On February 17th, 2021, I hosted the "Investor Chat and Founder Pitch" event with Matthew Scherba, Investment Director of Tern Plc.
Tern Plc is a Venture Capital firm that predominantly invests in European IoT software companies, with proven technology, a commercial track record, and significant cornerstone customers that can be grown substantially over a three to five-year period.
They only invest in a handful of companies in a given period. One of their portfolio companies, Seal Software Group Limited (“Seal Software”), has been acquired by DocuSign Inc. for a total consideration of $188 million.
Their ticket size ranges from £ 250,000 to 1.5 million at the seed or early stage. Sometimes they do tranche and sometimes they syndicate. With their active operational model, they tend to lead in the seed round. They are committed and hands-on partners for the founders. As a result, they generally take a slightly higher equity stake at an earlier stage, but the value that the founders gained from that is so much more than the equity.
"Valuation is always highly subjective. Beauty is in the eye of the beholder. It has so many different variables involved. So it depends on the sector, on the stage, on scalability, and the management team."
"First, I'll look if the technology is interesting. Second, I’ll look at the product or service, or are the eventual product and service disruptive on a global scale? Third, I'll look at market timing. Are they educating the market or is the market ready for this solution? Will they buy this solution?"
A great technology is a good start but is not all you need to succeed in your entrepreneurial journey. During the fireside chat, he dived into his long career and learned from his failures and successes.
"I was always tearing the electronics and things apart and putting them back together and see if I could build other things on top of them. In school and in the university, it was really the start of the computer age and I was absolutely fascinated by it."
Matthew Scherba has been a life-long entrepreneur fascinated with creating, building, and scaling early-stage technology businesses. For over 25 years he has founded, run, scaled, and invested in companies across the Internet of Things (IoT), software, hardware, mobile, AI, and machine learning, among many other growing tech areas.
Thanks to his immense experience, he shared with the participants the prospects for investment and technological development shortly, the most common mistakes of the founders, and important learnings for all entrepreneurs interested in the areas of technology worldwide. He also shared his vision as an investor and gave relevant guidelines to analyze the market, technology in development, management teams, and risk sectors, among others.
After the fireside chat, our team invited 6 startups from the UK and Sweden to pitch:
- Anders Schening of Lifefinder.se, a ground-breaking intelligent alert system enables live-saving solutions that integrate seamlessly into workers’ everyday safety routines.
- Alexander Koelbl of Headingon, it takes the guesswork out of owning a vehicle. Compare quotes from garages in your area*. It is free, anonymous, and provided with no obligations.
- Dario Salvi of Mobistudy, an open platform for mobile-based clinical research.
- Yuan Xiong of Animals.ai empowers the livestock industry through AI & IoT solutions.
- Erik Rask of MedBeat, measure your heart at home and get a diagnosis faster.
- Mauro Pereira of Biketrace.se is a service provider making bicycles smarter and digitally connected.
You can re-watch the event and key learnings below:
About Entrepreneurial Journey
Q: You had a background in computer science and started your career in the industrial control automation sector, working with companies like ABB and Siemens. However, you decided to become an entrepreneur and started several companies such as Fenestra, Tx3, Talepathy, and Plancentric. Tell us a bit about some of the companies that you started.
So, out of university, I went into the industrial automation sector completely by chance. It was my first profession outside of the university. My goal was to get paid to see the world. So I wanted to get into a position that took me to different countries, different places and allowed me to engage and in a multifaceted way. That led to running my first company for the first 10-12 years of my career before I started to get into building products.
I came back to the UK and the first company I got involved with was Fenestra which no longer exists. But I joined them as one of the senior leadership teams was moving to Canada. They were a bespoke software company that had a few customers and they were looking to productize. It was the early 2000s, so about 20 years before SaaS was the name of the software industry and when we didn’t have cloud solutions.
They have this product which helps customers to manage how their customers manage their customers. They have developed bespoke solutions for some big customers. They wanted to build a product and scale which was interesting for me. So I invested in them and joined them. Six months after I joined them, they decided that they didn't want to be a product company. Instead, they want to be a bespoke IT services company which wasn't really why I invested in them.
So I ended up suing them to get my money back. They had a product that was the precursor to a CRM solution. Yet they didn't want to productize it, they thought that they could use it as a CRM and bespoke to all of their customers. And, when Salesforce came out, they introduced their SAP CRM product. The rest is history. So a very big missed opportunity from a strategic perspective.
The next company was Tx3. That was again a software company for time and performance management. I bought that company's assets and then built it up into a company that eventually got sold. So that was my first real software scale-up company. We had customers, and about 100 customers in 12 different countries, Europe and the US predominantly. We built the company up and managed to exist.
That led to Plancentric which I was already working on at the time. It led me to resource management. Going back into the early-mid 2000s, cloud computing had not been coined yet by the analysts and we were still working on hosted solutions. Those hosted solutions were seen as highly insecure, especially by large enterprise providers, banks, and financial services companies who only wanted to host their solutions in-house.
So, there was a real challenge around getting companies to build a SaaS product to launch these as an enterprise solution into big financial and professional services organizations. The market just wasn't ready. We had customers in the public and private sectors, but a huge amount in local government. So it was a real challenge building a SaaS product and trying to sell it to customers who didn't have faith in the SAS model. So it took some time to get them over that hurdle. But we eventually did and Plancentriccentric is still operational.
Telepathy was a side project before I went into the VC space. Telepathy was an AI, machine learning application for the HR industry. It took your CV and kept your credentials updated automatically by going out to social channels and pulling in all of the data to the company HR system. It was very cutting-edge at the time and it worked exceptionally well. But it was a trial-and-error solution but we never launched. It had some fantastic predictive capability around whether this person fit into the role that they were looking for in the organization.
Q: In 2014, you joined Breed Reply as their strategy and commercial partner. For those who are not familiar with Reply, it is a global IT Services company that provides system integration and digital services. In 2018, it had a revenue of €1,035.8 million and over 7,600 employees. Bread Reply is part of Reply and it is Reply's investment fund. Tell us a bit more about Breed Reply, their investment focus, and how you support startups.
I didn't have a lot of respect for financial investors. I never wanted to be a VC. That was never part of my plan. But in 2014 the majority of investors were financial investors. There were incubators accelerators and company builders. But there wasn't a model of what's coined today as smart money. Although I don't like that terminology, because it sends the wrong connotation.
But there was a need and a gap in the market. BreedReply, which is a corporate VC, had the intention of building an operational support model around their investment. They look at investing at the seed stage and then help the companies to build their proposition. I joined them intending to disrupt and change the VC market.
I saw an opportunity because Breed Reply was a startup itself. There were no professional investors involved. We were creating a very new concept. It was exciting and it encapsulated all of my experience especially because their focus was on IoT.
One of the other partners and I built the operational model. We would invest around a million pounds into early-stage companies. We created a structured program. But every startup is different. So, that structured program was applied to each of the companies depending on where the stage was. It wasn't like an incubator and accelerator where you got a little bit of consultancy. It was going in and brass knuckles, rolling up your sleeves, and looking at strategy around the product.
For example, we would go in and have a kickoff session management team and agree with them on where the gaps are. We will define the right strategy on MVP, customer validation, marketing, pricing as well as investment, and finances. The program covered everything the founder needed.
The goal was to get them to market them and be in a position to raise a bigger round investment at a higher valuation after 12 months. We were successful and we made 24 investments in four and a half years. In that period, we had two exits. At an early stage, that was the top of the curve from a VC perspective in what we were doing with a different model.
About Fundraising
Q: What made you decide to become involved with the companies as advisors and as investors? ofin
I get approached quite often to advise and invest in startups. I'm involved in several really interesting companies.
First, I'll see if the technology is interesting. If it is not interesting, I am not interested. Second, I'll look at the product or service, or are the eventual product and service disruptive on a global scale? Third, I'll look at market timing - are they educating the market, or is the market ready for this solution? Will they buy this solution? How is the product or service consumed?
A lot of times you'll get fantastic technology, but it's almost unusable in the market or you have to create a completely new methodology on how to use or consume this. That is very expensive and time-consuming.
Lastly, does the company need assistance and can I add value? So I look at it from both a push and pull perspective. Is there an opportunity and can I add sufficient value to this company that makes an impact? When I look at new potential opportunities, these are the things that I look at.
Q: What are some of the common mistakes that you see founders make when they are looking to raise capital from angel investors or venture capitalists? Would you please elaborate on that with some examples? (Part 2 video clip minute 10:00)
So an extreme example is different VCs invest think that they're going to become a unicorn in 12 months. Forget it. It's not gonna happen. I don't care how good the technology is. It's not gonna happen. And if you think you can go out and raise 30 million at the end of 12 months. Forget it.
When you're looking at the VC space, raising money from venture capitalists, the formula has to work. Different VCs invest in different sectors at different stages. So, you need to know which investors they are.
For example, I received an email about a month ago in January from a company that didn't know how to use BCC. They had about 200 venture capitalists all cc'd in one email. Most of them are info-type email addresses. I would say that 99% of those went unopened. That is how not to interest a VC. This is a very big mistake. So know your VC, and they need to know your market, understand it, and like it. They are your best bet in trying to find funding. You might get lucky but you will waste a lot of time going out with a shotgun approach.
About Tern and its investment philosophy
Q: Would you please tell us a little bit about the history of Tern and your investment thesis?
Tern was founded in 2014. It was a very small VC. It started from a shell company that was already listed on A. It was transitioned into a venture capital firm investing in the IoT sector, originally in the UK. They have invested in three or four companies to begin with, focusing specifically on the early-stage companies in the IoT sector. They were hands-on in our portfolio companies.
Now we invest in IoT and deep tech companies - MVP and pre-revenue stage. However, the startups should have some customer validation. That means that you have gone out to your early products, and you can get customers interested in the product and proposition that you're developing.
I joined them in late 2019. We have six portfolio companies at the moment with one exiting last year. We will be looking to grow that significantly this year. Last year was a slightly different year for the VC space. We did look at investing in a good number of companies, but we didn't invest in as many as we had originally planned.
Q: How does Tern in value to potential startups, and what are the common reasons for Tern to invest in this reject certain startups?
My partners are well-connected through our entrepreneurial experiences. We get a lot of deal flow organically through our network. We invest in European startups. Our goal is to help them grow and build their propositions.
When you look at the company website, it could be self-explanatory on what we do. It is easy to read about 60 to 70% of the companies. Due to the stage, the wrong industry sector or it is located outside of our geographic remit. Most of the time, it is that simple.
Even though you might have good company, you have to set boundaries. One of the partners will spearhead looking at them, understanding their data and their proposition. If it is something that the partner feels is investment-worthy, they will bring it in to pitch to all of the partners.
Based on that, we will determine whether that is something that we will look to continue to dig deeper into, evaluate, and perform some initial lightweight due diligence. If we get through that stage, we will build a proposition and an investment case and take it to the Investment Committee. When the Investment Committee agrees, we will do some more detailed DD.
I’ll give you an example of a cleantech company that we're looking at. We are not experts in this specific sector. So we brought in specialists. They did technical due diligence and generated a technical diligence report. The four partners had a report presentation and Q&A session where we looked at the technical merits, the market timing merits, the ability of that company to develop the technology, get that technology into the market, and scale. We engaged with them probably in late November, and we are at a stage in deciding if we want to proceed.
The timeframes do vary depending on the company, the stage, and their status. It is hard to put just a generic timeframe and process because it depends on what we need to convince ourselves, to create the investment case, that this is an investment that we want to make.
Advise for founders
Q: In many companies, you have this consultancy work that brings in money and then you have the product side that is always losing money. You saw the potential in the product, and the others want the money. Can you talk a little bit more about this conflict?
It is a big conflict and it can be used to the best effect. I will give you an example of our portfolio at the moment called InVMA Limited. It started as an industrial IoT consultancy company such as installing machineries, the operability of machinery, industrial machinery as well as the control Systems and integration of devices.
It wasn't a standardized product, but a bespoke product that was changed where every single customer to begin with. They saw an opportunity to build a SaaS product to run condition monitoring that helped automate a lot of the same processes and functionality that customers ask for.
They set off to build a standardized product. But evolution after evolution, the bespoke nature starts to turn into a more generic product. We invested in them in 2017. Now they have two sides to their business, where the revenues have been predominantly consultancy-driven to begin with which funds the development side of the product. Now the goal is for revenues generated from the SaaS product to outpace the revenues from the consultancy business.
The one thing that I will say is that you need to have all of your management team and all the founders on board with this strategy. If somebody isn't on board, they will always put more of an emphasis on the piece that generates the revenues, not the piece that generates the future revenue. I will say that investors have a good way of ensuring that that happens.
Q: Share with us what are some of the failed investments that you mentioned, and what did you learn from those experiences.
Nobody likes failed investments. It's hard to know when to pull the plug on the investments. Some of the key factors are - are they at the right stage with the right products and the market is ready?
With the best technology in the world and if the market is not ready for it, you have to educate the market and that is hard and expensive. It takes much longer and much more money than you would ever anticipate.
Companies think that the market is ready and they might have some early examples of that. But it can be difficult. Look at some key aspects of energy, these are big propositions that take governments and regulatory approval. There is huge regulatory approval and transition which takes time and effort, and nobody can predict how long that is going to take. So timing and failure related to timing is sometimes a key factor.
The other is management teams. One of my failures was due to a rogue CEO who breached their investment agreements. People are people regardless of how much due diligence you do. Sometimes you get it wrong. There's just nothing you can do about it.
Another area of failure is too many founders who think they are running the company. When you have too many founders who are equal shareholders, it causes a lot of friction. You need a clear leader. In one instance, we had five founders who were all equal shareholders. It was an absolute disaster. They could not differentiate between being on a board in setting the corporate strategy, being a shareholder in the company, and being employed by the company. These are just some examples of failures that we had.
To reduce your failure rate, you look at good management teams that are in the right sectors, and high-growth sectors that have the potential to be highly disruptive on a global scale. When you look at our portfolio, it is very diverse. But companies that have the potential to be disruptive and market leaders in their respective sectors.
Future of IoT
Q: Which market do you think is ready for IoT?
I think the hot sector at the moment without a doubt is health care. For example, IoT remote patient monitoring remote analysis. It was coming anyway but COVID accelerated it, and almost forced the hand of remote monitoring of IoT and devices in healthcare. That's not going to go away and that is only going to grow. I think you're already seeing that in the market.
We like the industrial IoT sector but it still needs some education, especially the large industrial players and manufacturers. Their digital transformation process is well in progress. If they're not, they're going to be left behind. They're going to be less competitive in the market and it will be a challenge for them.
The mid-market, which is traditionally more manual traditionally slow to adopt technology, has legacy solutions; that still need some work around digital transformation. But when you look at supporting consultancy businesses with new SaaS technology and new applications, it presents a win-win because you're taking expertise digitally and transforming to a new way of working. And for the midsize industrial IoT, that is a big growth sector over the next five years.
Cleantech energy and decarbonization will be a hot topic over the next 10 - 20 years. We are only at the beginning stages. Cybersecurity is the biggest barrier to IoT adoption. Nobody's cracked it yet because there are so many different avenues and problems and barriers to overcome. We're hoping device authority will solve that problem.
There are many other opportunities for communication between IoT devices using mesh networking. Supply chain, huge disruption potential from creating efficiencies to IoT sensing to new energy being applied to those sectors, optimization of very old manual paper-based processes, etc.
And lastly, quantum in space tech, I think you've seen a few sectors that are highly technical that three or four years ago which are pretty much untouchable are now starting to come to being much more acceptable than mainstream in the market.