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Monday
Jul082019

HOW TO CREATE A STARTUP ECOSYSTEM 

Ten Years of Growth as Lived by Amplify’s Paul Bricault  

Amplify is a pre-seed fund based in Venice, CA. Since 2011, Amplify has backed 80+ companies, which together have gone on to raise over a billion dollars in funding, with exits to Apple, Google, and FanDuel, among others. Amplify has taken a strong lead within the Southern California startup ecosystem, not only by investing and nurturing its own portfolio, but by operating a coworking space and event hub and providing regular data updates, including a blog and quarterly updates called the “LA Seed Report” (to subscribe, go here). Amplify’s 2019 annual roundup of the LA tech and venture scene provides a great framework for this interview with Amplify co-founder and Managing Partner Paul Bricault. This post originated as my monthly column, 'Notes from Silicon Beach' commissioned by the Canadian Film Centre

Nick DeMartino: Let’s start with your journey, which began in Ontario, as I understand it. 

Paul Bricault: Yes, I was born in Ontario – Sault Ste. Marie. I did my undergraduate at Western University in London, Ontario and then migrated to L.A. because I got a scholarship to USC University of Southern California here in L.A. to do my graduate work at the Annenberg School. After graduation I decided I would do my optional employment allowed under the F1 visa here in L.A., with the intent that I would go back to Canada afterwards. One thing led to another and I never left.  Initially I was in finance, then media, then what I do now.

ND: What drove that change?

PB:  I guess my career has been a series of beautiful accidents. It's hard to say whether it was serendipity or skill or intent, but I ended up at the William Morris Agency -- a top talent agency here in L.A. that is about to go public, actually. During the intervening years I was working at a consulting firm that focused on the intersection of technology on media -- I was working in finance, specifically focused on digital media. That was my stepping stone to work at the agency because at the time they were trying to build up a digital media practice. I ended up spending well over a decade at William Morris, serving on the board there and running digital media.

ND: How did you move to venture capital?

PB: While at Morris I set up a sort of a corporate venture fund, actually a joint venture with a firm called Accel Partners that was one of the first investors in Facebook and a bunch of other companies. We established what was called The Mailroom Fund in 2008 and that's where I found my true passion. After the merger between William Morris and Endeavor in 2009, I left the agency and joined The Mailroom Fund fulltime. From there I went to a fund called Greycroft Partners, with operations in New York and L.A. From there, I co-founded Amplify. 

ND: So you founded Amplify with the idea of jumping into the accelerator space. The only models at the time were Y Combinator and TechStars and maybe a few in L.A. but not many. You were pretty early, right?

PB: Yeah we were. There were I think two other accelerators here when we launched -- Launchpad LA and Mucker Labs. Also Science was a third entity that was more of an incubator than an accelerator. They were probably all of them or only about a year old when we started and that was seven and a half years ago. This was a moment when all of a sudden L.A. was in the zeitgeist. All of us were looking at the same thing -- there was a lot of promise in L.A. that had not yet been realized. To catalyze the environment we needed to provide early stage capital and a support ecosystem for startups. Brad Feld of TechStars who has written a bunch on how to build startup communities -- he posits that every city has similar needs, but also a set of unique needs that are endemic to that city. When we started out, L.A. needed everything. The city was a bit of a venture wasteland. Plus, we needed to offer multifaceted services to really jumpstart the ecosystem.

ND:  Can you describe the elements of the model that you created and how it has evolved over the years?

PB: It's a constant evolution, like any business. When we when we started Amplify was modeled on the TechStars and Y Combinator model, with slight changes. For example, those accelerators were largely and still are driven on a sort of cohort-based model. Once accepted, a company is there for a designated period of time, usually three months; they all accept the same venture terms, the same valuation, and the same investment rate from the accelerator. That all culminates in a demo day and they all graduate at the same time. 

We didn't take any of those characteristics of a traditional accelerator early on because we decided that the world had changed. Entrepreneurs were no longer looking for a one-size-fits-all model, this factory-like finale, where they are all kicked out on the street at the same time. The startups here in L.A. needed more support than they might otherwise need in Silicon Valley or New York, because the nascent system here and the culture here was so new. We were afraid that companies kicked out on the street would just asphyxiate and die.

Instead, we decided, yes, we would offer services and help with product, tech, business development, and fundraising. But we were not going to do this during a designated period of time, but rather in a bespoke fashion based upon what that individual company needed. Similarly, we were going to offer up capital based on each individual company’s needs and how far along they were in terms of their development, traction, and product/market fit. So every one of our deals is different in terms of how much capital we invest. And every one of our companies stays inside of our building doing business for different periods of time. Nowadays, we even have some companies that are outside of L.A., even outside the U.S. including Canada and some of those companies have never worked inside of our building.

ND: To do all of this you obviously have to raise capital. Indeed, you’re raising a new fund right now. Can you talk about what it means to raise a fund and how large a pool of capital you raise, and where you get it?

PB: Obviously every fund is going to be different. Andreeson Horowitz is going to raise a billion dollars because that's their focus, to invest in companies at all stages. You raise based upon your focus. We’re a Pre-Seed-focused fund. We’re usually the first institutional check that goes into a company and we're investing in rounds that are sub-two million dollars in size. We're writing checks of $250 to 500 thousand for that first check and then follow-on capital thereafter.

ND: This is after they've come out of the accelerator or are as a result of you accepting them?

PB: This is a result of us accepting them. So that's why we don't necessarily refer to ourselves as an accelerator because an accelerator has a lot of trappings based upon the perceptions in the venture community. We just refer to ourselves as a Pre-Seed-focused fund. Every company that comes into our building or that takes capital from us, does so on terms that are unique to each company and does so on that sort of $250-500,000 dollar range where we're generally leading in the round, and then syndicating the remainder of the round.

ND: How many funds have you raised?

PB: We're closing our fourth fund currently. Every fund has a sort of a two-year investment horizon where we're making investments over the course of two years in terms of principal investments and that we will follow on with pro rata rights in subsequent rounds usually into the Series A round, but generally not thereafter because our fund sizes are small. 

When we started out we were raising largely from high net worth individuals. Then we started raising from family offices and now are raising from fund of funds in this current iteration with the LP base very geographically diverse, meaning Asia and all across North America. Within those different constituent groupings, some investors are interested in making direct investments in companies and some are just interested in getting high returns at an early stage that are better than public market returns.

ND: Traditional accelerators begin to find out whether they're successful after seven or eight years. Are you at a point where your earlier investments are beginning to pay off? How well are you doing? 

PB: Yeah absolutely. In fact you could you know there's a blog post just yesterday from Fred Wilson, the founding Managing Partner of Union Square Ventures which is one of the best performing venture funds. He talks about the seven-to-ten-year cycle. He doesn't know why it's seven-to-ten-year rather than 10 to 15, or three to five or whatever. He has looked back at all his investments over time including hundreds of angel investments as well as the venture funds that he's been involved in and the typical sort of maturity and exit timeframe is seven-to-ten-years. So, yes, our first fund was seven and half years ago that fund is now fully paid off. We had an exit to Google and exit to Apple that have resulted in the returns for that fund. We just sold our first Fund Two company this week, a music-related company that was sold SoundCloud, the deal just closed.

ND: You’ve written that Amplify invests in only like 1 percent of the companies that you may meet. How many companies do you review and a typical year at Amplify and what makes the company stand out? 

PB: We look at about 2500 to 3000 per year. That doesn't mean we take extensive meetings with all 3000 companies. Maybe they submit a deck or a description of the company and then we make a determination of whether we should dig in further and physically meet with the founding team. The first filter is the team -- we will look extensively at the team, their background, their domain experience and the sector that they're focused on, what they've done prior. 

The second filter is the sector that they're going into because you have to constantly be filtering out for the potential of that sector to later stage venture capitalists. So for instance when we started out ad tech was very hot in you know back in the US in 2000 of them in 2012. It's now about as cold as it could get because the public market IPOs for ad tech companies did not perform well and because Google and Facebook sucked all of the revenue through the ad through programmatic.  

The third filter is what we call TAM or total addressable market. So it could be an amazing team and it could be an amazing sector. But if they're only selling red shoes to millennials then that's obviously not a very big TAM. We might have to say to this exciting team working in an interesting sector like e-commerce, you're gonna have to go back to the drawing board on your specific product focus. And similarly it could be an amazing TAM and an amazing sector. But if the team isn't great then that would also be a pass.  

ND: What about the entertainment sector? I was surprised to learn from your colleague Richard Wolpert how limited your interest has been in entertainment media tech startups in a location where that industry is so dominant. Why is that?

PB: You’re right, only 3-4 of our 80 investments have some kind of media connection. Both Richard and I have 15 to 20 years in the media business. That’s both good and bad, right? You have a lot of scar tissue that comes with that kind of history -- you can see all of the warts on any business in which you know too much about. We avoid any kind of rights-related issue that can be a massive hurdle to try to win your way through in terms of negotiating deals with media companies. Media companies historically are not ones that are prone to embrace change. And so the multiples that they will pay and trying to get traction as a startup with media companies tends to be very challenging. This makes it difficult for media related startups to raise capital because the venture capital firms down the road have the same kind of scar tissue as we do. So for instance we just sold the company as I mentioned in the music space to SoundCloud. That was a great exit for us. We did very well. But that company was extremely challenged in raising capital after they came out of Amplify because the entire venture community considers music to be anathema to them. They just will not invest in music-related startups for the most part. So given that we need follow-on capital because we're an early stage focused firm, we look carefully at other venture capitalists downstream that may invest in this company in a Series A round and beyond.

ND: What are you seeing is as the hottest sectors right now?

PB: I mean it's constantly changing. It's like it was Heraclitus who said that you can't step in the same river twice. Venture is an ever evolving, shifting-sands environment where one day a sector is hot, and then it’s not. So, three years ago VR was sizzling hot, and now virtual reality couldn't be colder. Blockchain was sizzling hot a few years ago similarly it's gone extremely cold. So you have to constantly pay attention to what's happening in any given environment and that evolve your strategy accordingly. 

When we started there was no one investing in A.I. or IoT, (Internet of Things) or augmented reality or space tech or robotics and so forth. And now of course we have investments across most of those categories. I wouldn’t peg any particular sectors being hotter than any other, though we've spent a lot more time for instance in A.I. than we did a couple of years ago with a couple of investments in that sector in the last year. We've also made our first investment in food tech, which is a particularly hot category at the moment. And we made an investment in what's called the voice space -- think of Alexa and Google Home and the businesses that are sort of sitting on top of that world. Robotics continues to be a hot area, though we have not made any investments there just because it's very high cap-ex for us. We tend to avoid areas that require hundreds of billions of dollars since we're early-stage focused.

ND: Amplify constantly ranks high measured against similar programs. I wonder why that's turned out to be true. What are the factors that you think differentiate you from the others?

PB: I think I mean that's a pretty simple answer really -- it's akin to what we tell all of our startups -- stick to what you're good at and be hyper focused. That’s really what we've done over the last seven years. We haven't evolved to be a series A fund or Series B fund or anything else. We've been hyper focused on pre-seed -- the pattern recognition around finding early stage teams and understanding what they require and then evolving the resources and the added value that we bring to those companies to help them be successful. Over the last three years our graduation rate from Pre-seed to Seed to Series A continually increased over time which speaks to the fact that we've much better at identifying companies that have the opportunity to be larger, potentially billion dollar companies down the road. 

ND: Amplify L.A. has really invested a lot of time and energy in tracking and sharing information about the Southern California startup ecosystem. Why do you do it? What value does this effort provide for you as a result of being so public about the information that you amass? 

PB: This started off as a tool for us. We wanted to internally track what was happening in the ecosystem here locally because we're heavily invested in the success of L.A. since we're based here. A good portion of our startups are based here. And so I think it's important to shine a light on what's happening in your local community in your local market. And no one else was really taking the lead. If you look at Silicon Valley and in New York and in other venture communities there's somebody that's publishing a ton of data on what's happening and no one was doing that in L.A. The perception is as important as reality in venture -- L.A. was long perceived to be a bit of a backwater in the tech world 10 years ago and now it's considered to be one of the fastest growing tech ecosystems not just in the U.S. but in the world. We thought it was really important to share that information globally so that people will be able to see that there are opportunities both to invest here and also if you're a startup to move here because it is now a more robust and thriving technology ecosystem than it was five or 10 years ago.

ND: Are you seeing a lot of inbound founders coming to L.A. to take advantage of all of these things you are documenting?

PB: In the last two for three years there are a lot more companies moving here. We have always had a lot of companies apply to us from outside the U.S., but most of them stayed where they were. But in the last few years we've had companies move here from Utah, Portland, New York, from outside the U.S. -- as I mentioned, Canada – and, increasingly over the last two years even from San Francisco. Almost monthly I get a call from somebody saying, we’re moving to L.A. from San Francisco. I think that's because they're trying to avoid the “mono culture” that has developed in the Bay Area as well as the skyrocketing cost of living in Northern California. There's an opportunity for people to come down to L.A. where there's more diversity, there's better work/life balance. And, of course, we have better weather.

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