Entrepreneur First - Startup Factory
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Entrepreneur First - Startup Factory
A deep dive on EF's business, and an opportunity to angel invest in their latest London cohort
Hi folks, Patrick Ryan here from Odin.
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Smart domain experts with ideas that sound stupid
These are the people that build the future.
Peter Thiel hunts for them with his favourite question, “What important truth do very few people agree with you on?”
Paul Graham’s take is similar: “the best ideas look initially like bad ideas.” “Most implausible-sounding ideas are in fact bad… But not when they're proposed by reasonable domain experts.”1
How many “great ideas that look like bad ideas” are there out there?
And, crucially, how many of them are left forever unloved, rattling around in the subconscious of an unassuming civil servant, physicist, doctor, etc.?
You would imagine quite a few.
This is one of the insights that led Alice Bentinck and Matt Clifford to start Entrepreneur First (aka EF) in 2011.
EF is a talent investor. In a nutshell, their business works like this:
Identify incredibly ambitious outlier humans with special skills in cities around the world;
Match these people with cofounders during batched eight week programs (50 - 80 people per batch);
Help them find a crazy idea and start a company;
Invest in about 50% of the companies
Since launch, EF have backed over 3,000 people in London, Bangalore, Berlin, Singapore, Toronto, Paris and New York. These founders have started over 600 companies now worth a combined $10 billion.
EF’s portfolio has received investment from top global venture firms (Sequoia, a16z, Founders Fund, Lowercarbon Capital, Index, Balderton, LocalGlobe, Softbank, General Catalyst, etc.), and there have been exits to multiple tech giants, including Spotify and Twitter (before it became X).
Apply to invest in Entrepreneur First London Batch 20
For EF’s upcoming London batch, we’ll be partnering with Founders Capital, an Odin syndicate, to offer our community exclusive access to 2-4 pre-seed deals (S/EIS available for UK investors).
With one unicorn (Tractable, an AI-powered claims assistant for insurers), and no IPOs so far, EF are certainly yet to reach the heights of Y-Combinator, an organisation we could easily compare them to. But their achievements are, nonetheless, impressive.
And arguably, EF are just getting started.
The feedback loops in pre-seed investing are incredibly long. Plus, it has taken them time to figure out their sector focus and refine their talent identification, matchmaking & deal selection processes.
Start a company with a stranger
Founder conflict is one of the key reasons startups fail. It’s very difficult to know you’re going to get along with someone if you’ve never worked with them before. As such, you’re supposed to back founders who’ve known each other for years and have a track record of working together successfully, preferably at startups.
EF does the exact opposite. However, their logic is reasonable: what are the chances that your best friend or long-time colleague is also your optimal co-founder? Do they have the most complementary skills? Will they be ready to start a company when you are? Are they interested in pursuing the same idea?
Or can EF, with the right “speed dating” process, find you a more optimal match?
Perhaps this is Alice and Matt’s own “important truth”. Few investors will agree that this is the “right way” to build a company, but if it works then EF will be rewarded handsomely, because they own a whopping 10% of every company that graduates their programs at the moment (for only a $100k investment!). Even by the time a company like Tractable reaches a billion dollar valuation, this stake is going to be worth $20m - $30m, accounting for several rounds of dilution. You only need a few unicorns from thousands of bets for this business model to start looking pretty good.
I think EF are on to something. Mary (who was actually on EF’s fifth London cohort) and I met at our friend Nina’s birthday party. We only met about three times before we decided to start a company together. What we realised quickly is that we were aligned on values, both wanted to pursue a big idea AND had very complementary skills. It has worked well so far.
The thing here is, EF might end up getting it wrong a bit more often than investors who back cofounders with a track record of working together, but all the returns in venture are driven by outliers, and their business model allows them to make thousands of bets with good levels of ownership, so I don’t think this actually matters. If EF’s process increases the probability of “optimal cofounder pairings” significantly, there’s a ton of potential in it.
All in on deeptech
EF’s other big “non consensus” bet has been “deeptech”. They focus on backing talent exploring the space where frontier technologies meet cutting-edge scientific research.
This has produced some pretty cool companies - from genetically enhanced plants that mine metals (yes you read that right. The company is called Genomines) to next generation spacecraft propulsion powered by high-energy plasma (Magdrive). EF also backs founders building more conventional software companies, but there is a significant amount of pretty technical stuff in their portfolio.
This sounds exciting, but it is also very risky.
When you are investing so early in these sorts of businesses, it might be 5 years or more before they even have a product in market (if they make it that far). For example, it took SpaceX, with Elon Musk at the helm, 6 years to reach their first revenues. They burned through hundreds of millions of dollars to get there, and almost went bust on numerous occasions.
Once you get to revenue, you’re then looking at perhaps another 10 - 15 years before you start to see meaningful exit opportunities.
B2B SaaS this is not.
In short, you expose yourself to a high degree of both technology risk and market risk. You are swinging for the fences and might hit it waaay out of the park, but your failure rate is also likely to be much higher.
But tech investing is changing.
The upside in software, the argument goes, is likely to level out in the coming years. The barriers to entry to building “traditional” software startups are getting ever lower, the market knows how to price these businesses much better than it did 20 years ago, and there is still (even after the recent cooling of the market) too much capital chasing too few good ideas.
As I wrote last year, if we are reaching the end of the “boom times” in categories like ecommerce, B2B SaaS and social networks, you have to wonder what the next big thing will be.
A lot of people are betting their money on “hard” problems where “bits and atoms” intersect. As Marc Andreessen put it in 2020, “it’s time to build”. Think biotech, climate, space, defense, healthcare, transportation, manufacturing, real estate, logistics & supply chain, etc - as well as AI (of course).
This fits EF’s model perfectly. These are exactly the kinds of businesses they have been backing for the last 12 years.
A lot of smart people seem to think they’re on to something special.
In their own 2022 series C round of funding, EF picked up $158m for their startup machine - a war chest to go and create thousands more companies building solutions to hard problems.
Their investors are a veritable who’s who of tech from both Europe and the US, including Reid Hoffman (cofounder of LinkedIn, Paypal mafia), John and Patrick Collison (cofounders of Stripe), Tom Blomfield (cofounder of Monzo), Demis Hassabis and Mustafa Suleyman (cofounders of Deepmind), Taavet Hinrikus (cofounder of Wise), Sara Clemens (former COO of Twitch), Nat Friedman (former CEO of Github) and Matt Robinson (cofounder of Nested & Gocardless).
Only time will tell us if these people have backed the right horse, but one thing is for certain - the businesses that EF are creating are inspiring, and a future where more of them exist will be infinitely more interesting.
Apply to invest in EF London Batch 20
We are working with Founders Capital, an Odin syndicate, to offer our community exclusive access to 2-4 pre-seed deals (S/EIS available for UK investors) from the next EF batch
That’s all for today!
Before I go, here’s a couple of good things I’ve read recently:
“Startups: the door is closing” - Nicolas Colin (European Straits)
“AI’s $200B Question” - David Cahn (Sequoia) - Thanks Alex for sharing
Take care.
PR
Risk Warning
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To dig into PG’s ideas on “good ideas that look like bad ideas”, see the essays “Black Swan Farming” and “Crazy New Ideas”
Entrepreneur First - Startup Factory
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