ZappiStore’s Stephen Phillips explains how he got through his first VC raise

Stephen Phillips may have worked in market research for most of his career, but now he’s swimming against the tide. “Market research is full of smart people who care about understanding human behaviour, but profit margins are slim and processes are very intensive.”

At a recent Leap 100 roundtable, Phillips explained how his firm ZappiStore is trying to disrupt the industry, as well as sharing his experience of raising VC funding. “We go to big market research firms and say ‘we’ll take your thinking, your great ideas, and we’ll automate the processes end-to-end, so we can deliver that much, much quicker and much, much cheaper.’”

Merging with a technology company and getting funding from WPP strengthened ZappiStore’s ambition to cement itself as a real tech player – albeit one operating within the market research industry. “Our ambition as a tech company does not only translate in a particular mind-set or culture, but also in financial valuation and multiples, which seem alien to the market research industry.”

Although they were growing organically and were profitable, he wanted to expand rapidly, so about a year and a half ago he tried to find a corporate finance house to help. “We hadn’t really put a business plan together but we knew what the vision was,” says Phillips. “Our corporate financiers constructed a very ambitious business plan that showed the kind of rapid growth that we were hitting. It made sense at the time, but it turned out to be the wrong business plan and a bit of a shackle.”

The plan for the raise was to send out the idea to 50 VCs with an expectation of getting meetings with 10. However, 45 of the 50 wanted a meeting. “You go into these fancy offices to meet with two people and both have three MBAs and are only 25,” says Phillips. “The whole thing was absolutely fascinating. I even did one trip to Silicon Valley. I wanted to raise US money – partly because around 65 per cent of our revenue is US based, and partly because we are a tech company and I wanted to feel like we are in that space.”

However, the eventual VC, Prime Ventures, is from Holland, explains Phillips. “The investor we ended up with had just sold a company in our space and just knew it really well, which made the conversations about the business model very easy.”

But the deal took longer than planned. Phillips offloaded a lot of the raise to his chief operating officer, who is ex-BearingPoint, but it still distracted him. “All my headspace – like those moments in the shower when you have great ideas – were about the raise for six months. So the business did lose focus.”

It was supposed to be wrapped up by March, but it ended up taking until July. The business plan projected annual growth from £6m to £15m, but this was starting to slip in the second quarter, as besides the distraction from the raise they were rebuilding a lot of the code. “We were not as open with the investor as we should have been. That’s my biggest regret,” admits Phillips.

“I had a meeting with the investors before they signed and they said they were getting nervous. I put everything on the table. They were very supportive and didn’t try to reduce the money. They weren’t investing in us for 2016 revenue; they were investing in us for 2020 growth.”

Phillips went on to speak with humility about the positive influence of the VC on improving processes, systems and management. But it would be a mistake to confuse humility with a lack of ambition. By the end of this year ZappiStore will have doubled and next year he expects to do the same. “They are going to make a lot of money from us,” he says of his VC firm, “I hope.”

This article originally appeared in City A.M.