Like many great startup ideas, the formation of L.A.-based incubator, investment firm, and accelerator Science had its origins at a dinner.
In 2007, Peter Pham and Mike Jones found themselves working in L.A., having recently sold companies to News Corp. and AOL, respectively. The duo, who were friends, started to organize dinners, called Beta South, to bring together startup founders and tech leaders in the area. Pham says that attendance at these dinners was in the single-digits but soon expanded to include many more. At that point, Jones and Pham started thinking about ways to foster entrepreneurship and bring more VC dollars to L.A.
Flash forward four years, and Jones had just sold News Corp.’s Myspace, where he was CEO, to Specific Media. As he was thinking about what to do next, he came back to what he and Pham discussed. He was certain that the best way to foster more entrepreneurship in L.A. would be to combine the best elements of Idealab, Y Combinator, Betaworks and a VC firm into a startup-creation machine.
From the start, Jones had a very different view on how to structure Science, and it’s this unique model that he hopes will set it apart from the hoards of incubators that are emerging in the current market. While many of the companies that Science is incubating are interesting, what’s far more intriguing is the process through which Science forms, develops and then supports these companies.
Jones reconnected with BillShrink founder Pham who had just, infamously, left the photo sharing app Color, in 2011 at the The Lobby conference, a yearly gathering hosted by August Capital partner David Hornik. Pham was brought on to control investments and the money side of things.
One Part Art, One Part Scientific Formula
After spending years at News Corp. and AOL, Jones had observed the structure of media companies, realizing that the right management structure could provide strategic services to launch and support businesses. For example, large media companies have some assets that they own 100 percent of, some assets they own part of, and some assets they produce in-house to support other content. This model, says Jones, has not been applied to venture capital yet.
“Why weigh a startup down with things like developing customer-acquisition tools, handling financing and legal operations,” he explains. “We have an operational and strategic way we build companies, and there is a set structure behind this.” And Science’s name refers to the science of building startups.
Using revenue and metrics data from companies incubated, Science is trying to create a pattern recognition of sorts of what works in various verticals. Jones and Pham admit that the first thing they do each day is log-in to a proprietary dashboard that collects all of this data on portfolio companies. The first vertical Science has been heavily investing in is the e-commerce and marketplace market, and exploring how technology can solve real-world problems. DogVacay, a marketplace to find pet sitters, helps harness ordinary people who like to take care of dogs and helps connect them to people who need dog sitters. Urban Remedy is capitalizing on the popularity of juicing and gluten-free foods to make a profit. Dollar Shave Club is a subscription service and e-commerce platform for razors.
Science conducts three types of deals procedurally. The first takes an idea or early-stage startup and helps the cofounder craft and scale the business. The second takes an entrepreneur in residence and actually creates a homegrown startup. The third takes a business that has been around for a while and helps it scale.
So what’s the method to this Science? There are a few elements to the organization’s strategy, and it goes beyond just daily hands-on help with founders.
The first is that the company has a core platform of talent and services that provide a layer of support to startups, including a legal team, a commerce specialist, a design team, a performance marketing specialist, and a hiring manager. The performance marketing exec, for example, handles all Facebook ad buying for portfolio startups.
Each individual company has a CTO, but Science has a shared code repository and additional development staff to provide engineering support.
Second, Science has built a number of B2B companies that can provide its other consumer-facing startups with marketing technologies. TripleThread, which launched in November and powers personalization for styling and clothing companies, is supporting another Science company, Fourth And Grand, which offers a personalized styling service for men. HelloInsights was developed to provide Pinterest analytics. TripleThread uses HelloInsights on a daily basis to power its personalization engine and track Pinterest traffic.
Additionally, Science has an internal system that monitors pretty much every metric you can think of online, including social media, sentiment across all social media channels, and how they rank with competitors in the space. “No startup would have the time or money to build such an in-depth data platform,” says Jones.
Third, and interconnected with the second point, Science is using and parsing through mass amounts of data every day to figure out what is making revenue, where traffic is coming from, and more. But Jones says they don’t look at page views as much. “We fundamentally build businesses that have revenue. Our core daily metric is what was revenue yesterday,” says Jones.
TripleThread CEO Allan Jones, who joined Science last year, says that the program’s focus is to help build businesses that have meaningful revenue. And where they are doing this, he adds, is in industries that are stale and boring and often overlooked. “It’s one part art, one part scientific formula,” he says.
But sometimes Science gets it wrong. “This is a dynamic environment, and we are looking at data every day and thinking about ideas on what we can improve with each company and what we can work on next,” says Pham. If the data shows an idea is not working, then it’s time to close up shop and move onto the next idea. This has happened several times over the course of a year, and, Jones admits, “we’ve had stumbles and made some bad bets.
The Money Game
Pham took 101 flights back and forth from Los Angeles to San Francisco in 2011. Basically, Pham was up in the Valley every week last year talking to investors and pitching them on Science startups.
Science raised $10 million in funding in 2011 from Eric Schmidt’s Tomorrow Ventures, Rustic Canyon, White Star Capital, The Social+Capital Partnership, Jean-Marie Messier, Philippe Camus, Jonathan Miller and Dennis Phelps.
But what separates Science’s investment strategy from other non-SF based incubators and accelerators is what it does for its startups when it comes to financing. Originally, Jones and Pham had plans to launch six companies in 2012. The team ended up developing 15 businesses in 2012, and either shut down or never launched four of these startups. Of the nine companies that have publicly launched and raised funding, Science has helped coordinate 13 rounds of financing and raised $35 million for seed and Series A rounds.
As he began the round in the winter of 2011, he realized this was going to be an uphill battle. Science didn’t yet have the credibility of a Y Combinator. There’s also the question of investing in an L.A. startup. In some cases, Pham says he had to talk to almost 100 people (including both angels and VCs) for one deal. A lot of VCs didn’t understand why Pham would need to be sitting in the room with a startup when pitching and for ongoing negotiations with a startup.
A year later, for one deal, Pham will take around 60 meetings with VCs. That will be narrowed down to 30 who are sort of interested, and 20 who will actually sit down to hear the pitch from the entrepreneur. From that, usually three to four VCs invest.
Pham rides a fine balance between investor, mentor and friend to the startups he is pitching for and the investors he is pitching. He says of his role, “The stars have to align in a lot of ways. You have to find the investor that in that small window of time is currently looking to invest, is interested in the space and gets excited for whatever reason about the company. It’s tough. I have to continually figure out which of the 200 investors I know to talk to about a specific company.”
Recently an investor came down from Silicon Valley to meet with Pham and one of his previous investments at Science (Pham says a year ago, most Silicon Valley investors weren’t coming down to L.A.). This also was the day that one of Science’s other startups started to hockey stick in terms of data, users and engagement. The visiting VC happened to hear this while at Science’s office and he wanted the pitch. Even though the deck hadn’t even put together yet for investor pitches, the entrepreneur pitched the idea on the fly. The VC decided on the spot to invest in the startup.
As for what Science invests in and how much, it’s dynamic. There’s no range or set formula, which is the way some incubators operate. Science makes a few types of investments. First, Jones and Pham will actually incubate and fund an idea and bring in an entrepreneur-in-residence to develop the idea into a startup. This was the case with TopFloor, a video-driven e-commerce platform. Science also will take an existing startup that hasn’t had much traction, and help seed and rejuvenate the product with the “Science” touch (Dollar Shave Club). Lastly, Science makes traditional investments into startups. An example of this is a recent investment in BlackJet, the Uber for private travel.
“At the end of the day, there is no template for deals,” explains Jones. “We’re not an accelerator and sometimes we put in a lot of money or we don’t.”
Science says that with incubations the stake is in the double digits, which is high compared to Y Combinator, where the stake is around 7 percent on average. While Pham and Jones wouldn’t disclose what the exact percentage of ownership the organization takes in startups, we’ve heard it can be as high as two-thirds. That’s a boatload of equity for an entrepreneur to give away early.
Despite some of the challenges Pham outlined above, Science has been able to complete a number of impressive seed raises and Series A raises for startups. DogVacay raised over $7 million from Benchmark Capital, Andreessen Horowitz, First Round Capital, Baroda, and Quest. Dollar Shave Club has raised from Kleiner Perkins, Andreessen Horowitz, Venrock, Forerunner Ventures, Shasta Ventures, Felicis Ventures, and White Star Capital.
DogVacay founder Aaron Hirschhorn said that the value of having Science help develop his idea was twofold. First, Science helped him make DogVacay into an actual, usable product and interface. Second, the credibility and connections Science brought with fundraising were extremely valuable, both at the seed and Series A levels.
Beyond just getting investors to bite, there’s also the question of the quality of startups coming out of Science. With the frothiness of the incubator market, investors are wary of many of the startups that are coming out of accelerators. But Pham maintains that because of the data- and revenue-focused nature of Science, investors actually consider this a benefit. Science vets these ideas on a daily basis through its metrics-focused approach.
And as the Series A crunch becomes a reality, investors are looking for real revenue and metrics. Science, says both Pham and Jones, can provide that early on with almost all of its companies. “Good metrics and good businesses will always attract money,” they say.
Being based in L.A. also has its advantages for investors. “Valuations are actually reasonable and investors are attracted to that. They are a lot less than they would be in the Valley,” Pham adds.
Nate Redmond, general partner at L.A. and San Francisco VC firm Rustic Canyon, and who has invested in Science and a few of the company’s portfolio startups, explains that he sees Science as a “technology operating company.” He agrees with Jones that the idea of applying the media company model to the VC world is compelling. Another differentiator from most incubators is that the core Science team is incredibly talented, he explains. “There is real value for entrepreneurs in with working with Mike and the team around how to market and build a business.”
He adds that Science has out-executed and are ahead of initial projections from 2011 on all key metrics.
What Will 2013 Bring?
While Pham and Jones wouldn’t comment on whether they are fundraising for more money for Science, their silence on the matter speaks volumes. We’ve heard independently that they are planning to do a Series B round soon.
New funding would make sense considering the expansion Jones and Pham have in mind for 2013. Currently, Science has around 16 in-house employees, after starting with six staffers in 2011. Science wants to hire additional employees in operations, customer acquisition and product. We’ll also see the company bringing on more leadership at these levels.
Science is also considering a Start Fund-like financial entity that would allow a few investors to put money in everything Science incubates at a very early stage. There are some investors, says Pham, that tend to put money into most of Science’s companies as it is, but this will become more formalized.
And the organization will move into new segments. The common thread is that all of these startups solve real-world problems, and we’ll see Science expand this philosophy into the enterprise and other areas. Additionally, we’ll see Science start to do more Bay Area investments and New York deals, says Pham. “Science companies now employ 200 people and we want to have 1,000 by the end of this year,” he says.
Scaling to this capacity is a challenge, however, and Jones highlights it as one of the biggest challenges for both Science and its portfolio companies.
How Science will perform long-term will depend on whether Jones’ “science” actually ends up being a tried-and-true way to found revenue-generating startups. The application of the structure of media companies in venture capital and tech startup incubation is not a tried and true method yet.
Economist Benjamin Graham once described the market as a “voting machine” in the short-term and a “weighing machine” in the long-term. In the near future, Science will be judged in the same way that they judge their own startup founders — by the numbers. Jones and Pham believe all of their startups have the potential to be heavyweights with $100 million in revenue or more, but it’s too early to adjudicate their progress.
Walk into its Santa Monica headquarters and you’ll be face-to-face with passionate entrepreneurs hungry to become Science’s first major exit. Many of them entered Science without any knowledge of how to build a startup and without an organized ecosystem to enter. Regardless of the long-term results, Jones and Pham have earned the right to think back to the 2007 dinner when they decided to bolster technology entrepreneurship in L.A. and make a little toast.