00:01:11 (Alastair)
Okay, today in the studio we have Stuart all the way from sunny Nevada. Stuart's founded and exited two businesses, PayCycle and Karbon, and is now more recently founded and his managing partner at Waverley Studios, a startup studio in the U.S. Stuart, welcome to the pod.
00:01:28 (Stuart)
Thank you, Alastair. Thank you for having me. It's exciting to be here.
00:01:31 (Alastair)
Brilliant. And we also have another guest in the studio. We have my…I'm not sure if I should say my partner in crime, that never really works out that well. But we have my co-founder and COO here, Luke Streeter.
00:01:42 (Luke)
Thanks for inviting me along finally, Alastair.
00:01:45 (Alastair)
Yeah, well, we're nine episodes in.
00:01:46 (Stuart)
I figured, I figured better light than never.
00:01:49 (Alastair)
I figured he should make an appearance at some point. So, Stuart, you've got a pretty colourful background in entrepreneurship, but it would be great to get an elevator pitch on what you're doing now at Waverley Studios.
00:02:00 (Stuart)
Yeah, so Waverley is a company that creates companies and I was lucky enough to spend about a year or so off after leaving Karbon in more than capable hands and thought about what I was best at and what I wanted to do and what I get most joy out of and what I get most purpose out of. And I love the creation stage… the something from nothing aspect of creating anything, really, but creating that value, creating those companies is what I love to do. And so a startup studio allows me to do that. And I just have fun, enormous amount of fun doing it. So, yeah, that's what Waverley is.
00:02:43 (Alastair)
Sounds awesome. Especially for someone else that has a creative streak and likes to come up with visions in their mind and at some point hand them over to someone more successful and operate them like Luke as my COO.
00:02:56 (Stuart)
Luke, you've got a job ahead of you.
00:02:57 (Luke)
Yeah, and I guess on that the team around you if your idea creation, like who's around you in Waverley as well.
00:03:03 (Stuart)
Yeah, some better the devil you know. I love you, Bruce, I love you Agus. People that I've worked with before, even from the PayCycle days, Agus I met at a university in Melbourne and Bruce, who we've worked, Bruce Phillips was HPC and now Aprio and you know, was on the Xero journey very, very early on and we've got to know each other over the years and he's definitely the adult in the room and so the three of us are just, I like to hope a powerhouse of creation and Bruce keeps us on the straight and narrow and Agus and I go out and do it and that's the plan.
00:03:43 (Alastair)
Well, I want to definitely dig into Waverley in more detail and find out the breadth of what you're doing, how you're doing it and more around that. But first of all I want to go back 15 years in time to 2009 and dig into a little bit more around PayCycle. The build and the sale seemed relatively short, but how did you manage to build a product and sell it to a listed company like Xero in such a short space of time? So maybe give us a feel of how you managed to build that product and get it to market so quickly?
00:04:19 (Stuart)
Yeah, well, it certainly doesn't feel like it was quick. Remember back. So I reckon it's that the germination of the idea started in about 2007. I was… I had an IT degree, I was working with Oracle, I had a great job and then I stuffed it all up and I went and did some things in property in Melbourne. So this is in Melbourne in, as I said, 2006, 2007 and then... so I ended up being a bit broke and I needed to rest back on my IT degree, so I moved to Canberra where the rates for hiring were, you know, twice as much or something like that than the rest of the country. And so I met one of the most amazing people I've ever met in my life, who hired me. And he regrets it to this day, I'm sure, John Freeman. And in what was then AusAID, which was responsible for distributing Australian aid overseas, and he was writing applications to do that and I kind of helped him as a small team of, I don't know, about a dozen or so. But Canberra had this very strange thing where it turned contractors into employees called a payroll bureau. And I saw an opportunity on the side like any good entrepreneur does and created my own payroll bureau. And so I did it for myself and then I did it for one more person. Then I did it for another person, which ended up being contract one, which we had like 120 contractors, which I ended up selling, but it was earning me like 60 or 70 grand a month towards the end. And I was doing pretty much fuck all because I wrote the software and what John did. And so we were using MYOB desktop to run the payroll and thought there must be a better way. There was no online payroll offering at all in Australia at that time. And so this is… and we saw Xero, you know, we were using a bit of Xero was coming from New Zealand. So I think Rod started Xero in 2006, I reckon, so it was still pretty early on for those guys and. But I love the whole online paradigm. I mean, you know, Salesforce, remember Zendesk and stuff like that. That was only 2006, so this is still really early. It was so early on we built the first version of PayCycle in Silverlight, Microsoft Silverlight. So our biggest support issues, and Agus would remember this, were in the plugin for the browser. That was the biggest issue we had. And so. So that was my first scratching of a niche. We built a product that we needed to use in the Payroll bureau, which became Contract one. And as I said, we sold that. And so that's why we started PayCycle to scratch our itch.
00:07:10 (Alastair)
And how quickly did you get a product up and running and working?
00:07:14 (Stuart)
Oh, real quick. We built it in Ollie's bedroom, John's son, who's now like, you know, grown up and left the house and all that.
00:07:25 (Alastair)
And so when did you get your first paying customer?
00:07:28 (Stuart)
Oh, I should know who that was. I reckon it was early 2009.
00:07:32 (Alastair)
Yeah.
00:07:36 (Stuart)
Steph, we love you. I don't think it was Steph at that… Steph was the first Karbon customer, but I think it was… I think it was like a one or two person bookkeeper firm. We realised that Xero was going to be a channel from early on and so it was an accounting firm, I reckon, yeah.
00:07:52 (Luke)
Did you have… did you have many free users on it or was it straight into paid customers? Did you build up much of a free customer base first and then monetise it?
00:08:01 (Stuart)
I can't remember. I reckon we would have because, like payments and stuff just wasn't a thing. We would have had to build out our own payments solution and everything back then. So I reckon we probably like, you know, hand took down credit card numbers over the phone and stuff. So I would, I would guess that we had a quite a long trial period before, before we had paying customers, but I don't remember that bit.
00:08:25 (Alastair)
And how much capital does this business need? Because you were doing it in spare bedroom, your partner's son's bedroom, you were building yourselves in your spare time. What sort of capital commitment did this need and how did you pull that together?
00:08:45 (Stuart)
Yeah, well, I mean it didn't need much and, and it happened to, you know, the bureau and credit cards basically paid for PayCycle. I mean our loan account…
00:08:58 (Alastair)
Bootstrapped then.
00:08:59 (Stuart)
Yeah, completely bootstrapped. I mean there wasn't… even if we wanted capital, there wasn't any available like in. I remember doing this really dumb like pitch angel pitch thing that was mind billowingly stupid and they had us in this boxing ring like down at Docklands or something in Melbourne. It was like… and nobody got, it was for 20 grand. It's like, fuck, we wasn't going to pay for anything. We ended up with like, when we sold to Xero, we had six staff and my loan account I reckon was like 500 grand. And so over two years we spent, you know, 500 tops.
00:09:33 (Alastair)
And so you did sell to Xero in 2011? Yeah, I think for one and a half million dollars, some of which was cash consideration, some of which was in stock in Xero. What sort of revenue were you at at that time?
00:09:47 (Stuart)
I reckon it was. I, I could be wrong. I reckon it's about 20 grand a month. What does that work out? So, so two, two, call it 250. I remember Rod saying… yeah, it was like 15 times revenue or something. The price that we sold for. Does that maths make sense?
00:10:05 (Alastair)
We'll go with that.
00:10:06 (Stuart)
Yeah. So probably even less then.
00:10:09 (Alastair)
But.
00:10:09 (Stuart)
Right. It might only be ten grand a month. Yeah, it wasn't much, you know, like we were. We only had four or five staff, maybe six at the end, so we couldn't have been doing very much.
00:10:22 (Luke)
But you're using your own payroll software to pay those stuff.
00:10:25 (Stuart)
Did we get to that point? I reckon we did. I'd like to think we weren't using MYOB by that stage. I reckon we would have.
00:10:34 (Alastair)
So what, what was the sale to Xero, like? So this is a early on in Xero’s life cycle. They were listed on the New Zealand Stock Exchange at the time?
00:10:43 (Stuart)
Yes.
00:10:43 (Alastair)
What, how involved… because we, you know, hear other stories of like, you know, months and months and months of an army of due diligence from finance to legal to product to, you know, whatever else. Yeah, you know, what did it look like from your perspective, a PayCycle in terms of the due diligence and the complexity and speed of the process?
00:11:01 (Stuart)
Yeah, nothing like that. Not one bit. Rod was over in Aussie, I think on a roadshow or something, he said, why don't we buy you. And I said, okay, for 2 million. He said 1 million. I said 2 million. We split it in the middle and that was done. It was, it was more or less like that. Like, I mean, a little bit literally.
00:11:22 (Alastair)
The ideal transaction for any founder, isn't it?
00:11:24 (Stuart)
Yeah.
00:11:24 (Alastair)
To do it in the pub.
00:11:26 (Stuart)
And yeah, I mean, I remember Sarah and Craig coming to Canberra and we're in the off… we had, we must have had an office by that point because it was, we called it the Cage because it was in the middle of the city. But in Canberra it gets so cold and like, you know, everybody clears out at night. There's, I guess homeless and stuff around, but the windows had bars on them. And I remember David Riverford being there and Sarah Gopel who we, who's an amazing leader of product at Karbon and Craig Walker came and did a tech review. So there was about three months I think from that conversation to close. But one of the hardest things I ever kind of had to do was have the conversation with the staff about selling. Agus went through that and you know, because we. What we had to decide at the end of the day was whether PayCycle was going to be going to create more value by itself or with Xero. And to this day I think we made the right decision.
00:13:23 (Alastair)
And so what was the, what was the challenge around the conversation with the team? Did they know you'd built it to sell or were they not necessary… Was that not necessarily part of the conversation initially? And therefore it was actually they bought into your vision, your dream and worked for you?
00:13:39 (Stuart)
The latter, the def… You'd have to ask Agus because I still remember the emotional sort of turmoil and, and stuff we went through. But I, I've never bought… I've never built anything to sell. Like people, people have said that to me. It's like, I don't, I don't build for an exit per se because I don't know, I think it's a weird thing to do, like just build great businesses and product, yeah, great product that people love and, and what will be will be. So I would stand by, you know, saying that I didn't build PayCycle to sell. Xero turned out to be, in hindsight, the obvious place for it to go, no worries, but that's all in hindsight, right? Like we didn't know, you know, there was a day where payroll came out of Xero and Alastair Greg rang me and said, we're releasing payroll in Xero. We all thought, fuck, this is the end of it, right? Like Xero's built payroll. And then we sort of had a look at it and it actually turned out that that got Australian users of Xero interest in payroll and therefore. And it didn't have the facility that we had and the tax calcs and all this stuff. Right. And it actually created the market. Yeah, it created a market for us which, you know, you can't predict any of that stuff and I don't try and predict a sale. So the question was, what was the motive about it? I think Agus in particular and some of the team, yeah, we were this sort of core little unit that were, we're having fun and making a difference together. And we know, we know every single customer and every time we got a sale we must have automated it by this point. Every time we got a sale there was an electronic bell that went off and all the fun of being six people building something as opposed to 100 people building something, which is what Xero was. There was 94 people when we moved over.
00:15:34 (Alastair)
Yeah, yeah reminiscent some of those. We, I think in Slack we had a virtual bell whenever we want to climb in the early days. And those, those kind of zero to six people is scrappy, it's exciting, it's let's figure things as we... I think I've quite often said to Luke is what, you know, the answer is yes and we'll figure it out, we'll open it, we'll build the parachute on the way down. Yeah, I probably pinch that from someone.
00:16:00 (Luke)
I've recycled it many a time. I've recycled that many a time now as well.
00:16:06 (Alastair)
So then you joined Xero and it started at a 94 person organisation where you joined and then you, I think ultimately left because the company got too big and you didn't feel like you were that agile, nimble as you were at one point I guess?
00:16:19 (Stuart)
My usefulness in a 1200 person organization is limited, right. Like, nothing against… it was and still is a fabulous company. And I'd moved the family to the US to San Francisco to sort of try and help that the US Xero business along and probably didn't do a great job like sort of looking in the wrong areas and enter an amazing, you know, company that's got an enormous market share in the US, so it's hard going but it just, at that point it's not for me, you know, like, and I don't take offense and I'm sure nobody else does that we moved on and yeah, I had a good three years. I learned a lot. I learned a lot from Rod and Ross and all the product and senior leadership team there. They were so generous to me and I learned about boardroom dynamics and, and how to pitch in a board and you know, like it was a serious business then. It was, it was, you know, I think during my time there they listed on the ASX as well and you know, and I remember doing roadshows with Chris Reardon, who I still keep in touch with these days and we made some great friendships and learned a huge amount. So I'm forever grateful for my time at Xero.
00:17:43 (Alastair)
What was the biggest lesson you took from going from a six person company to all of a sudden a 1200 person company?
00:17:50 (Stuart)
Yeah, I've thought about that a lot. I mean I, I do admire the way that you can do that and get away with. It's not the right words but like it really is the duck underwater, you know, like being able to accept the criticism that you're going to get when you grow like that. You accept that the culture is going to alter. You accept that, you know, things are going to go wrong. They just have to like, you can't grow like that and keep things, you know, the gaffer tape is going to break. Yeah. And just is. And so I admired, you know, how Rod and some of the others went about that and in that way and I learned that, you know, that you just keep going, right. Like you just, you can't stop. Once you've sort of on that train, you can't stop. And you just sort of got to accept the criticism and accept that things will break and accept that things will, you know, not be exactly how you want them and you just keep going.
00:18:53 (Alastair)
So you saw for cash and equity, good decision?
00:18:57 (Stuart)
Yeah, great decision.
00:18:58 (Alastair)
Great decision. What sort of increase in share price did Xero go through?
00:19:03 (Stuart)
Well, I think we, in that period when we first we, we bought for. So we, we sold PayCycle for cash and equity. I think we, our shares were at a dollar or $1.60 or something. I don't know what Xero is today, but it's a bit more than that.
00:19:17 (Alastair)
Yeah. Considerably more than that. Yeah, good decision. Let's move on to Karbon.
00:19:23 (Stuart)
Yeah.
00:19:23 (Alastair)
Okay, so. So the entrepreneur… entrepreneur in you kind of, you know, surrounded by a 1000 person organization, presumably wants to go out and be that 0 to 1 again.
00:19:37 (Stuart)
Yeah.
00:19:38 (Alastair)
At what point did you have the idea for Karbon? While you were still in Xero or do you take time out to reflect and balance after that?
00:19:47 (Stuart)
No, we didn't take any time out at all. I mean, what was I… Well, 47, 10 years ago. It was exactly 10 years ago in April this year. So 37. So I still had bills to pay and all of that kind of thing. So we were ready to jump in and we were thinking… so that the germination of the idea was really around… and I don't, I don't think this is the right way to go about it, by the way, in hindsight. But it was really around like, what can we not fuck up? Right? Like, what is the idea? What is the business that we're most good at? You know, and when I say we as sort of me and those that have, you know, been on that journey, John came over and then eventually Ian, Ian came over as well. And so I wouldn't say it came from a place of fear, but like America, to build a business in San Francisco, which I thought, you know, was, was like the Holy Grail is like, you know, how can we be successful? How can I go on the, on the funding road trip and raise money easy? Well, you know, we've got all this experience and it fucking didn't turn out to be like that at all. Like not one bit. And it's not that I regret how we, it's not that I regret making the decision for practice management at all, but how I got there might could have been a little bit more thought through, I think, and she shouldn't do it out of fear.
00:21:14 (Luke)
And for those that are not familiar with Karbon, what was the Karbon elevator pitch… You mentioned practice management. But is that what it was from day one and where it is today? Just bit of context for people?
00:21:24 (Stuart)
I reckon it is, I reckon, I reckon more or less, you know, we, we decided that we were going to solve the shit everywhere problem in for accountants. We drew the… what is now pretty well known throughout the industry as sort of the Kanban board and we, I know that we didn't invent that by any stretch but you know, we bought that to accountants and we made it easier and we made it, we brought everything together for them and more. Apart from a sidebar into tax in the US that wasn't a great idea. It is more or less the product that we imagined in Marin county in Mill Valley with Pax and Sarah and John and I don't know whether Ian was there but in the, you know, like 11 years ago.
00:22:14 (Alastair)
Can we give some context to how big Karbon is in terms of number of people or a revenue proxy or valuation proxy, whatever you're most comfortable with, just, just to get context of that versus PayCycle. Because PayCycle is a two year journey plus the three year kind of, you know, post… post exit, whereas Karbon's been a ten year journey or nine years. Ten years until you kind of largely exited yeah, the day to day operations.
00:22:37 (Stuart)
Yep. So I, I haven't been in Karbon… I handed over to the amazing Mary about 18 months ago and so when I left, you know, we're sort of 130, 140 people. I know they've grown towards sort of 200ish now and we're doing, you know, 10 million plus of revenue or run rate and it's probably, you know, increased substantially since then, I'm sure.
00:23:07 (Alastair)
Yeah. So if you look at that and apply some sort of similar valuation concepts, SaaS business to PayCycle, that's what, 100 times the size?
00:23:16 (Stuart)
Yeah, thereabouts. Yeah, thereabouts.
00:23:19 (Alastair)
But people wise, bit fewer than 100 obviously, but revenue and valuation probably 100 times. So significant increase in scale from PayCycle to Karbon and do you think the Xero piece in the middle at that organization, surrounded by Rod and the other leadership team, do you think that helped your kind of experience, confidence or whatever you want get you to that I can build a business 100 times.
00:23:43 (Stuart)
Without a doubt. 100%. Yeah. It's this Karbon felt like the third business and it wasn't my. Xero was definitely not my.... I'm not saying that Xero was my business, but it felt like the second learning experience.
00:23:55 (Alastair)
And so it sounds like an element there where you went from PayCycle, founding a business. There was one and a half million pound valuation to, you know, a much, much bigger valued business or a business with complexity. So the next time round, actually you had a bigger comfort zone on your own and the greater confidence to just be yourself in that situation.
00:24:17 (Stuart)
Yeah, that's definitely true. Even to the point. Maybe like too much confidence, I think in, you know, perhaps a bit arrogant along the way where we thought we could raise money easier than it was and sort of got… got over our skis a bit so…
00:24:33 (Alastair)
We all know what that feels like.
00:24:35 (Stuart)
Yeah, literally, figuratively yeah. But I mean… but Waverley is just the extension of that. Like, I know how to build businesses. I mean, I'm sure I do. We'll find out, won't we? But, you know, it feels like track records. It feels like I've done it a few times and this is. Waverley is just an extension of that is like, I can do this and I enjoy it.
00:24:53 (Alastair)
So you've mentioned. Sorry, mate, go on.
00:24:55 (Luke)
I was going to say, you mentioned there like a challenge with perhaps going to raise money and not perhaps what you thought. Like, did that change direction of the business, just change the speed of growth that you're going at? Like, what was the outcome of not getting.
00:25:08 (Stuart)
That changed everything. I mean, there were three or four times we were, you know, hours away from not paying payroll. And in the US, like, that's… that's basically it. Yeah, yeah. And we… we second mortgaged our house to. We were off salary for two years. We pulled another million out of our house to put into Karbon. And then, you know, we rode it out. We just rode it and rode it and rode it and we. We reduce headcount at one stage, I don't know, I can't remember the exact numbers, but say from 40 to 30 and then, you know, got it slowly back up again where we must have broke even or, you know, there and thereabouts for a little bit and then, you know, go out and find… with Blackbird, had put in a Mean, at that stage we'd spent most of that or if not all of it, and then eventually sort of around the start of 2019. So there's five years in of sort of up and down and up and down and, and, and paying a lot of wages out of our own pockets and people delaying wages. There's a lot of creative cap table stuff, people sort of going on half wages for long periods of times and all this stuff. It was, it was really hard for a while.
00:26:26 (Alastair)
So these are the things that you don't read about from founders in TechCrunch or on their overnight success stories, right. You don't read about the challenges and the remortgaging your house and not knowing how to pay. You know, maybe behind closed doors, but certainly not openly. So I think it's really great to get into, but I'd quite like to go back to how you actually, because I think you mentioned also at the beginning it might have been harder to get funding, but how did you actually get Karbon off the ground? How did you fund it to begin with? Self funded initially?
00:26:58 (Stuart)
Yeah.
00:26:59 (Alastair)
Like pre-seed funded by yourselves?
00:27:00 (Stuart)
Yes, yeah, it was, yeah, I reckon we put in, maybe John and I put in half a million or a million and then Blackbird… actually the funny thing is to get funded initially was, in hindsight was quite straightforward. Like, you know, that pre-revenue that, you know, before you're actually selling anything and you have numbers you've got to increase, you know, that relatively speaking, felt.
00:27:26 (Luke)
Zero to anything.
00:27:27 (Stuart)
Yeah, yeah, yeah. While you're at zero, it's, it's like, it's just a, it's just a deck and a dream and some experience. So that was…
00:27:34 (Alastair)
And you had the experience but both of starting and working and on the CV, yeah, you had it, you had it all right.
00:27:42 (Stuart)
And Nikki and Rick wrote us a check from Blackbird, God love them, wrote us a check for a mill and it is still in Karbon today.
00:27:50 (Alastair)
And what sort of dilution did you take at that point? What sort of stake did they take for a million?
00:27:53 (Stuart)
I reckon I'd have to look, I want to guess 20%, something like that one, one on four or something like that.
00:28:01 (Alastair)
And so that was easier than when you actually had customers and was that because you were still finding product market fit and maybe the traction wasn't as quick as Venture wanted to see?
00:28:10 (Stuart)
The latter, definitely. Like, you know, I still… you know, the Sester guy, you know, the triple, triple, double, double, double stuff, you know, these are just numbers that in our market, selling to or, you know, distributing, selling to accountants is just not... Well, we couldn't achieve them, right. Like we couldn't go from a mil to 3 mil in a year, for instance, which is what that sort of was calling for. We doubled. but that, you know, raising money against guys that are just going bananas in other verticals or whatever at that point in time was just too hard. I mean, we trawled Sandhill Road up and down 60, 70 odd meetings and couldn't find a dollar. So that, that was the hardest time.
00:29:03 (Alastair)
So what, you know, 60, 70 meetings, first meetings, I presume, or they also set into second meetings or just first meetings. But what, at what point do you kind of self reflect and go, we need to pivot here? We've spoken with 60 people that are supposed to be in the know, or maybe they're, maybe they're… you know, backing other, other types of businesses. But what do you take from that? Or what did you take from that and reflect on and do differently?
00:29:34 (Stuart)
Yeah.
00:29:34 (Alastair)
Or was it perseverance?
00:29:37 (Stuart)
Well, yeah, I mean, that's a good question. I think it was, it was arrogance and stubbornness I think that sort of delayed or, you know, didn't, didn't set us on the right path soon enough, I reckon. Like when I heard. No, it was just, it was because they didn't know what they were talking about.
00:30:02 (Alastair)
They didn't understand the problem.
00:30:03 (Stuart)
They didn't understand them. What the fuck's wrong with you? You know, like all there, it's all on them. Nothing was, you know, on me. And, and I think that that was, that was just a mistake of where I was in my life and, and, and you know, that I thought I knew better and you know, like it took, it took that belting to sort of, you know, make some strategic decisions around and, and, and I mean, I probably a bit of luck with COVID but not that much. We're in that we're in a good place to take advantage of the COVID upswing, but well and truly by then.
00:30:41 (Luke)
So I think, yeah, what was that upswing in Karbon's case then? So that teams were now remote and therefore they needed the practice management software or.
00:30:53 (Stuart)
Oh, yeah, yeah. From a Covid point of view. Yeah, I mean we'd build everything that we had to. It's like we… you know, we're at that market in Russia. Shouldn't joke about that, should I? But we, yeah, I mean that Karbon was perfect for those remote teams that had to go remote over overnight. But, but the point that got us to there, you know, that two years in between trying to raise money and getting to Covid were just, like I said before, building a good business. Like we got rid of the tax stuff and didn't worry about that. We, we just, we, we got out of, we're in the process of. Yeah, getting out of San Francisco, getting cheaper labour, just, just building a business that made sense.
00:31:39 (Alastair)
Interestingly it, yeah, it's building a better business because of the, the setbacks rather than riding a wave which can carry you through in a business that's maybe not optimised from a cost perspective, from a go to market strategy perspective. So it's actually, yeah, when times get tough, I think I said earlier at launch, wasn't that a smooth sea never made a great sailor. So, but, but it is that, isn't it? Tough times makes it better.
00:32:06 (Stuart)
We were doing most of our sale, 50% of our customers and about 70% of our revenue was coming from the U.S. the currency in Australia was dismal. And so a lot of our development was done in Australia. Like just balancing managing, you know, costs and just making a good business made us very investable when the time came.
00:32:27 (Alastair)
What was the biggest lesson that you took from PayCycle that you implemented in Karbon? But interestingly, you didn't, so we've just talked obviously about funding. You didn't, you didn't get external or venture backing in PayCycles, it was bootstrapped. So that's obviously been a challenge. But yeah, a lesson that you took from PayCycle days that you did apply in Karbon.
00:32:54 (Stuart)
Yeah, I, I'll say. What, yeah, the, the funding thing was always a bit, you know, tied to ego. Right. Like going out and you know, you read TechCrunch, especially during those heady days of sort of late, late 2010s, whatever you call them, you know, as people might think it's a bit of a stretch but, but practice management that helps accountants run a firm, easier, better, less admin, more profitable, more enjoyable. Whatever it is, there's good to be had there. And I think that's, that's the lesson I took. You can build great companies with great people. And that is one of the most important things that I feel like that I can bring to the earth.
00:33:40 (Luke)
You took it from what, Xero to circa 100 people? What, what you bought from, from that landing you described, what was the cut off point where that, that culture was hard to maintain? Like maintain 30, 50 people. What? Because you lose that, right? You, you can't have the impact as CEO that you have on the team of five that you can. On a team of 50.
00:34:01 (Stuart)
Right, I definitely… 50 was all right, 150, I was sort of really, you know, struggling, I think. Jordan, I love you. I think the day that I knew it was sort of my time had come was the, the Compensation and Audit committee meeting. It's like, I love you guys, but I just, I'm done. I can't.
00:34:23 (Luke)
Sounds way too grown up.
00:34:24 (Alastair)
Yeah, the two hour meeting was two hours too long.
00:34:27 (Stuart)
Yeah, yeah, yeah, yeah. At least two hours long for me. And I admire, you know, like I would like to think that, you know, that I did this… the intelligent thing and handed it over to people that are more capable to take Karbon to that next stage, and Mary's doing an amazing job.
00:34:47 (Alastair)
So it moves us nicely into picking up on the topic of a board and a board composition and the value a board can bring in the good times and the bad times. Did you put the board together or was it put together by Blackbird or…
00:35:02 (Stuart)
No, it was.
00:35:03 (Alastair)
How did it come about?
00:35:04 (Stuart)
It was put. So we had a pretty loose board up until Tidemark and Dave invested in the B. And that was a pretty chunky round that sort of set us on a good path for growth.
00:35:20 (Alastair)
And how much was that?
00:35:22 (Stuart)
40 odd million.
00:35:23 (Alastair)
And what did it value at the time or is that undisclosable?
00:35:25 (Stuart)
I don't know. Can we disclose it? I'll ask Mary.
00:35:28 (Alastair)
I'll say you can.
00:35:30 (Stuart)
That was sort of 200 plus million.
00:35:33 (Alastair)
Okay, well we'll add a...
00:35:35 (Stuart)
If we can't, if Mary says we can't say it, we won't say it. So, and at that point, you know, sort of things change, you know, things get serious. That's, that's, yeah, that's money that you can't, you know, just, just be sort of casual with. And so Dave is one of the most… Dave Yuan from Tidemark, who we'd knew, who we'd known at TCV through the Xero days. They put 200 odd or something I think into Xero after enlisted and stuff. And I'd met Dave through that process and then we reconnected, you know, later on and was lucky enough to have Dave in our, in our series B. And then so, so he, he, you know, he's a very, very experienced operator. One of the brightest guys I've ever met. And so he…
00:36:29 (Alastair)
Is he US or?
00:36:31 (Stuart)
He's us yeah, on the peninsula in California. And so he came to the board, Joe was, Joe was already on the board from Five Elms, also an amazing operator. And they introduced Jack from Cleo and, and myself. And so, yeah, Dave, Joe and Jack as an independent and somebody who, you know, much braver than me, sort of founded a company and is doing, you know, tens and hundreds of millions of revenue and so those three, you know, once the company was sort of through that 10 million plus stage, you know, really ran it with rigor and like it becomes a serious cycle of board meetings really.
00:37:25 (Alastair)
How does that feel as an entrepreneur? Does it, does it help? Did you feel it? Well, obviously it helped the company. Did it help you or hinder you or do you feel stifled and constrained and as that kind of entrepreneur that wants to break free and kind of break things.
00:37:39 (Stuart)
Yes, all of the above. Yeah, it helps. Like you do need to, you need that rigour, right. Like it's people's livelihoods and customers invest decent, you know, real investment money. It all hinders. Right, so yeah. Did I love it? No. But did I need it? Yeah. Would I do it again? Yeah, yeah, definitely.
00:38:03 (Alastair)
What's an example of where the board really shone through in a tough time, supported you?
00:38:12 (Stuart)
Well, yeah, I mean we were after Covid, we were sort of hiring too quickly and I remember being in Germany and Dave rang and said that we've really got to sort of scale this back and then he supported us, you know, through that, through that time and I think, I think we had to let go… we must have been 160 odd people and we had to, we had to scale back by 40 and. I know, I know, you know, and that, that was really tough as it's very, it's a lot of distraction away from the actual business. But obviously, you know, and it's, it's tougher for, for the people that don't have their roles after that, of course. But you know that they were very supportive and you know that they kept saying, you know, you can, you can only do this once. You can only do this once. You can only do this once. And, and even though you don't, otherwise.
00:39:10 (Alastair)
It even more unsettling for people that are allegedly staying in.
00:39:13 (Stuart)
Yeah, yeah. And even though it feels hard at the time, like they're absolutely right, you know, we scale back to reduce the cost base to the point where, you know, we're back under control of burning less and growing sustainably and the businesses sort of, you know, thrive from there.
00:39:33 (Alastair)
Do you have to make those calls personally to the 40 people or do you have HR?
00:39:37 (Stuart)
Well, by that point, even if I wanted to, I couldn't. Yeah, there's too many people involved. It's a whole… it's a whole exercise of all, you know, dozens of people.
00:39:50 (Luke)
Was that trimming in all areas of the business or was there like a certain this team's just not needed?
00:39:56 (Stuart)
No, it was. It was all, it was, it was pretty even all over.
00:40:01 (Alastair)
My last question on Karbon before we move on to Waverley, which is the most current, and I don't want to say the most exciting, but maybe... I don't want to do injustice.
00:40:14 (Stuart)
No, no, of course not.
00:40:15 (Alastair)
The team's there as well, but I think, yeah, I mean, it's spawning, obviously, lots of great, you know, entrepreneurial ideas and running with them very quickly. So it is the most exciting in that sense. But to finish off on Karbon, you mentioned earlier about the cap tables, or actually you mentioned a couple of times about the cap table and cleaning, maybe cleaning up the cap table. That's my words, not your words. But what, what did you mean by that? And kind of in hindsight, what would you have done differently around how fragmented or dial or fragmented the table was?
00:40:48 (Stuart)
Well, I made all the mistakes up front, right. Like, we had notes on notes and we had preferences on preferences, and it was a shit show and my own creation. And so, you know, when we finally sort of. I mean, my recollection is a bit…
00:41:04 (Alastair)
And this is because it was salary in leiu, was that the main…
00:41:07 (Stuart)
Yes, it was all of that. And. And, you know, money was sort of, you know, money was, was easing in or, you know, like, we'd, we'd put in for payroll and then we'd sort of, you know, sometimes it come back out again because, you know, just the shuffle, right? Like, and, you know, none of that, none of that is ideal. I don't run any businesses that way anymore, it's horrific. And so it was just a sort of a product of its time. So at the end of the day, the cap table just got a mess. And so we literally had to clean it up. You know, we tried to be as fair as possible, but at the end of the day, like, our money was worth less than investors money because we had to, you know, honor… honor those term sheets and everything, right? And so, you know, we ended up with, with options in lieu, and it all worked out fine. But... and the cap table is pretty straightforward these days. And so my lesson in that is just keep your cap tables just straightforward. Like, don't, you know, the ways in which cap tables get, you know, deranged, for want of a better words, is many and plentiful. But, yeah, I find it much easier these days just to, you know, you can do a SAFE, you can do one SAFE and then that's it. Like, you know, don't pile stuff on stuff.
00:42:39 (Alastair)
And for those in the UK listening, SAFE Luke, the UK equivalent is?
00:42:44 (Luke)
It's an Advanced Shell… ASA, Advanced Shareholders Agreement.
00:42:48 (Stuart)
That sounds. Right.
00:42:50 (Luke)
Common terminology, a lot of founders say SAFEs and you're like, that doesn't kind of exist in the UK.
00:42:55 (Stuart)
Yeah, they're not that safe if you keep piling on top of each other.
00:42:58 (Alastair)
Let's move on to Waverley Studios. So I want to hear more about what's going on in Waverley. I've obviously heard some of the ideas and the ambitions when we were on a chairlift out in Morzine and Avoriaz earlier this year, which is really cool and exciting to hear the breadth and the variety there. And it sounds like these are just ideas that you come up with and run with, which is. Which is pretty cool. But yeah, you gave us the elevator pitch on earlier you talked about a studio and earlier today we talked about the difference between studio and accelerator. But I think it's worthwhile sharing the difference in studio and accelerator from your perspective. And therefore what Waverley does, that's different to maybe what people are probably more commonly in the UK used to, which is an accelerator.
00:43:47 (Stuart)
Yeah.
00:43:47 (Alastair)
And just how different they are.
00:43:49 (Stuart)
Yeah. And then there's another one thing in there, another sort of term in the venture studio. So I think there's. So startup studios have become a little bit more prominent over the last sort of 10 years or so. There's a couple of hundred around the world now, none of which are identical. Some famous brands that have come out of studios are Front the email sort of collaboration tool, Him’s and Her’s, which is a medical, the hair loss and erectile dysfunction…
00:44:24 (Alastair)
I was just about saying I targeted all the time and see what you said the erectile dysfunction…
00:44:29 (Stuart)
I know you're all the hair. And so… but a startup, so an accelerator is a group of people that will bring in ideas and other people and help them develop those ideas. A venture studio will be a, you know, a spin off or a side shoot of a venture capital firm, typically, that is, you know, endeavouring to sort of come up with ideas based on all their research through screening ideas.
00:45:01 (Alastair)
Other people's pitches?
00:45:02 (Stuart)
Yeah, other people's pitches, yeah. And then… and then funding that and doing that themselves. But a startup studio is a studio where we take our own ideas and we have our own fund at the moment, we'll do a fund later this year for external money. But we essentially do a pre-seed fund for these or pre-seed round for these ideas that we develop and they go through a factory process that we keep on developing and fine tuning through proof of concept validation and then finally go to market and scale.
00:45:38 (Alastair)
Yeah, perfect. Let's get into some of the come up with.
00:45:43 (Stuart)
Right.
00:45:43 (Alastair)
And also where they are in their pre product lifecycle?
00:45:48 (Stuart)
Yeah, yeah. So a lot of studios and we're still sort of playing, you know, we still might go this way, have a vertical or an approach that they keep their ideas to. That makes sense because you get a lot all ideas. Yes. You keep all your ideas. Say in AI, for instance, there's one just making trillions of money churning out AI startups, right. Like that would be a sensible thing to do if you're just there to make money. Right, so we believe that…
00:46:22 (Alastair)
Change humanity for the better is what you also mean.
00:46:23 (Stuart)
Yeah, yes, yes, yes, yes. Improve people's lives and all that stuff, yeah, yeah. No, we believe that we're good at creating companies that will operate on the verge of the new, new technology and where the earth is at right. So AI applied to green technology is a great example, but there's all kinds of ways that you can interpret that and we think that there's themes that there are themes or thematics that are developing where we think there'll be some similarities. So we're not strictly vertical. We're not just sort of developing for accountants or something like that. We wouldn't do that. But yeah, we want to try and sort of keep it not so broad in the future. We'll narrow it down a little bit.
00:47:10 (Alastair)
So let's pick up the, I guess you call it products. Yeah, product that you're furthest ahead in.
00:47:20 (Stuart)
Yeah, so the one that we're furthest ahead in is called Athletiq with an IQ at the end. Which funny side story, we a Karbon was PracticeIQ at one point and we had IQ is actually the domain name, the dot IQ is Iraq.
00:47:39 (Alastair)
Oh, right, okay, and you changed it very quickly after?
00:47:43 (Stuart)
Well, we actually got… somebody went to a DMZ of some sort to the Iraqi, you know, top level domain office. I can only imagine, you know, dodging bullets and bombs of some sort to get us a domain. We tried, we tried to get Practice IQ, but we got one before that, just as a test and then we never heard from him again, I hope he's okay. All right, but Athletic is an operations management platform for youth sports. So I happen to be the on the board and the president of the local ski team in Incline Village, Nevada. When I came on the board, there's just stuff everywhere. Right. Like, I don't know as an accountant whether you can relate to the stuff everywhere problem. And so…
00:48:33 (Alastair)
Well, Luke can.
00:48:34 (Stuart)
Luke can.
00:48:36 (Luke)
We do use Karbon as well.
00:48:39 (Stuart)
Hopefully you've got it more under control. And so we had like nine apps. There was faxes of timesheets. There was a schedule that didn't work for the staff. There's just stuff everywhere.
00:48:50 (Alastair)
And so you did say fax?
00:48:52 (Stuart)
Yes, yes, fax machine. Like they literally were faxing their payroll and they're writing payroll in cheque, they were writing cheques for payroll. And so these are itinerant kids, you know, coaching for us and stuff, right. And so there'd be kids that never got paid and all this anyway, it was a nightmare. So we cleaned it up with Gusto and Deputy and a few other products. But, you know, there's still sort of seven or eight products in there. So youth sports, even more difficult to sell to than accountants I understand.
00:49:24 (Alastair)
Why is that from. Because of security of volunteers?
00:49:27 (Stuart)
Volunteer organisations, right. Just no money. But we… we think that, you know, huge…
00:49:34 (Alastair)
There's probably no decision making.
00:49:36 (Stuart)
Yeah. Yeah.
00:49:36 (Alastair)
Ever gets happen.
00:49:37 (Stuart)
Yeah. A board that sort of doesn't, you know, is probably not focused on this one thing. So… so we understand that go to market is. Is a long tail, but we also think that it's a worthwhile cause because, you know, promotion or if volunteers can run their organizations more easily, like, you know, whether it be football or soccer in America or baseball or basketball or skiing like we do or, you know, whatever it is globally. We think that there's. It's not a market that has been, you know, explored greatly by great software makers because it is hard to sell into, it is hard to distribute. And so we think it deserves better. And we think the promotion of kids back out onto the playing field or, you know, the pitch or the ski hill or whatever it is is a worthwhile cause. And so we're. We've got our first customer coming on doing their registration in two weeks.
00:50:33 (Alastair)
At your ski school.
00:50:34 (Stuart)
At our. It happens to be our ski school. At our ski team. Yeah. And so we do. About. The ski team does about a million bucks of registration. So all that will go through the platform and we'll hopefully it'll perform well.
00:50:45 (Alastair)
So it'll be a fintech as well then?
00:50:47 (Stuart)
It is a fintech, yeah.
00:50:48 (Alastair)
Okay.
00:50:49 (Stuart)
Yeah.
00:50:49 (Alastair)
Interesting. So you will also Take a slice of the fees.
00:50:53 (Stuart)
Yeah, we think that that's the revenue model. So you get paying per athlete or something I think is just a hard sell.
00:51:02 (Alastair)
Will it be free then?
00:51:03 (Stuart)
I think it'll be free. And we'll take transaction slice. Yeah, yeah.
00:51:08 (Alastair)
And so if you look at that, would you look at the go to market and go. Actually we can get in with, I don't know, the federations.
00:51:18 (Stuart)
Yeah.
00:51:18 (Alastair)
The top level and.
00:51:19 (Stuart)
Yeah.
00:51:19 (Alastair)
So a little bit like how franchising.
00:51:21 (Stuart)
Yeah.
00:51:21 (Alastair)
Network.
00:51:22 (Stuart)
That is the other model and there's a successful one in Australia that's done that with sailing. And we, we've had conversations with ussa, which is you, US Ski and Snowboard Association. There is, you know, these organizations are not as enjoyable as some others to deal with, but it's not impossible. And so the other thing is grants. Right. Like government grants. Either local, state or federal government grants are a really good source of revenue for this stuff. We just have to work hard to find them and utilize them.
00:51:59 (Alastair)
And when you look at an idea for the studio, do you try and size it and understand what is the potential for the market here or do you look at it a different way, more from a purpose perspective than a. What can we actually.
00:52:14 (Stuart)
Yeah, you can't completely ignore market. Ignore tam. Right. But I'm not, you know, put it this way, if a VC has got, you know, we look at big markets on the front of their website, we're probably not there kind of people. Right. Because we've seen markets change, market sizes change dramatically in our time in the industry. Right. So youth sports globally is a massive market. What can we reasonably expect to achieve from that? Not that much, but that's okay. Like I'm not of the school that is like, you know, has to be a massive market in order to raise money. But you can't ignore it because you do need to raise money, I guess, if that makes sense.
00:53:00 (Alastair)
So sticking on this application, what have you done in the studio, what have you partnered with an elastic solution design, build, whatever it might be. Tell us about how actually you get that product from your head into somebody paying subscriptions through it.
00:53:18 (Stuart)
Yeah. So the studio is four people in total, three partners and another. And the studio itself will always be pretty small in payroll. Right. So we want to be as nimble and as utilize elastic resources as much as possible.
00:53:39 (Alastair)
Back to those peace cycle days.
00:53:41 (Stuart)
Yes, yes, yes. I want to travel the world and set up three studios. That is my dream job.
00:53:47 (Alastair)
And that's why you're in London.
00:53:49 (Stuart)
Amanda would love It My family would love an offer office here and so we eat a lot for this one. We're trying Top Tower, which is sort of a marketplace for resources. They're all onshore in the US and we just treat them like a remote workforce. You know, like we do Sprint meetings every week. They're full time. We have a designer as an elastic resource as well and he produces designs. Three weeks before that they get developed and you know, you. We just run it like a product team like we always have. And that, you know, I think will be the model for some time. We might reuse some of these resources on other projects if we find them great people to utilize. But I don't foresee us, you know, having two dozen developers in Incline Village any day soon, that's for sure. Yeah.
00:54:46 (Luke)
And how are you separating out the. At the moment that almost sounds like you've just come up with an idea. You founded a new business and you are the CEO of this business versus who's going to run the business once it takes off?
00:54:59 (Stuart)
Yeah, once I prove that it's actually a business and we've got revenue somewhere between, depending on the business, $1 and $2 million, we will find what we genuinely call a founder to come in and take that business and have the passion for it that we do and scale it and we'll give them or, you know, they'll earn equity in order to, you know, to take that business on that journey.
00:55:29 (Luke)
It's almost that self incubation. Once it's too big or too much for your studio as the incubation, you.
00:55:35 (Stuart)
Then yeah, we've got, we've got more fun things to do. Right. Like we've proven that we can do that one and then. But again, you know, there's just more talented, more energetic, more purposeful people to take those ideas and run with them and produce great results.
00:55:50 (Alastair)
Can you give us 30, 60 seconds on a couple of the other ideas just to get a feel for the breadth of some of these and they're not all in the same area.
00:55:59 (Stuart)
Yeah. So there is a lot of scratching of a niche here. So there's a private margin, so that one's called athletic. There's private margin which is loaning to series B and C stage founders of companies based on the equity in their company. You know, I certainly went through a stage where, you know, the Karbon was worth quite a bit, but it's difficult to access capital based on, you know, your private ownership. And especially through the stages where, you know, you're getting the most growth Seems it's just such a, such a pleasure. You get the cash. But a bitter pill when you, when you sort of downsizing your own holding that you've worked so hard to, to sort of maintain through all the cap table issues and everything. Right. So that's, that seems to be a new idea. We've got licenses in 12 company in 12 states in the US we can't find anybody else doing it.
00:56:58 (Alastair)
I love this one.
00:56:58 (Stuart)
I think it's so good and Sarah's running that and doing a great job. We expect to make our first loan in July.
00:57:06 (Alastair)
What would be the magnitude of that?
00:57:08 (Stuart)
I reckon like 100 grand or something like that. Just start small. We don't want to do small. Small but. And we don't want, we want to spread out the portfolio. So it's just, it's just an arbitrage. We'll loan money at somewhere between 10 and 12% and we'll lend it out at somewhere between 15 and 20% and see if we need to educate the market a bit that that product's available.
00:57:28 (Alastair)
And I'm sure it's hard, I think, you know, knowing a bunch of very paper rich, cash poor founders, I think that will be a huge appetite for that.
00:57:39 (Stuart)
There's Bright Earth, which is a Karbon accounting ish platform. We're focused on producing or taking information from a company and producing Scope one reports for free in car. So this is another sort of scratching of an itch a little bit in Karbon. We produce a scope one report, it costs about $6,000 to produce to work out that we were emitting about $6,000 of Karbon a year seems a little bit off and, but the process to get that Scope one report produced was pretty onerous, right? Like it was spreadsheets and questionnaires and. But from data that was relatively easily available from, from SAS products across the company. Right. Like payroll and your GL and all this kind of stuff. So we're using AI to apply to a green tech and produce Scope one reports for the small end of, for small businesses. So there's a lot of green tech at enterprise, like a lot, a huge amount because they're, they're the ones that are more regulatory bound to produce that, you know, to sort of start managing their emissions. And the first stage of managing your emissions is obviously counting them. And it's a lot more detailed process to go through a Scope three. It's got supply chain and everything in it. And so we're just starting at the bottom with, with, you know, we know small business Pretty well. We, the studies in the uk actually, that have proven that people want to do better for the climate, but have absolutely no idea about how to go about it in their businesses. And so we think that the, you know, talking about TAM before. Right. Like, who knows the TAM for, you know, Karbon based AI businesses today, let alone tomorrow, you know. Right. What we're banking on is a macro factor of the earth is getting hotter and worse and we want to build companies that, you know, can either slow or improve that process. And our domain knowledge is not extensive and so we're learning about it as we go. And so we want to build companies in that realm. And this is our first one.
01:00:02 (Alastair)
Cool. I want to ask you about being an angel investor. Right. So you've been an entrepreneur. Well, you're not. You've not been an entrepreneur multiple times. You are an entrepreneur and you've kind of explored that a number of times. But as an angel investor, what do you look for in a founder when you. When you write a small check to them?
01:00:21 (Stuart)
Yeah, I don't love angel investing, to be honest. I sort of did a tiny bit with, with some local people who. With some good businesses, but I've. I've stopped doing it because we've got to raise our own fund and I'd.
01:00:36 (Alastair)
Rather focus on your investment. Yourself?
01:00:38 (Stuart)
Yeah, just the money that you. The devil that you know. And I mean, I hope I know myself. I've done enough therapy to know myself, hopefully.
01:00:46 (Alastair)
I think, I think we've given you some therapy as well.
01:00:50 (Stuart)
That's right, exactly.
01:00:52 (Luke)
Maybe for a different episode.
01:00:54 (Stuart)
Yeah, that might be more blue episode, but the therapy on the chairlift absolutely counts.
01:01:00 (Alastair)
I want to close on metrics, obviously, like flinder, we're hugely passionate about, and you mentioned yourself, the data. If you have the data, you can measure and then you can take action, take change.