Tractor Ventures Co-Founder & Co-CEO Matt Allen (Matta to many) sits down with Gaz Williams to discuss the 3+ year journey thus far to build Tractor, and what the future state looks like for TV and the many founders we’ve funded/ will fund.
Gaz: So, Matta, welcome to Tractor-Talk.
We’re chatting 3 full years (+ change) into the Tractor journey now, after you launched in December 2020 publicly with Jodie and Aprill, the other Co-Founders.
Let’s go back in time first of all, to find out your career story before we lean into the current state of affairs at Tractor. There might be plenty of people who are still unaware of your background if they haven’t met you yet…
Yep, career was first in software and technology and software development. During that time, I started a couple of different startups as the CTO, not the CEO, wrote all the code etc. My post-technical career came around 20…2010 / 2011, where I turned into a technical recruiter, moved to Melbourne and started building up software engineering teams for scaleup companies like Redbubble, Envato, realestate.com.au and so on.
In parallel with all that over a decade ago, I also decided that I wanted to be an investor, because being a founder is hard, and being an investor seemed easier! So I started doing angel investing, which was effectively supporting my tech mates who wanted to leave their jobs and start a company.
Along that journey, I was lucky enough to be able to take some LP positions in funds. I was also working closely with Blackbird as one of their scouts in Melbourne (before they had any Melbourne team). Then, that allowed me to, after my recruiting career, join the Startup & Venture Capital team at Amazon Web Services, where I looked after the portfolio's of the VCs and also the accelerators, and also they got to meet tonnes of founders scaling up tech businesses, which you know, generated the original idea of Tractor Ventures!
The Tractor Inspiration
Great! Take us through that inspiration - how did the Tractor idea come about specifically?
So, my time at Amazon was really informative. It allowed me to meet not just the venture backed portfolio, but also everybody who is using the cloud in Australia, which was eye opening, because what it really showed me was that there's so many tech companies or tech enabled companies that are using using the cloud to grow their businesses.
But only a very small fraction of them were able to use venture capital to run their businesses because VC is a very precise type of capital that requires a very precise type of business.
So the reason Tractor was born, was to actually help find companies, and fund them, that weren’t necessarily compatible with venture.
The Tractor name…
Tell us a bit more of why the company was called Tractor in the first place? Obviously I know, but some others would probably like to know the reasoning behind it, rather than just assuming it’s a whatever name thrown into the mix?
Yeah absolutely. The reason why we came up with the name Tractor was, originally it was because of the fact…the VCs fuel VC-backed rockets. They've been known as attractive rocket fuel I guess.
But we provide the capital to allow businesses that are growing at a rate that is consistent and reliable, to use our capital to continue to grow.
So that's why we started trying to solve for the capital requirements for tech companies. We’re not venture backed. As it turns out, we happily sit alongside venture quite often. But the real problem we're solving out there is understanding tech enabled businesses, funding them, allowing them to use it as funds to continue to grow, whether they’re venture backed or not.
A majority of founders (we’ve backed) are bootstrapped. They don't have a whole bunch of shareholders. They're unlikely to have shareholders going forwards and they use their capital to do the things that they're doing well, faster, or more often.
The evolution of Tractor
How has Tractor evolved in the time since everything was set in motion in late 2020?
Yep, it all started on the first of December 2020. A quick break in Jan, and then it was on from Feb onwards, and we haven’t really stopped since then!
It's really interesting, because the way we think about these companies - they're an asset class that is quite misunderstood. Technology companies have traditionally identified as falling into one of two camps, which is A) very exciting venture backed and off to be valued at a billion dollars or at least trying to, or B) a lifestyle business where it's some one person operation doing something so they don't have to have a job.
And as it turns out, there is a subset of that asset class, which are tech enabled businesses that are growing really well, that are run by people that are as ambitious as VC backed businesses.
They have millions of dollars in revenue, but they just do not want to take venture or for one reason or another, cannot or don’t want to use that particular type of capital.
So what's evolved is, is that my original hypothesis was twofold: That there is a lot of these types of businesses, and then, that they behave in a certain way. So as it turns out, there is a lot of those businesses, as we've originated over 200 loans, and they do behave in a certain way, which is fairly predictable in the way that they will continue to grow.
They're run by people that understand that taking new capital into the business all day long is not the way that you run these businesses, and that they really love their customers and their customers may look like a small niche, king like a small niche, but still, often are driving millions, if not 10’s of millions of dollars in revenue.
Lightbulb moments for Founders
So, Tractor does debt funding, currently. Doesn’t sound extremely enticing…until you know how to use it to your advantage. What’s been some lightbulb moments that you can remember as part of the journey in bringing more funding alternatives into the market?
Yeah, so, debt funding has been not really available to a lot of these businesses. The reason being is the only the only potential courses of action was a bank, or a venture debt fund, and a venture debt fund generally write very large tickets, probably $3-$5million minimum. They generally sit alongside venture capital, and get their money back out at the next venture round.
So there's so many businesses that are unable to take that particular path. And as far as banks go, they just don't understand how non-tangible asset, recurring revenue businesses work, especially if they're not hyper profitable on the bottom line because they're using it for growth.
So, the journey we've taken a lot of founders on is understanding that every dollar every dollar you put to use in your business can have a potential different return profile attached to it.
Some things are hyper risky, and you might want to use external risky capital who are happy to take a big swing and if it misses, that's fine. But, most people actually just want to do even more of the same and bring forward investment a little bit ahead of the curve to drive some revenue.
All the founders we speak to have very precise uses for this capital. So if you do happen to be a venture backed or an externally backed founder, where you do have to raise more money in the future because you're not yet cashflow positive…then there are times when you're able to deploy certain types of capital with a known return at no cost to it, to drive to put your company into a different state, which even allows you to go and have a conversation with the equity market.
The real light bulb moment was bringing new capital into any business takes a lot of time.
You know, these very slow processes a lot of the time, educating external potential shareholders as to what you do, how you do it, and what the future looks like, which generally takes months, if not years.
If you've got a business that's actually working and growing, and you need to deploy some capital into certain parts, to continue that growth and to continue to to reinvest in your business, then taking a bunch of time to explain why the future state of this business is going to be something that someone should be excited about, can actually be very detrimental to the growth.
So, we find that our favourite founders seeking our funds are the ones who understand that being able to access capital with a known return path in a very timely manner, is actually very, very important to them.
It's the time taken to capture other types of capital. Whether it be venture capital, if that's the path you're going down. Whether it be even talking to a traditional bank, which is very slow and painful. Whether it be grants and other kinds of other capital that can help you they are really slow. They all are slow and you don't really know what you know, you don't know where you stand and then you may or may not get them at the end.
Whereas we are quite precise and can go quite quickly once we sort of figure out how your business works.
The tech driving Tractor
Tell us about the tech sitting in the background of Tractor. Why is this a big deal?
The founding team at Tractor are all exited tech founders. We've all been inside tech companies before. I'm allergic to large teams. I've worked in large teams before and I think that the bigger they are, the slower they go.
So, the thought process was always here that, we are going to be tech-enabled ourselves. We are a tech-enabled lender of funds. We take the data out of businesses, we analyse it consistently. We give every company we talk to a credit score. And we use that credit score to determine if we can lend to them and if we can, what does that look like?
So, we're using that technology to be able to look at two different businesses and tell you why we think one is more likely to continue on the growth path and accelerate than the other.
So, we have two pieces of technology. One is called Horsepower, which is a credit score, where everybody gets run through the same process. We pull the data in and we analyse that as part of our investment committee process.
The other one is Harvo, which is our platform, which allows us to originate the loans. It's a customer experience, and it runs all that Treasury Department. That in-and-of-itself is interesting. I think there's very few people who set out to build a platform that allows them to manage Treasury behind the scenes.
It's not the most exciting thing on earth. But for us, it allows us to, to deal with our wholesale lenders, to accurately track all the money through the system, and to get to the point where there's not a lot of people involved in doing that, which means our accuracy and our efficiency is really high.
Scaling the Tractor tech
And in terms of scaling that, what does the future look like?
I mean, I think people think of Tractor as a non-bank lender for tech-enabled companies which we are, but we're actually a tech company that happens to lend money for two reasons. One, because the data that we get through the companies who apply and the companies who lend to and the financials we monitor, drives our AI modelling and allows us to utilise that back at the beginning of the process for our analysts to lean on.
So it means that we're actually driving revenue as well. So although we have shareholders, we're not reliant on future capital raises to run our business, into the future and forever. The tech stack and the modelling we do is becoming more and more accurate, and it's enabling our team to be able to do things more efficiently, fewer analysts to do more deals. More data to allow the internal teams to be able to understand what's happening on a granular basis.
Tractor team, culture & people
So, whats at the top of your mind when you think about team, culture, people, as part of building the mission?
Yep, well Tractor itself is a bit of a tractor. A bit of a fast Tractor which is not surprising.
A lot of the companies we back, although they're not venture backed, they are still growing at a rapid clip.
We, as I mentioned, are not venture backed. Therefore, we run frugal, we run a small team. We try and do more things with fewer people and more technology. And that'll be the way we do things into the future. The aim of our game is cashflow positivity. The aim of the game is sustainable, yet not-slow growth. The aim of our game is to have people on our team being hyper-focused on the things that they’re really good at - the one or two things they're really good at, rather than doing a bunch of busy work that processes and software can handle.
Matt’s development as a leader
I can vouch for that. You've got that background as a CTO, and obviously worked with our founders a lot over your time, but what about your own experience? How have you personally developed as a leader?
Yeah, so it's my first time in the CEO seat. I get to share it with Jodie obviously, which means that as a CEO, I only have a portion of the CEO duties, but they are the portion that that does light me up and allows me to focus on the stuff I’m good at.
Which is making sure we don't run out of money and dealing with our shareholders and our wholesale vendors. For me, it is about people, but it's not about headcount. One of my least favourite metrics or my, my favourite vanity metric…whichever way you want to phrase it is: headcount as a proxy for importance, size, valuation, so on and so forth.
I think when people tell me they got a team of hundreds and hundreds of people, I hear: high fixed costs, inefficiency, and, my god, I hope you've got enough revenue to pay for all those people.
I think that is a probably a common tenet across the people that borrow from us as well, which is: use this money to grow your business. Keep your costs under control. And that consistent reliable compounding growth is actually more exciting than hyper growth with a massive cash burn every month.
Perfect Tractor funding use-case
No favouritism, but what’s a cool tractor funding story that comes to mind in terms of, a particular company?
One of my favourites is a company called Swoop Aero. They create these amazing drones that are flown remotely, globally from Melbourne. The founder, Eric Peck, used to fly Hercules in the Air Force. He said to me, that when he flew these aeroplanes, it took 70 people to allow him to fly this thing and I want to build a company that allows one person to fly 70 drones at once and I want to help humanity while I’m at it.
It got to the point where they had an exciting opportunity to deliver a bunch of drones, but their balance sheet is filled up by venture and they didn't want to spend that on acquiring a bunch of bits and pieces to assemble the drones to test them to get them in the sky.
So we're going to fund them through that process to be able to allow them to buy and build those drones and then once they're out in the sky, generating revenue, they’re able to pay back our money, and that saves them from having to sell more shares to fund that.
If you are venture backed, or anytime really, but if you are venture backed, the last moment you would want to sell shares is when you’re about to have a massive bump in revenue. You want to do it after the fact, not before the fact.
So, you know, that particular funding product that we have, which allows companies to realise a step change in their revenue, requires pulling forward, borrowing from us, to allow them to realise the returns, relatively known but significant step change… That’s one of my favourite ways to fund companies.
The problems founders dwell on
That makes sense. Always fascinating to hear the different ways you toggle capital needs for different use cases in a business, such as those we’ve funded thus far.
What do you still think about when it comes to the problems founders dwell on?
I think the challenge for a lot of founders who run growing technology companies is that all the literature on the internet sort of makes them either identify as, like I said earlier, a unicorn: a fast-growth hyper-funded company that’s appealing to venture so they identify as a venture backed founder.
Or, you know, a lot of derogatory terms like ‘lifestyle founders.’ And it turns out that there's a lot of them struggling to reconcile with the fact that they’re building a solid growing business that has great people, great products, great customers and, is consistent and reliable.
But they feel like they’re not good enough, because all the literature says that they should be growing at ‘X over Y’. But they’re not that! But I think the challenge for those founders is comparing themselves to someone who's got 100 times more capital than they do, and is happy to spend that money to acquire to grow, hoping that they can turn it into a real business or into a cashflow positive business afterwards, which is different to the way that these founders I’m speaking to are doing it.
I think that the interesting thing is, if I look out the window and I look at the regular non-software businesses that have some significant constraints on their growth, that's more likely to be the type of business I compare them to. ‘I'm growing, I'm only growing 75% year on year?’ You’d say that to anyone else who doesn't have a scalable business and they'd be like, ‘I don't know how you do that. That's impossible.’
So the challenge for a lot of these founders is disconnecting their personal identity from things that are still okay to not be that thing.
Plenty of those conversations the last few years as we have been on the road regularly. Plus, a message that definitely resonates, well put.
Now, what comes to mind when I ask you about ‘Elastic capital?’
That’s not the name of our own finance as we know, but is, I guess, a way of thinking about how to manage your capital requirements with a combination of debt and equity funding in varying ways.
What comes to mind for you when you think about Elastic capital as a mindset?
Well, ‘Elastic capital’ is something we talk about internally and it's, you know, equity funding as the ability to raise capital by selling shares, presents a set of challenges in the fact that you’ve now promised a certain future state to your new stakeholders.
That, depending on who they are and what their appetite looks like, it sort of sets you on a trajectory where that if you change, if it turns out that that is hard or impossible even, or for circumstances, whatever circumstances, you can't do it?
As a founder, you kind of promised this future state that you're going to get to. I think the type of capital you take, every time you take other people's money, you are asking them then to believe that you're going to be able to give them the returns they require.
Some people have long term goals, some people have short term goals, some equity holders are happy to be very patient, some equity holders want short sharp returns and they expect then to get their money out quickly.
Lenders like us have fairly fairly known return paths, which can be accelerated if need be, but as a founder, I think about which parts of my business can use different types of funding that have different return profiles.
I think traditionally, tech companies have sold a share for $1 and that dollar does every job inside the business, whether it be a highly risky experiment that may or may not work, and if it does, it could be 100 times. Or whether it's to buy a customer that has a very known ROI and you know it's not risky at all because it works.
I think, the type of capital you bring into your business should change over time. You should blend it together and you should understand which parts, which type of capital to solve different problems. I think especially in Australia, given it’s so new, the selling a share for $1 and making $1 do every single thing, forever, introduces its own set of complexities in the future, especially when it doesn't necessarily equate. The job for that to be done and the risk return is not the same thing. But it requires a fair bit of sophistication of understanding your business to really get comfortable with that.
Legendary answer. Looking forward to talking about this all year, and onwards.
So, your favourite question - what’s next?
For us the ability to deploy, reasonably deploy capital into these tractor shaped businesses and have it drive the outcome they want.
Tractor itself will become cashflow positive and have a significant number of customers which is exciting for us.
After three and a bit years, I think for us, it's about being the challenge of understanding the risk of our businesses, about potential customers and the return that we need and the growth that we want in our business.
And to the point I made earlier, is identifying with the natural growth of our business rather than the unnatural growth of our business.
Every founder has a risk vs return decision every time they make it. We’re no different. So we're trying to understand the types of businesses that we can lend to, the types of, the risks involved in those and then balancing that as we scale our business through software and technology.