How to Create a Startup Ecosystem: 10 Years of Growth, as Lived by Amplify’s Paul Bricault
By Nicholas DeMartino ● July 10, 2019 15:10
Amplify is a pre-seed fund based in Venice, California. Since 2011, Amplify has backed 80+ companies, which have gone on to raise more than a billion dollars in funding, with exits to Apple, Google and FanDuel, among others. Amplify has taken a strong lead in the Southern California startup ecosystem, not only by investing and nurturing its own portfolio, but also by operating a coworking space and event hub and providing regular data updates, including a blog and quarterly updates called the “LA Seed Report” (to subscribe, go here). Amplify’s 2019 annual roundup of the Los Angeles tech and venture scene provides a great framework for this interview with Amplify co-founder and managing partner, Paul Bricault.
Let’s start with your journey, which began in Ontario.
Paul Bricault (PB): Yes, I was born in Ontario, in Sault Ste. Marie. I did my undergraduate at Western University in London, Ontario and then migrated to L.A. because I got a scholarship to the University of Southern California (USC) to do my graduate work at the Annenberg School. After graduation, I decided I would do my optional employment allowed under the F1 visa here with the intent to go back to Canada after. One thing led to another and I never left. Initially I was in finance, then media, and now Amplify.
What drove that change?
PB: I guess my career has been a series of beautiful accidents. It's hard to say whether it was serendipity, skill or intent, but I ended up at the William Morris, a top talent agency here. Before that I worked at a consulting firm that focused on technology and media, as well as in finance focused on digital media. That was my stepping stone to the agency, because at the time they were trying to build a digital media practice. I ended up spending more than a decade at William Morris, serving on the board there and running digital media.
How did you move to venture capital?
PB: While at William Morris I set up a corporate venture fund, actually a joint venture with a firm called Accel Partners that was one of the first investors in Facebook and other companies. We established what was called The Mailroom Fund in 2008, and that's where I found my true passion. After the merger between William Morris and Endeavor in 2009, I left the agency and joined The Mailroom Fund full-time. From there I went to a fund called Greycroft Partners, with operations in New York and L.A. Then I co-founded Amplify.
So you co-founded Amplify with the idea of jumping into the accelerator space. The only models at the time were Y Combinator, TechStars and maybe a few in L.A., but not many. You were pretty early, right?
PB: Yes, we were. There were two other accelerators here when we launched – Launchpad LA and Mucker Labs. Also Science was a third entity, but that was more of an incubator than accelerator. All of them were only about a year old when we started and that was seven and a half years ago. This was a moment when all of a sudden L.A. was in the zeitgeist. All of us were looking at the same thing – promise that had not yet been realized. To catalyze the environment we needed to provide early stage capital and a support ecosystem for startups. Brad Feld of TechStars has written on how to build startup communities. He posits that every city has similar needs, as well as unique needs specific to that city. When we started out, L.A. needed everything. The city was a bit of a venture wasteland. Plus, we needed to offer multifaceted services to really jumpstart the ecosystem.
Can you describe the elements of the model that you created and how it has evolved?
PB: It's a constant evolution, like any business. When we started, Amplify was modeled on the TechStars and Y Combinator model, with slight changes. For example, those accelerators were largely driven, and still are driven, by a cohort-based model. Once accepted, a company is there for a designated period of time, usually three months. They all accept the same venture terms, the same valuation, and the same investment rate from the accelerator. That all culminates in a demo day and they all graduate at the same time.
We didn't take any of those characteristics of a traditional accelerator early on because we decided that the world had changed. Entrepreneurs were no longer looking for a one-size-fits-all model, this factory-like finale, where they are all kicked out on the street at the same time. The startups here in L.A. needed more support than they might otherwise need in Silicon Valley or New York, because the nascent system here was so new. We were afraid that companies kicked out on the street would just asphyxiate and die.
So we decided that we would offer services and help with product, tech, business development and fundraising, not only during a designated period of time, but in a bespoke fashion based on what individual companies needed. We would offer capital based on each company’s needs and how far along they were in terms of their development, traction and product/market fit. So every one of our deals was, and still is, different in terms of how much capital we invest. Each of our companies stays in our building doing business for different periods of time. Now, we even have some companies that are outside of L.A. and the U.S., including Canada, and some of them have never worked inside of our building.
To do all of this work, you obviously must raise capital. Indeed, you’re raising a new fund right now. Can you talk about what it means to raise a fund, how large a pool of capital you raise, and where you get it?
PB: Obviously every fund is going to be different. Andreeson Horowitz is going to raise a billion dollars because that's their focus, to invest in companies at all stages. You raise based upon your focus. We’re a pre-seed-focused fund. We’re usually the first institutional check that goes into a company and we're investing in rounds that are sub-two million dollars in size. We're writing checks of $250 to 500 thousand for that first check and then follow-on capital thereafter.
This is after they've come out of the accelerator? Or as a result of you accepting them?
PB: This is a result of us accepting them. That's why we don't necessarily refer to ourselves as an accelerator, because an accelerator has a lot of trappings based on the perceptions in the venture community. We just refer to ourselves as a pre-seed-focused fund. Every company that comes into our building or takes capital from us, does so on terms that are unique to each company, and does so in that $250 to 500,000 dollar range, where we're generally leading in the round and then syndicating the remainder of the round.
How many funds have you raised?
PB: We're closing our fourth fund currently. Every fund has a two-year investment horizon in which we're making investments over two years in terms of principal investments, and which we will follow on with pro rata rights in subsequent rounds, usually into the Series A round, but generally not thereafter because our fund sizes are small.
When we started out, we were raising largely from high net-worth individuals. Then we started raising from family offices. Now we are raising from funds in this current iteration with the LP base very geographically diverse, meaning Asia and all across North America. Within those different constituent groupings, some investors are interested in making direct investments in companies and some are interested in getting high returns at an early stage, returns that are better than public market returns.
Traditional accelerators begin to find out whether they're successful after seven or eight years. Are you at a point where your earlier investments are beginning to pay off?
PB: Yes, absolutely. In fact, here's a blog post just yesterday from Fred Wilson, the founding Managing Partner of Union Square Ventures, one of the best performing venture funds. He talks about the seven to 10-year cycle. He doesn't know why it's seven-to-ten-year rather than 10 to 15, or three to five or whatever. He has looked back at all his investments over time, including hundreds of angel investments and venture funds that he's been involved in and the typical sort of maturity and exit timeframe is seven to 10 years. So, yes, our first fund was seven and half years ago that fund is now fully paid off. We had an exit to Google and exit to Apple that resulted in returns for that fund. We just sold our first Fund Two company this week, a music-related company that was sold SoundCloud.
You’ve written that Amplify invests in only one per cent of the companies that you meet. How many companies do you review in a typical year at Amplify and what makes the successful ones stand out?
PB: We look at about 2500 to 3000 per year. That doesn't mean we take extensive meetings with all of the companies. Maybe they submit a deck or company description and then we make a determination of whether we should dig in further and physically meet with the founding team. The first filter is the team. We will look extensively at them, their background, their domain experience, the sector on which they're focused, and what they've done prior.
The second filter is the sector, because we must filter out for the potential of that sector to later stage venture capitalists. For instance, when we started out, ad tech was very hot in the U.S. with 2000 of them in 2012. Now it’s about as cold as it can get because the public market IPOs for ad tech companies did not perform well, and because Google and Facebook sucked all of the revenue through the ad through programmatic.
The third filter is what we call TAM, or Total Addressable Market. So it could be an amazing team and it could be an amazing sector, but if they're only selling red shoes to millennials then that's obviously not a very big TAM. We might have to say to this exciting team working in an interesting sector like e-commerce, “You need to go back to the drawing board on your specific product focus.” Similarly, it could be an amazing TAM and an amazing sector, but if the team isn't great, then that would also be a pass.
What about the entertainment sector? I was surprised to learn from your colleague Richard Wolpert how limited your interest has been in entertainment media tech startups in a location where that industry is so dominant. Why is that?
PB: You’re right, only three or four of our 80 investments have some kind of media connection. Both Richard and I have 15 to 20 years in the media business. That’s both good and bad, right? You have a lot of scar tissue that comes with that kind of history and can see all of the warts on any business in which you know too much about. We avoid any kind of rights-related issue that can be a massive hurdle to try to win in terms of negotiating deals with media companies. Media companies historically are not prone to embracing change. So trying to get traction as a startup with media companies is challenging. This makes it difficult for media-related startups to raise capital; the venture capital firms down the road have the same scar tissue that we do. We just sold the music space company, as I mentioned above, to SoundCloud. That was a great exit for us. We did very well. But that company was extremely challenged in raising capital after they came out of Amplify because the entire venture community considers music to be anathema to them. They will not invest in music-related startups for the most part. So given that we need follow-on capital because we're an early stage-focused firm, we look carefully at other venture capitalists downstream that may invest in this company in a Series A round and beyond.
What are you seeing is as the hottest sectors right now?
PB: It's constantly changing. Like Heraclitus said, you can't step in the same river twice. Venture is an ever-evolving, shifting-sands environment where one day a sector is hot, and then it’s not. Three years ago VR was sizzling hot, and now it couldn't be colder. Blockchain was sizzling hot a few years ago and similarly it's gone extremely cold. Always pay attention to what's happening in any given environment and evolve the strategy accordingly.
When we started there was no one investing in artificial intelligence (AI), the internet of things (IoT), augmented reality (AR), space tech or robotics. Now we have investments across most of those categories. I wouldn’t peg any particular sectors as being hotter than others, though we've spent a lot more time for instance in A.I. than a couple of years ago. We've also made our first investment in food tech, which is a particularly hot category at the moment. We also made an investment in what's called the voice space, like Alexa, Google Home and the businesses sitting on top of that world. Robotics continues to be a hot area, though we have not made any investments there just because it's high cap-ex for us. We tend to avoid areas that require hundreds of billions of dollars since we're early-stage focused.
Amplify constantly ranks high against similar programs. What are the factors that differentiate you from the others?
PB: I think that's a pretty simple answer really, as it's akin to what we tell all of our startups – stick to what you're good at and be hyper-focused. That’s really what we've done over the last seven years. We haven't evolved to be a Series A fund or Series B fund or anything else. We've been hyper-focused on pre-seed: the pattern recognition of finding early-stage teams, understanding what they require, and then evolving the resources and the added value that we bring to those companies to help them be successful. Over the last three years, our graduation rate from pre-seed to seed to Series A funding continually increased, That speaks to how we've gotten better at identifying companies that have the opportunity to be larger, potentially billion dollar companies down the road.
Amplify has invested a lot of time and energy in tracking and sharing information about the Southern California startup ecosystem. Why do you do it? What value does this effort provide, as you are so public about the information you amass?
PB: This started off as a tool. We wanted to track internally and locally what was happening in the ecosystem here. We're heavily invested in the success of L.A. since we're based here, and a good portion of our startups are based here. So I think it's important to shine a light on what's happening in your local community, and in your local market. Also, no one else was taking the lead. If you look at Silicon Valley, New York and other venture communities, there has been somebody publishing a ton of data on what's happening, but no one was doing that in L.A. and the perception is as important as reality in venture. Ten years ago, L.A. was perceived as a bit of a backwater in the tech world. Now it's considered one of the fastest growing tech ecosystems not just in the U.S., but in the world. We thought it was important to share that information globally so that people could see that there are opportunities to invest here and, if you're a startup, move here. Now it is a more robust, thriving technology ecosystem than it was five or 10 years ago.
Are you seeing a lot of inbound founders coming to L.A. to take advantage of the things you are documenting?
PB: In the last two for three years there are a lot more companies moving here. We have always had a lot of companies apply from outside the U.S., but most stayed where they were. In the last few years, though, we've had companies move here from Utah, Portland, New York and from others outside the U.S., including Canada. We have even had companies move here from San Francisco over the last two years. Almost monthly I get a call from somebody saying, “We’re moving to L.A. from San Francisco.” I think that's because they're trying to avoid the “monoculture” that has developed in the Bay Area, as well as the skyrocketing cost of living in Northern California. There's an opportunity for people to come down to L.A., where there's more diversity, better work/life balance, and, of course, better weather.
This interview has been edited and condensed for clarity.
Nick DeMartino is a media and technology consultant based in Los Angeles and the chair of the IDEABOOST Investment Advisor Group.