Thought waves on seed venture

Get to know Tidal's Grant McCarthy

Which experiences have shaped you as a venture capital investor today?

I think working in the technology and product-led operating teams at Yahoo really opened my eyes to how digital businesses could be built, scaled and developed into profitable businesses. There was such big target audience we needed to attract, engage and retain, and that was a key challenge. The technology sector might have changed since the early 2000s, but the principles for growing core customer segments remains the same. I think having a broad set of experiences and accumulating knowledge in different technology market conditions has shaped my approach to venture capital investment significantly. It not just about identifying opportunities and allocating capital, it’s about building audiences into products, and that’s how we think when we invest in companies at Tidal.

What do you know now that you wish you knew when you first started as an investor?

I now have over 20 years of experience investing in and advising early-stage companies, and one of my earliest learnings was to take extra time in making decisions around thematic investments. We know that the venture capital market is about velocity and 'fast decisions', but to get real conviction at an early stage it takes research, patience, and time. There’s not always much information available to you as an early stage investor, so during interactions with a founder you have to form assumptions.

And even if what you learn is very appealing, you need to keep acquiring more information. Waiting for a clearer picture to emerge about a sector, founders, products and customers means our investment decisions and formed from strong convictions rather than just enthusiastic assumptions.

A great example is one of our Tidal portfolio companies Upflowy. Their ability to find product-market-fit is what was initially appealing, but by also seeing how they built their low-code product and gained early validation with customers, gave us both enormous confidence in their team and more certainty in our investment decision. Read Upflowy Investment Notes - here.

As a ‘seed stage' investor you have to be willing to wait for signals that prospective companies are finding market-fit and growing product proof points. In saying this, sometimes it is also purely about the founder and the vision in the right segment, but that’s the exception to the rule.

What was your most memorable first meeting with a founder?

In my first meeting with PredictHQ's Campbell Brown, he was pitching his new company to me while simultaneously sending a fax to sell his current business. Great founders never wait to solve a problem they truly care about and Campbell was a perfect example of this in action. His passion and drive was right on his sleeve, and this kind of energy and hustle is something we really look for in our Tidal Wavemakers. It was also quite memorable to see him using an actual fax machine to do business - surely one of the most important innovations in human communication (at the time)!

Advice to live by

While there’s much wisdom in the world, my top piece of advice is don’t use the past as a point of reference for the future.

What are you interested in that might surprise other people?

I’m an avid reader of European history, from the late 1800s to 20th century events like WWI and WWII. The geopolitical dynamics that led to these turning points in history are fascinating to learn about. For example, the end of the Czar dynasty in Russia might have been precipitated by successive defeats to Germany during WWI, but underneath it was also a nation desperate for change. The build-up of war with Japan, constitutional reforms that were not delivered on, and systemic poverty, ended up pushing Russia over the edge in 1917.

What new technology do you wish you could experience again for the first time?

Oh that’s easy: Bose noise cancelling headphones. They’re essential for getting through long flights and noisy commutes. There are a variety of noise cancelling options on the market nowadays but I have found the Bose to be the most effective for my sanity.

What advice do you live by?

While there’s much wisdom in the world, my top piece of advice is don’t use the past as a point of reference for the future. If Steve Jobs had just replicated the functions of a traditional phone, we would not have the iPhone. At the time, a handheld device with internet, apps, photos and video capability was revolutionary. The first car was not invented by thinking about how to make “faster horses”. Innovation is always forward-looking.

When I talked with Drive Yello co-founder and CEO Steve Fanale for this interview, he was in a car, driving towards Canberra. I mean, he was the passenger, but it still somehow seemed appropriate to be talking about his company while he was on the move.

Drive Yello is a bit different to other startups. They are a platform connecting retailers to a gig driver network. Their network of drivers delivers to consumers on behalf of their customer base of major retailers, connected through Drive Yello's intelligent product layer. The Australian economy was protected somewhat during the pandemic because of a strong supply chain, so Drive Yello did well, delivering grocery and convenience items to locked down retail consumers.

More than just a convenience service business, however, Steve describes changing customer behaviour in the last few years. “Retailers like Amazon are innovating in this area, and Australia is still a bit behind. But we’re catching up, now that consumer behaviour has changed and retailers are finally getting systems in place to meet the demand.”

Solving a simple problem is a great start

The business value proposition is simple: help retailers get products to their customers. Starting with restaurant delivery through Menulog and then later cracking the retail sector with major players Woolworths and BWS, Drive Yello has always had its sights on national market presence. But the road was sometimes rocky.

Like many startups, building on a central idea or technology is one thing, but building a business requires scale and market reach, which is a whole other thing. With Steve Fanale at the helm, Drive Yello was always going to get the best shot possible.

“I'm a problem-solver and a product guy,” says Steve. “I’ve got a business background and I studied commerce and marketing at Uni, and I have worn many hats.” Versatility has been a key driver of business growth and for weathering the many challenges of being a gig economy-reliant business.

The solution is not always simple

Gig-economy businesses have challenges that are unique. Steve notes that one of the biggest ones is a lack of “real clarity around a gig economy worker from a legal perspective.” It’s hard, he says, to “come up with a model that is valid”, but adds that “the gig economy is not going anywhere and it’s a matter of making it work in terms of the legislation and policies around work models. To get the network effect, you also need scale and critical mass.”

The challenges don’t stop there, with the capital intensive nature of gig-economy businesses and historical scarcity of funding in Australia. “You can grow organically with most businesses to a point of profitability, whereas in a gig economy business, it's all about scale and you can't achieve that scale without funding.” At times just scraping by, Steve says Tidal’s support has been invaluable to gaining the momentum to to turn the corner and scale.

When an investment injection came at around the same time as securing some major new retail clients and the arrival of the pandemic, Drive Yello was poised to boom.

A long history and a more recent connection

Steve has known Tidal’s Grant McCarthy for over 20 years, through Steve’s previous businesses and around the once relatively small Australian startup sector. But back in 2016, Grant reached out to Steve and suggested an investment partnership. He saw the potential in Drive Yello and Steve’s vision, and wanted to invest.

“We're pretty good at separating our friendship and commercial relationship. We’re quite open with each other, and pretty direct, which means we are transparent on both levels.” He goes on to say that “Grant's been a sounding board and a personal support, as well as a funding support.” Through some tough times in late 2019, Steve explains how Grant was there through some of the hardest business decisions.

“He's probably the main person I go to when making a decision on strategy and direction. Whether we're considering mergers or being acquired or acquiring, or thinking about new product opportunities.” Grant is there, even as Steve is looking ahead to the next move.

The calm voice in the storm

Among a number of anecdotes about working with Tidal, Steve mentioned the “calm voice” and solid support of Wendell Keuneman when it comes to product strategy, senior hiring and technology decisions.

Wendell has been “a great sounding board from a product strategy perspective, offering advice and helping to hire a VP of engineering.” Accustomed to wearing multiple hats and juggling strategic, tactical and technical problems, Steve welcomed the expertise on product direction and building technical teams. “I know that our CTO has reached out [to Wendell] and I know he's always there if we need to help enhance from that perspective.”

Being a CEO can be a lonely gig. “If you haven't done it, it's hard to relate to how tough it is, particularly when you're dealing with people.  It's not just about the numbers, it’s people's lives and when there's tough times and you have to let people go, or when there's a conflict on a human resource level, that affects you personally as well." External support can be critical at these times.

Not just cash, but connections

When I asked Steve what he looked for in an investor, he said “cash is good, but it's really important that you get along, and you feel that they are going to contribute to your business beyond just the money.”

The relationship between co-founders, he says, “is like being in a marriage and so is the relationship with an investor and an entrepreneur. You’ve got to think about what the relationship looks like in one year, two years, three years time, because you're going to be hanging out together pretty closely.”

The other thing to look for is connections and a strong network. You want your investor to connect you to people who can help your business beyond what it does now. “Grant's been heavily involved in introducing us to a range of people that can assist us and also support what we need to do next."

Tidal has also got “good experience across the board that they can bring to the table and any situation; whether that be a funding scenario, a growth scenario, or going international. There’s plenty of things that they can get involved in beyond just funding.”

When it comes to investors, Steve says, it’s part of his due diligence to check out the nature of the investor. “You don't want everyone to be hands-on and you don't want everyone to be passive. It's good to have an investor that can actually assist in the business and help us grow, and luckily I’ve got that with Tidal.”

Growing with greater clarity

Steve describes the business as having a clear north star. A clarity of mission that has really only solidified in recent times. “The maturity of the business around our values and our mission has evolved over the last 12 months. That’s been the ‘aha’ moment if I had to sum it up. We’re more confident now in what we’ve achieved. We know what we offer the market and having that real clarity will enable us to grow to another level.”

The next step for Drive Yello is to partner internationally and break into new markets. With the confidence in decision making and the strategic steers provided by Tidal and other investors, Steve is looking to the future. When I ask if he would do anything differently, he thinks for a moment and then answers that it's very easy to look back in hindsight, but “if I look at every decision that we made, we thought we made the best decision at the time.” Words that are true for all of us.