Want the maritime technology market to thrive? Stop glorifying raising money
Nick Chubb, the founder of Thetius, with some useful advice to startup founders.
Picture the scene. You are a wide-eyed entrepreneur looking to make a major impact on the industry you know and love. Perhaps you are a naval architect, or you’ve worked at sea. Maybe you know everything about port community systems or you think chartering shouldn’t be done by email. Whatever your expertise is, you feel that starting a company is the best route to bring your idea to life.
To help feed your entrepreneurial ambition you read Techcrunch and Forbes religiously. You hear stories of hero CEOs raising tens of millions from venture capital funds. It seems like nearly every week entrepreneurs exit their businesses for eye-watering sums of money and you want a piece of the action.
You start your business. Quit your well paid job. Spend 18 months trying to raise funds to get it going. When you finally close the funding, you have 18 months to hire a team, build a product, show significant customer growth and also raise the next funding round.
Things go OK, but not incredibly. You fail to get enough sales in the first year to raise the next round of funding in time. You are burning through cash. You are left with three options: sell the company for whatever you can get before you run out of cash, wind down the company with enough cash in the bank to do it in an orderly fashion, keep running until the bank account hits zero and you hit the wall.
There’s nothing unique to the maritime industry about this. It’s a fairly common cycle that repeats itself across every industry. But maritime has some nuances and complexities that make the traditional VC funding model of raising large sums of money to fuel growth structurally unsound.
Hitting the wall
Recently the news broke that Nautilus Labs had been sold to Danelec. Most of the headlines positioned the sale as a positive outcome for the seven-year-old technology business. Unfortunately, the reality was that Nautilus was facing exactly this exact scenario and the exit was some combination of option one (getting acquired) and three (hitting the wall).
18 months ago Nautilus Labs was valued at $80m to $120m by investors who have put around $50m into it since 2016. In what was likely a stunningly good deal for Danelec, Nautilus sold for an undisclosed sum, rumoured to be less than $5m.
Sadly, it’s a bad exit for the founding team, the investors, and most critically the employees (most of whom are looking for jobs today). It may also be bad for the industry. Such a spectacular implosion may put other investors off at a time where the industry really needs access to capital for decarbonisation technology.
How did we get here and what can it teach us about investing in maritime technology?
The whole point in raising capital is to bridge the gap between your vision for the future and the reality of building something of value that you can profitably deliver. There’s nothing wrong with raising money through equity to close that gap. But before you do, it is critical to understand exactly how that gap will be closed.
This is where the maritime industry’s quirks and complexities come in.
Selling technology into the maritime industry is not usually a function of the resources you have at your disposal. Your ability to sell into the industry is far more likely to be a function of quality, reputation, and most critically, time. To analogise, the false assumption that investors often make is that because one woman can make a baby in nine months, nine women could make a baby in one month. If we invest heavily in sales, we will grow fast.
The truth is, almost every senior leader I know at a shipping company talks to their opposite number in the competition (often through our forum – shameless plug). If a technology company delivers a bad outcome to their customers, that reputation will spread like wildfire. If a technology company delivers a good outcome, that reputation will still spread, albeit much more slowly.
As well as misunderstanding the importance of time and reputation, it is very common for VCs to misunderstand the scale of opportunity in maritime. They see a trillion dollar industry that is relatively under-digitalised and make investments expecting to see disruption.
People from outside the industry often assume that maritime leaders don’t understand technology. Nothing could be further from the truth. Ship owners operate the largest and most complex pieces of machinery on earth. Charterers have been using complex datasets for many years. Ports and terminals regularly invest in technological infrastructure that will survive decades into the future.
The entire sector is actually made up of very shrewd technology buyers and many of the conventions and systems that look arcane to an outsider have been built up over many years, and sometimes centuries of good practice. It’s not a good idea to move fast and break things when you are responsible for safely moving a million barrels of oil across the Pacific, or the lives of 3,000 passengers, or the safe operation of a port in a city of two million residents.
When investors commit their capital to this giant, underserved industry they expect to see the rapid growth that has proven possible in other similar industrial sectors. When those numbers don’t materialise, they cool off, quietly declining to offer more funding.
Unfortunately, Nautilus won’t be the last. Raising a major round of funding is often wrongly considered the zenith of entrepreneurial experience. The reality is that as soon as the round closes you are under pressure to return the investment as fast as possible. You have less control, fewer options, and if you raise too much money you will be contending with time.
As a founder, the deck is stacked against you
In the best possible circumstances, when a venture fund truly understands the dynamics of the industry they are investing in, the deck is still stacked against you. Here’s the truth to all would-be founders. To a venture capital firm, you are a bet that the investor wants to win but is expecting to lose.
The business model of the venture capital industry bakes in a 90% failure rate. The trick is to back enough companies with outsized upside potential that your few wins not only cover your losses, but also make up all of your investor returns too.
That means when you take venture backing, you will be driven to either a multibillion-dollar exit or failure. Anything in between those two options just doesn’t appeal to your investors. Further, every round of capital you raise dilutes your shareholding, reducing your control over the business and your financial outcome on any potential exit.
Starting something new is always risky, but before taking on venture capital you should ask yourself some searching questions. What does success look like and what are your chances of achieving it with or without venture investment? What are the likely outcomes and what would each mean for you? Is the investment of time and effort worth it for you personally? For example, would you rather have a 50% chance of selling a $10m business that you own 100% of or a 5% chance of selling a $1bn business that you own 10% of?
Mathematically, both opportunities are worth $5m. Neither answer is right, but either answer could be wrong depending on what you want from life.
There are other ways
Going back to the point about closing the gap between vision and reality, if simply chucking huge amounts of money at the problem doesn’t solve the gap, what does?
The founders who do best in maritime technology raise smart, patient capital at sensible valuations. They work with investors who recognise that trust is a major factor in success, and time is a major factor in trust. Better yet, they work with investors who have some kind of operational skin in the game. Investors who operate ships or have a lot of cargo to move or run a terminal.
The most resourceful founders don’t work with outside investors at all. Through our research platform, Thetius IQ (shameless plug number two), we see countless startups come onto the market. The majority of them want to raise outside capital but they don’t need to. Only those startups working in deep technology development that will take years of R&D absolutely must raise equity. Your idea for a SaaS platform that automates a process, or provides a dashboard doesn’t need outside funding, it needs customers.
Raising funding is a highly inefficient use of time. Many founders slog for months to raise a round of funding. It involves a roadshow of thousands of calls, hundreds of meetings, a handful of term sheets, and an often painful diligence process. The process is all-consuming and is more than a full-time job. Could that time be better spent elsewhere? If instead of thousands of calls to investors, you made thousands of calls to potential customers, could you close the gap another way?
There are of course no hard and fast rules. There are a number of tech companies that we are tracking through Thetius IQ (final shameless plug) that have raised $10m+ that I believe have a strong chance at a positive outcome. Survivorship bias leads us to believe they are the norm, but in reality they are an exception, not a rule.
We want a thriving maritime technology sector. The industry has too many challenges that are too big to solve on its own. There’s nothing wrong with the maritime media covering the latest startup’s funding round. But the vast majority of innovation in our industry comes from a long tail of small and medium-sized enterprises that form deep, long-lasting partnerships with industry. This should be celebrated and encouraged more than it is today.
