, meant that we had sales in about 16 countries. So it was… It was a strategic approach to try and open up the opportunities and there was a significant amount of advice from people within the industry. We left the advice at one point and decided that we wouldn’t pursue all of the suggestions because we wanted to do something which was truly unique and we felt that if we continued to follow their business models and their approach, we wouldn’t necessarily have a solution that was Knog, that was us, or reflected our abilities.
O’Neill: So that sounds like a very courageous approach to growing your business. How did you know whose advice to take and whose not to?
Davidson: I think in the end… There was logic in much of the suggestions, but I think you have to just, you know, put yourself out there and so most of the things that we did which we felt confident about, you know, we both worked with a number of other companies in a consulting role and so much of it was common sense. You know, if things didn’t seem logical, we chose not to pursue. Being small and being nimble is a word that is bandied around a lot, but being small means that you can react very quickly and so for us, we could actually achieve significant amount very quickly because we could change strategy, we could change direction. So that aspect about starting a company and starting a business was critical that we could test certain things and then if they didn’t work, we could try something else and we hadn’t invested so much money into one particular direction that we couldn’t alter our plans and actually do a move in different directions.
O’Neill: And I wonder that when I’m listening to you talk and I reflect on the many small businesses that I have the luck of interacting with them and I see how innovative they are and then I reflect on the corporate culture and I see how challenging the perception of innovation is – do you think you need to be small to innovate?
Davidson: No. I think you… I think it’s interesting. We’ve grown from a staff of four or five up to, at one point, about 36 people and a lot of those people come in wanting to have a corporate culture. Wanting to have complete strict structures to ensure that everything is done effectively. And I’ve argued with them on some levels that I think, you know, being true to ourselves is critical. We need to remain… The culture of the company is critical and that is one of innovation, is one of being able to do things and be slightly ad hoc in some of our decision-making. It doesn’t necessarily mean that we don’t try to have a level of structure, because that helps to implement things, but I think the creativity can be driven by, you know, maintaining small company mentality.
O’Neill: I wonder if you could give us an example of something that you’ve done more recently. I know we’ve just talked about the way that you now promote your products using social media. Would you describe you’ve had to take an innovative approach to that?
Davidson: Probably… Most recently, one of the things we did was to actually adopt Kickstarter, which is the crowd funding website, as one methodology or one method to actually release a product. So we developed a new bicycle bell and we did the bell because we thought it was an iconic product. Something that… Everyone understands what a bicycle bell looks like. But we wanted to change the complete aesthetic and the look and the way that that product worked, so we came up with a concept for the design. We decided that… We planned out the strategy as to how we’d release it into the market and took on Kickstarter as that approach. It was not so much for funding, it was more in order to actually market the release of the product effectively. What was really interesting is that of the funds we raised, which was just over $1 million for a $19 bicycle bell, we ended up with 35,000 bells being pledged from 20,000 people in about 98 countries. And it allowed us, I suppose, to reach out via social media to a whole raft of different demographics and different people. So what was very interesting, from our perspective, is that we sell all of our products through traditional distribution channels and those distribution channels mean that you have a wholesaler and retailer and a consumer and it works on that basis. So to launch a product where the product is being reviewed by a blogger or shown on an article on LinkedIn or on Facebook and find that all of the traffic that is driven from those social media sites where 100% of the backers come from, for me, it was an eye opener because we hadn’t considered the power of social media.
O’Neill: Because I’m listening to you talk with such great passion about your product, but it sounds to me at the beginning you had a single product, a very clear focus on market and now you’re 98 countries, great reach. How do you stay focused on the core and delivery for outcomes?
Davidson: I think the passion in the products is where I come from. So that’s my background. So each project and each new product or each business opportunity is considered in the same way – as an individual project. And it’s like anything. If you’re birthing an idea or you’ve got something which is unique, then it’s very easy to remain focused on that and to make sure that the outcome is considered and the process is methodical. So I think from our perspective, we try to make sure that not only is the creation and the concept appropriate, but that we can implement that all the way through. The excitement remains until we actually get the product in the market and get our first orders because that is the point at which you actually realise that there is a… There’s a response that you can measure and that response then tells you whether you’ve been successful in the concepting of the product through the production and the quality and all the other things that you need to get right. A product, in our terms, isn’t successful unless you get a tick in probably 10 boxes right along the process from conceiving it to having it in someone’s hand.
O’Neill: Yeah. It sounds to me that we’re using innovation in designing the product, but also continually innovating the way that you distribute the product, think about growing the product, think about the way that you market it.
Davidson: That’s right. The marketing is absolutely critical. Point of sale. Right through to things…mundane and very dry topics like, you know, quality testing, testing assurance and working with factories in China. So every aspect of that has progressed so significantly since we started the company because Chinese companies… We used to manufacture in Australia. We find that that’s not as cost-effective as it once was and it’s more difficult to find production technologies that are appropriate to the way we make. And so all of these things have changed over that period and you have to be looking and borrowing and adopting technologies from outside your industry to make sure that you can stay ahead of the game.
O’Neill: You’ve picked up on something that I see a lot, Hugo, which is innovating the product but then just being really open to creativity and innovation as we’re growing, as we’re marketing, but focused on what you need to do in terms of the core.
O’Neill: In terms of your product.
O’Neill: Yeah. And so you’ve talked about Kickstarter as one source of investment for Knog. Are there other ways that you’ve needed to think about how you’re going to invest in your company and your product to grow, and how did you go about preparing yourself for those?
Davidson: We’re quite lucky in that the process we’ve taken is very organic. It’s been a very organic growth, typically. And so we were… We’ve worked with NAB effectively and your business bankers to provide us with the flexibility in some of the funding and certainly, I don’t know, we had no experience in foreign exchange and all the dealings that we have to deal with in working with distributors in a number of countries. So that’s been a process in itself. As far as the funding of the company, we have a business model which allows us to generate the sales and then manufacture the products without keeping massive inventories, so we do that by choice so that we’re not overly exposed. But overall, it’s sort of been a case of looking outside of banks and looking at other people. We had involved… Got involved with Lynch Capital many years ago and decided that it was an interesting approach, but probably one that we’ll leave, you know, leave behind.
O’Neill: Sounds… Well, you’ve obviously been through a number of iterations for the company. I wonder if you could talk to us about a time that you’ve come in real challenge and… Where does the resilience come in? What’s kept you going?
Davidson: Oh, which time?
O’Neill: Many times, hey?
Davidson: I think, you know, business is about the journey. It’s not about the end. And that reality is that we entered the bike industry where there were 16% growth and we only had nine other companies internationally that made bicycle lights. At last count, there were 59 companies that make bicycle lights. And the growth…
O’Neill: Even bicycle lights have disruption.
Davidson: Exactly. And the industry has moved through the boom and is now… It’s only what you make it, so you have to create your own growth and your own opportunities. No doubt that will change and there’s always ebbs and flows. I think that the times when it’s challenging is probably the times that we’ve had to really sit down and ascertain what’s important to us as far as business and how do we overcome the adversity that sits there. It does mean reconsidering the size of your company. You have to look at whether the… Your approach to capital expenditure and more tooling and more products is the way, or you should be marketing more effectively, or we’ve had times where we’ve taken half a million dollars out of the marketing budget just focused on social media to find that that did impact things and we had to, next year, put more money back into marketing. So you test things and you try things and you do try to move effectively to balance all that to make…to generate the most growth in those times.
O’Neill: To make some courageous decisions, it sounds like.
Davidson: Sometimes. (LAUGHS)
O’Neill: We talk about… So we have customers and clients that have a massive spectrum of businesses and there will be individuals listening to this that… “Well, I sell fruit and vegetables” or “I sell food or coffee – how do I innovate and his innovation important to me?” As an industrial designer, what’s your view on… Can every company innovate?
Davidson: I think they can. And I think that it’s…as we discussed earlier, it isn’t just about the product. It can be about the business case or the way you adopt new business practices. So I think the reality is that probably the biggest changes come from, you know, a massive rethink or restructure in the way you might run a business. But innovation can be very small. It can be in the way that people approach the customers. It could be, obviously, the way in which they go about marketing the company or selling it or answering the phone. You know, there’s, really, I suppose, on many, many levels it’s a scalable thing. I think we always look at the way we do things and ask our staff and ask the people who we work with whether we can do it better and that’s critical way of then re-evaluating as to whether you are actually being innovative in everything you do, or whether it’s just that one R&D meeting we have a week where everyone’s got to put on their thinking cap and try and be creative. But the reality is, across the business, you know, if you can be thinking about better ways of achieving things, then that’s obviously another way of innovating.
O’Neill: How do you go about… I want to know, for my own role, how do you go about instilling that mindset that actually it’s OK to challenge and it’s OK to innovate within the company?
Davidson: I think it’s all about the corporate culture. I think it does come from… It comes from me and it comes from my business partner and others where the opportunity to actually… We encourage people to ask questions. We encourage people to be and to control their own destiny within the business. And if they’re not enjoying the way things are approached, then to actually come back and propose alternatives. So it’s done on an everyday basis within our business and it encourages people to take on personal responsibilities within the business that I think many companies… We’re very lucky. We’ve got a team who really do enjoy that responsibility.
O’Neill: Sounds like you embrace curiosity from your team.
Davidson: Absolutely. And they’re all very… They are very curious.
O’Neill: Yeah. Is there a key piece of advice that you give people that you can share for us today?
Davidson: Well, I think there’s lots of advice I could give, but probably the most important thing that works for us is making sure that every aspect of our business, every aspect of the product development and every aspect of the brand is consistent and it runs through. So when people touch the products, when people read the packaging, they look at the website, they understand what we stand for and it’s consistent. And trying to drive the consistency through everything we do drives a level of perfection and drives a level of passion, and that’s probably the… The good feedback that we get from our customers is the fact that they… When they enjoy a product and they see and they smile at the copy, they smile at the website and they understand what we stand for. That makes me happy.
O’Neill: I would absolutely say that that is exactly what I felt when I was doing my research to come in and talk to you today, was the real passion that comes through in anything that’s around your products.
O’Neill: So congratulations on such a wonderful story.
Davidson: Thank you very much. Yeah.
O’Neill: Do you ever have any time to relax? How do you do it? What do you do? Do you ever have any time off innovating?
Davidson: Yeah, I do. I have… Look, I love… I spend time with my kids. Because a lot of what to do is commercial, I spend a lot of time painting and doing other creative things at home, which actually is sort of for me, not for other people. So that’s how I relax. It sort of gives you time them to actually focus and think about the business and work on it rather than in it, which is quite a nice way…
O’Neill: And important?
O’Neill: Has that been important in your success?
Davidson: Yeah. I probably do much better thinking when I’m travelling or away than I do when I’m actually sitting at my desk.
O’Neill: Well, we’re going to go and let you do some thinking now. Hugo, thank you so much for joining us today. Thank you so much for inspiring many innovative entrepreneurs out there, and good luck with the next 10 years of success for Knog.
Davidson: Thanks very much, Leigh.