Investment Flashback - Tractor Ventures
Feb 08, 2023
Third in my series of February Funding Flashbacks is Tractor Ventures, and this one really does have quite a flashback. It's probably the most personal of the stories to tell, and one that spans many years rather than just a couple of conversations. So strap yourselves in...
Leaving the Bay Area
When my time at Heroku came to an end my family and I moved back to Australia. We didn't really know what we were moving back to though. I'd originally left with my girlfriend for a long overdue holiday in Europe, in large part because I was tired of my job at the time but couldn't find a better one (because my job at the time was actually pretty great!). Several years, an engagement, a marriage, multiple cities we'd called home, and a newborn later and we were coming back to... what? Family and friends, obviously. A beautiful city to live in and raise a child. But for work? My last memory of it was a country with relatively few tech jobs. Living in San Francisco you're certainly not being overwhelmed by the volume of startups out of Melbourne and Sydney that are "changing the world".
So I came back, hacked on a few things that went nowhere, and went to a bunch of meetups. It turned out there was heaps of interesting tech activity happening if you went looking for it. In the midsts of this aimless wandering I'd regularly end up chatting with Matt Allen. He ran a recruitment agency (with its founder, Steve), one of the few I've met that seemed to actually do a good job, and somewhat uniquely biased towards being useful to candidates. Recruitment and recruiters operate in a weird dynamic. As a recruiter you're hired by an employer to help them find candidates, you go through your network to find them the perfect match, you convince that person to leave their job for a new opportunity, and now you get to backfill the very position you just made vacant and the cycle continues. It's so rife with perverse incentives and conflict. Which is, at least in part, why I think so many tech workers treat recruiters with high levels of skepticism. You can feel when you're treated as a number being thrown into a high volume process and that they only care about you for their commission. Anyways, this is all a long digression to be able to say: not Matt. Candidates knew he had their backs, and so he was a welcome feature at every tech meetup (equally welcome was his sponsorship of most of them, I'm sure).
It turned out that not only did smart tech-minded people turn to Matt when they wanted a new job, they turned to him when they had a side project that needed investment to turn into their new job. So we'd talk about that. A lot.
Trying to be useful
In the midsts of this wandering I'd managed to find myself semi-regularly hanging out with other investors, founders, would-be founders, and having lots of interesting conversations. I didn't have much on, so I setup a booking link to make myself availble for a couple of days a week for anybody who wanted to grab coffee and chat about what they're working on. I pretty found myself fully booked and over-caffeinated most weeks.
Some pretty quick patterns emerged from those conversations. There were more people working on more interesting things than I'd realised. Some of them seemingly unaware of how well they'd done with basically no funding (there wasn't much of a VC industry in Australia). People who'd done quite well building a business selling to other local teams, but didn't really know how to grow a go to market function. And, sadly, far too many people getting absolutely fleeced by bad advice/design/consultancy from agencies who'd filled the gap in the market for people who'd been attracted by the idea of "let's build a startup!" and then didn't actually know what to do next.
Hatching a plan
Over the dozens of conversations I'd had with Matt, an idea had started to emerge. In hindsight it was a terrible combination of things trying to be mashed together. Part solution to actual problems, part social/capitalism/financial experiment, and probably a bit too much of that Silicon Valley "gotta change the world" / disrupt-all-the-things I'd brought home with me.
Something else I'd brought home with me was a soured taste of the Venture Capital industry. I'd seen people I knew build great businesses, the kinds of businesses that employed dozens if not hundreds of people that generated revenue most people would be envious of, contort themselves and their companies in the unhealthiest of ways chasing all-or-nothing outcomes. Raising their Series D rounds and knowing that a $1B exit would barely be enough to satisfy people now. WHAT?! Pouring almost every waking hour of their lives into their companies for a decade and it just never seeming like it would ever be good enough, even with everything seemingly going so well. Perception is relative, but so many people seemed to have a warped worldview. That's not to say there isn't a place for VC, but the growing allure around startups and the associated mythology had founders believing it was the one true way. Matt & I thought there had to be a better way. We weren't alone as Bryce was trying to start Indie.vc in the US around the same time and so we compared some notes and learnt a lot from his early experiments and structure.
Another thing I saw in SF was Heavybit. One of the Heroku founders built something that seemed quite special. A dedicated space for emerging devtools companies to work from. My team at Heroku had the privilege of working there for a while so I got to see the magic up close. There was just something special about the forced serendipity of having ambitious people sharing a space together, having lunch together, building products together, and probably most importantly selling them together. The companies in the space weren't adversarial, many were actually incredibly complimentary. So you'd see one company successfully close a sale to Customer A, and then the founders of other companies compare notes on what's working and what's not. A rising tide truly lifting all ships. I wanted to replicate it in Australia too, so for a while there I was talking with Heavybit about whether we partner up or whether Matt & I just blatantly rip-off their idea (with their permission).
What I didn't like about the Heavybit model was terms for the startups (at the time), basically you got free rent and support (there was a regular rotation of literal world leading experts in the building each week) for an equity stake in your company. That might have made sense in the Bay Area where these companies have raised VC, but that wasn't a realistic starting assumption for an Australian startup. And besides, we didn't want to force them to take VC. Instead we should invest in the companies.
We needed to raise some funds to make that happen. I was particularly big on aligning incentives everywhere. The idea of running "a fund" seemed misaligned with what I was wanting to achieve. We're telling these startups there's a better way to fund your companies, without perversive incentives that will drive specific outcomes in specific timeframes and then what... we'll go raise a fund that has a fixed term on it? No. Not that. We'll create a company. Our investors can invest in our company, the company will in-turn invest in the startups. We'll structure the deal a lot like Indie.vc did so it maximises optionality for the founders: build a sustainable business and we'll take a percentage of revenue up to some maximum pre-agreed cap, if instead you decide to ride the rocket ship and take VC then we'll convert into a traditional equity agreement and join you on the ride. We want founders to be aligned with helping each other too and really intentionally driving that rising tide raises all ships aspect, I guess that means founders should also end up with some equity in our company too? Sure, why not!? We're here to change the world and show everyone there's a better way.
We could also standardise all of the other good-for-the-world stuff at the earliest stages with founders and really pay it forward. Should we all be B-Corps? Let's get that whole Pledge 1% thing into all these companies. The list went on and on and on.
The outcome would have been a Berkshire Hathaway conglomerate that owned chunks of a series of complimentatry businesses that were throwing cash back to be re-invested into doing more of the same.
The harsh truths
There's still a tiny part of me that wonders... what if? What if we'd managed to get this co-working incubator not-a-fund congolmerate off the ground. Then there's a large part of me that's super thankful we didn't get stuck holding commercial office space coming into 2020.
The reality from our would-be investors was basically:
- "Let me get this right, you need a lot of money to... have a physical space, where you can fly world leading experts in, to help make a bunch of startups in that space more successful. But the startups in that space won't be paying rent, instead you'll be giving them money. And maybe, but not necessarily, getting equity in their startup in return. Either way you'll also be giving them equity in your company. The hope is eventually some subset of those startups start generating revenue and can pay you some of your money back. All of this money you're giving out is coming off the company balance sheet rather than a fund, and so not only is there no timeline to when I as an investor could expect a return but there's no actual specific mechanism to make that happen. And that if you somehow miraculously pull all of this off, the revenue streams compound to fund your growth projections so there's no expectation of a later funding round where I could exit... ?"
- Me: "Correct."
Look, I didn't say it was a great idea. It would have been a heck of a lot of fun. I think we could have helped a lot of people. The odds of it working out for our investors was slim though, and how the world has changed since then only made the odds tougher. That said, a handful of people were willing to take a risk on us pulling it off which I find amazing and incredible and all kinds of humbling given what we were asking them to believe. Unfortunately it wasn't going to be anywhere enough and so we never took their money.
A different way to help startups
Somehow in that process Matt and I met Ian Gardiner, who was heading up the Startup team at AWS in Australia and New Zealand. As the reality was sinking in, Matt and Ian had been talking about Matt joining the Startup team. Matt was a perfect for that role for all the same reasons he was great for our venture: he loved talking to founders, and they wanted to talk to him. He seemingly knew all of them already from being a recruiter. It was a great match. So he said farewell and joined AWS.
I've joked with him regularly that "once a recruiter, always a recruiter" because I think it must've been literally his first day when he referred me in as a potential candidate, and convinced Ian they should find a role for me. Ian is a pretty good judge of character and he must've been able to read me like a book. "Look man, you don't strike me as the kind guy who wants to run a finance company. And that's what you'll end up doing if you pursue this. VC, or anything like it, is a finance job. You seem like you just want to hang out with smart founders and be helpful. Come do it with me and instead of doing it for free you can get paid, and we'll cover the coffees you're shouting everyone too". He pretty quickly got me over my hesitations about working at Amazon, and possibly for the first time ever I was studying for a job interview like I was studying for an exam.
I got the job. Matt and I spent the next two years sharing a desk and helping startups. I skewed more towards the product and tech side of things, Matt towards people. By people, I mean everything that happened outside the cloud. Want to talk to people about your startup at an upcoming event? Let Matt get you on a panel. Thinking about raising and wondering which investors might be interested? Matt. I'm struggling with sales and want to speak to other founders who have had or are having this problem. Clear out Monday morning, Matt has booked a breakfast for all of you to get together. It was a fun double act while we got to do it together. It became pretty clear that "once a recruiter, always a recruiter" was missing an adjective: great recruiter. Even that is too reductive, because to be a great recruiter is really about listening to people. Lots of people. Hearing one person say they have a problem and then remembering that some other person had the solution. Your superpower is being in the information flow to able to pattern match and then connect people. Matt is great at it. And with the scale that AWS makes you operate people noticed. Lots of people. Matt could now make some magic happen...
A different different way to help startups
So when I left AWS I decided I'd get back into being operational within a startup and prove to myself I could actually still do the work. Matt however had some unfinished business. Even though in the intervening years the Australian VC industry had grown significantly there was still a belief there was something missing. A way for ambitious founders to get the money they needed to grow without giving up a huge chunk of their company. Something that allowed them to maintain optionality. The kind of founders who had built strong, dependable businesses that just needed a bit more fuel. Tractors, not rocketships.
Tractor Ventures was born. A rational re-interpretation of our earlier "something other than VC", stripped of all of the ridiculous additions I was trying to throw in there, packaged up in a way that actually made sense to both investors and founders. So when Matt came knocking he didn't really need to pitch me much, it's not like I could say I didn't believe in the idea! We both wanted to see this happen. The only decisions to make was 1) how much? and 2) which vehicle/entity? Because like before there's still big dreams about the company itself, and still the same belief in aligning incentives. So there was the opportunity to invest in Tractor itself, or into the debt facility that would be loaned out to the startups.
I decided the debt approach was the novel and not-VC bit and so that'd be what I'd do. Until my wife interjected, "What? It's Matt. You've been talking about this for years. Step up. If he's offered you both you invest in both".
And that, kids, is why I married your mother 😁
It's been such a joy watching Tractor go from strength to strength, to see that a kernel of that original thesis was obviously correct, and for Matt and the whole team to have done such a great job at stripping back all the bullshit to find that success. If you're a founder in Australia or New Zealand and you're at the stage where you need an injection of capital to fuel your growth you should definitely check them out.
Previously I led the Terraform product team @ HashiCorp, where we launched Terraform Cloud and set the stage for a successful IPO. Prior to that I was part of the Startup Team @ AWS, and earlier still an early employee @ Heroku. I've also invested in a couple of dozen early stage startups.