Features | News
14 May 2018
Making it pay: Funding Phrasee for a cool £1m
Parry Malm’s secret to funding a successful scale-up that works
It was voted the Most Innovative AI Company of 2017 by CB Insights and awarded Best New Business at the UK Business Awards in 2016, which also voted its founder and CEO Parry Malm Tech Entrepreneur of the Year. But how do you set up and fund a company based on technology that is so cutting edge that only a minority of people fully understand it?
Here’s how, says Parry Malm. By using technology not for its own sake to be “so cutting edge” but by using it to solve a business problem that enables your customers to make more money. Quite simple.
Founded in 2015, Phrasee is an AI marketing technology company that uses, in the words of its founder, “artificial intelligence to write email subject lines that out-perform humans”, optimising the lines to grab the reader’s attention and increase email response rates for customers. Parry describes it as “a scientifically-based way of encouraging people to open emails, boost response rates and subsequently generate greater revenue for the sender”.
The perils of being the first to market
And while Parry and co-founders Dr Neil Yager and Victoria Peppiatt were convinced of the potential of their technology to revolutionise the digital marketing world, it took a while to persuade the industry. And its funders. The problem with being first to market with a revolutionary new product is precisely that. You’re the first. And there are no proven results behind you.
“Trying to raise money in the early days was so frustrating, we went to meet nearly every venture capitalist in town and nearly every single one of them turned us down,” explains Parry. “They said things like ‘we don’t see this being a scalable business model’ and a lot of them didn’t understand the technology – they were saying, ‘but what you’re proposing doesn’t even seem possible’. And we got really down about that.”
“But then we met the right people. People who actually got it,” he continues. “Our investors from Next Fifteen and the angel syndicate Galvanise Capital got the concept and they saw what the possibilities were, so they went in and they went in hard.”
Making that million
Went in hard they certainly did and Phrasee received £1m in seed capital to help it scale operations and expand the company’s reach in the UK and the US markets. Phrasee closed on the funding on 1 July 2016, just one week after the controversial Brexit referendum, the first tech company to close a venture after the Brexit vote. It shows, explains Parry, how much confidence there is in our business model, even in a time of potential business crisis.
The venture capital investment followed a period of self-funding, which Parry describes as “burning through all of our savings, before having to borrow money from my dad, which is a wonderful feeling when you’ve reached the age of 36 – I imagine he was very proud of me at that point!”
Whatever about that, he’s certainly proud of him now as Phrasee’s clients include world-leading brands like Virgin Holidays, Gumtree and Dominos, all of whom attest to the revenue-boosting potential of Phrasee. In fact, Virgin Holidays reveal that the uplift in email open rates from using AI-generated email subject lines has equated to several million pounds in revenue for the company.
Why being cash-strapped helps
But Parry doesn’t write off his cash-strapped bootstrapping days, in fact, he describes them as “awesome”. Here’s why. “Not having huge cash reserves, while at times stressful, forces you to be pragmatic. We were forced to be nimble, responsive to customer requirements and ultimately focused on core product development.
“Also, while bootstrapping, you have to be laser-focused on immediate success. Whilst it’s great to have a lot of money so you can do a lot of stuff, most stuff has a 50% failure rate. While bootstrapping, we couldn’t afford failures.”
Parry advises fledging companies to expect the unexpected when raising finance for their ventures, explaining that the process is never easy. “Even when you think it’s going to be easy, there’s always curveballs coming at you and things that you just don’t expect.”
Even at the closing stages, going through due diligence for your operation is an incredibly intense and stressful period, he reveals. But there are positives and one of them is access to industry experts. “The most important thing I would say if you’re trying to raise funding is to listen to the advice you’re being given. You don’t have to take it but the advice is free.”
Funding the future: the figures look bright
And with the UK in a strong position to be a world leader in the development of artificial intelligence, according to a recent House of Lords Select Committee report – AI in the UK: ready, willing and able? – the financial future looks bright. According to figures in the report produced by Goldman Sachs, between 2012 and 2016 the UK invested around $850 million in AI, making it the third highest investor of any country.
But Parry sounds a note of caution when it comes to public sector finance. “In 2015 we applied for several grants from the government and we got turned down for every single one. And from my standpoint, I am relieved we were turned down because if people give you free money, you don’t value it. Instead, we used our blood, sweat, toil, and tears to develop a business model that could make money. I personally believe that growth is going to come from the people on the ground and the government’s job is to enable them, not give them a free lunch.”
Building a growth fund: what’s not to like
And on the House of Lords recommendation to provide a growth fund for SMEs to build a viable future for AI, he has this to say. “This funding will probably be made through a grant system and some grants are great because they will help get a certain number of businesses off the ground. However, the system will be very bureaucratic and the paperwork may slow these companies down.”
The other problem with this process is the element of deciding who gets what. “We need a panel of real experts to say what’s viable and what’s not,” Parry explains. “And this panel of experts already exist, and they exist in the free market. So I think what the government should do is provide economic incentives but not funding.”
Incentives that work
He points to the example of the current R&D tax credit system, which he says is “an incredibly effective tool to incentivise innovative companies to invest in R&D”, explaining that for every pound invested, the government made three pounds back in tax revenues.
“So, taking the long term view, expanding a programme like that makes a lot of sense.”
Government incentives, free advice and finding a solution that solves a problem to attract investment, that’s Parry’s secret recipe to funding a company that works. The rest is just making it happen…