Disclosure: this is not a word to word transcript, I have summarised our general conversation between Antoine and I into themes to make it easier to read.
Antoine is a co-founder of Early Metrics, the first rating agency for startups and innovative SMEs . The company was started in 2014 with its first office in Paris. Today, Early Metrics have offices in Paris, London and Tel Aviv with 20 employees.
Why did you start Early Metrics?
Startup ecosystem is complex, it is the new hype to a start company. There are also more people than ever interested in these early stage companies. More and more people are looking into investing in startups such as corporate VCs, crowdfunding platforms. Innovation departments of the large corporations are increasingly looking to engage with startups.
With the increase in demand, we lack proper tools to work with startups, such as means to filter out the bad, hence we decided to start Early Metrics, a startup rating agency. Our business model is novel. We steer away from the business model of the large rating agencies such as the big 3 (Moody’s, S&P and Fitch). We don’t charge the rated company. Our business model works by charging the end user of the reports: the large corporations or equity investors who receive a monthly report or can access information on a specified company they are interested in. We engage startups for free to avoid any conflict of interest.
What are your main challenges as a business? How did you get your first client?
Our biggest challenge by far was marketing and business development. We started off targeting all types of equity investors. Our first client was an angel investor; our second was a large financial organisation, followed by a small fund. The first 5 clients were very different – varying size, segments, and industries. This was a sign that we need to focus.
We have analysed Early Metrics the same way we would analyse any other business, for the growth potential. The best potential for growth for us was to work with institutional equity investors and innovation departments of large organisations. Since then, we have changed the way we market our products and changed pricing to focus on these two segments.
Our second challenge, not foreign to most entrepreneurs, was about finding the right balance between scale and culture of the startup. We have grown from 4 to 15 and now to 20 in a matter of months, opening two new offices in a year. Maintaining the same culture and quality is a challenge, but I think we dealt fine so far. We even appointed a Chief Quality Officer to ensure that we maintain the same quality and efficiency as we grow internationally, which we need to do very quickly because of our business model. Startups work on an international level, and our clients operate globally. They want us to work across the world as we have to support their international needs.
Who are your typical customers and the startups you rate?
On the startup side, we rate startups or early stage companies with revenues ranging from £0 to £20m in revenue. More than looking into just the financial aspect, we expect them to be innovative in some way.
For the users of the reports, we target a wide range of industries such as the Financial Services, Car Manufacturing, Retailers, Aerospace, VCs, and others. In the UK however, we focus on 3 verticals: the FinTech, Insurance, and Retail sectors.
So the ratings, how do they work? What’s your secret sauce?
The way our rating works is also different from the traditional rating agencies. We evaluate the potential for growth, not the credit risk. Our biggest focus is by far the founder and the team. As the old cliché goes – a good founder with a bad project will often be more successful than a bad founder with a good project.
The rating process is partly automated (data crunching mostly for the market sizing bit). The rest is manual, such as spending time with the founders, normally 3 hours. We are very transparent about the metrics we use, and startups know about them. The only secret sauce is our coefficients.
We have 3 pillars, with 50 criteria. We look at the quality of the management team, project potential, and the market. We worked with HR professionals, VC and psychologists to understand the soft skills that are critical to running a startup. For instance, we look into the synergies between founders and the wider team. For the project potential, we look at the how difficult is it to execute the idea, does the team have the necessary skills to do it. Finally, the market analysis is focused on two aspects: the size and addressability of the market as well as relationships with the potential clients, competitors, providers. We also take into consideration the impact of regulation.
The model itself has been built with an external committee, independent from Early Metrics. It includes the former head of Barclays Private Equity, IPO manager of Euronex, PwC partner and university reps. The model is also not set in stone as we constantly fine-tune it by back testing the ratings. The correlation is clear between the ranking and the performance. For example, more than 78% of the companies that were ranked above 75/100 have outperformed less than 12 months after their initial rating. We are lucky because the startup industry is so fast moving that you can see the impact quickly. Traditional rating agencies could only see the impact 3 to 5 years down the line.
Where would you say you sit in the decision-making process?
We are positioning ourselves in what we call the “pre due-diligence” process. We are trying to provide answers to companies, so that they can then decide if they want to make the deal or not. While during the actual due-diligence stage, the company has already made its mind to engage in the deal but is looking for reasons not to do it, hence it is focused on the legal/financial problems or concerns.
Why did you choose to expand to London? Was it the weather?
Well, definitely not the weather. For us, the size of London startups ecosystem is obviously attractive, but it wasn’t the main reason. We are more interested in a big and ‘messy’ market. London attracts startups from all over the world and is the centre for FinTech. Due to the size of the ecosystem here, the parties need a verification process, a label, and we provide exactly that.
Where do you see Early Metrics in 5 years time?
Well, our ambition is to have a global coverage and be able to knowledgeably rate startups anywhere in the world. We also want to be a reflex whenever someone mentions innovation and early stage companies in the same sentence. We want people to think – yea that sounds great, let me check Early Metrics’ rating. Finally, we want to have more products and enter different stages of the decision-making process.
From your conversations with the founders have you identified any patterns across the countries or industries?
Absolutely, there are definitely patterns geographically and across industries. For example, Israeli startups tend to have a very strong MVP, very technical. However, they tend to be weaker on the marketing and business development side. On the other hand, the UK has very strong marketing capacity but is weaker on the MVP side, this might be because a lot of companies are founded by business people and not technologists.
For the industries, FinTech companies tend to get lower ratings. Often they have a great team, good networks, they can invest themselves and have real industry expertise. However, their ratings are lower because of compliance issues, long product to market timing. Key risk factors that don’t exist in other industries. Fintech is a high-risk high-reward industry.
Are there any common mistakes that you notice across startups?
One thing that I often notice is that companies tend to underestimate the cost of acquisition. High volume low margin companies don’t work that well anymore since the digital advertising is becoming more competitive, and more expensive. A lot of companies are considering B2B2C business rather than a direct B2C model to avoid pressure on their brand and millions in marketing expenses. It is far easier to integrate into the back office of an established player than to spend millions on marketing yourself. I think we are going back to the good old SaaS recurring revenue business models.
What are the hot topics these days?
That’s a great question. To me, 3 areas stand out:
– Meaningful data – there is more and more data produced every day. Anything that helps us deal with that (i.e. data visualisation), helps us acquire data easier or middleware (ways to integrate hardware and software, like IoT) to help us use that data are really hot.
– InsurTech – it is still a few years behind FinTech, so I’m expecting a lot of innovation in that industry.
– New routes to market – innovation on how we deliver services are particularly hot. Think how Uber changed the way we deliver taxi services or the way Spotify changed the way we consume music. Concepts like direct to customer insurance are picking up a lot of traction.