Why Mentorloop got off the venture capital ‘hamster wheel’

Despite having the backing of some of Australia’s largest and flashiest venture capital firms, Mentorloop co-founders Lucy Lloyd and Heidi Holmes have decided to – in their words – get off the VC hamster wheel.

The pair had raised about $1 million in capital from Blackbird Ventures, Rampersand and Tempus Partners (now known as Folklore), as well as a number of angel investors, to scale up their tech business which connects mentors with mentees via an online platform.

Mentorloop made a splash in the media and among investor circles when it raised the funding in 2017, but has been relatively silent for the past three years. In 2020 amid a tech downturn, its co-founders moved away from venture capital, focusing instead on profitability. They say they’re happier and significantly less stressed as a result, while the business has benefited from abandoning the “growth at all costs” mindset that permeates the venture capital sector.

Mentorloop co-founders Heidi Holmes and Lucy Lloyd.

Lloyd and Holmes are now calling for more start-ups to follow suit as the current “tech wreck” deepens, and as rising global interest rates and economic uncertainty continue to buffet Australian start-up funding.

Data from Cut Through Venture shows a funding decline of more than 42 per cent year-on-year in the September quarter, with the total pool of start-up funding continuing to dry up, matching levels in 2020. Australian start-up valuations are also down by 32 per cent on average from their peak, according to the survey.

“Not every company can be a unicorn,” Mentorloop co-founder Lucy Lloyd said.

“We were really on the hamster wheel of grow-grow-grow, raise-raise-raise, then grow again. And we started having conversations to gear up for our next big round of funding, for $7 million or something like that, and that’s when COVID hit.

“To a certain extent we were relying on this round to achieve our strategy and our next round of growth. But it made us look deep into each other’s eyes and ask ourselves: ‘what kind of business are we trying to build here?’

“We basically decided to move away from that cycle of funding and growth, and we achieved what we call meaningful profitability in 2021. And since then, we’ve more than doubled our revenue while only adding three people to our headcount.”

It comes as Australia’s largest venture capital funds are nearing their 10-year horizons, and need liquidity to pay out their first investors.

Rampersand managing partner Paul Naphtali.Credit: AFR

Mentorloop’s investors said they remained supportive of Lloyd and Holmes, despite no longer necessarily expecting a return on their investment.

“I think they’re great founders, and they’ve done extremely well to recognise that the growth path for them was to get profitable,” said Paul Naphtali, managing partner at VC firm Rampersand.

“Their journey has been very authentic to them, which has been fantastic, and we’re very supportive.

“Not every company we invest in will be the one that returns over 100x, and that’s OK. The model is not designed for everything to be successful.”

Blackbird partner Nick Crocker said he first met Lloyd and Holmes as part of the Startmate program in 2016.

“In the 12 weeks of the program, they tripled their revenue,” he said. “That growth was already exciting, but to see them scale their revenue by more than 50x since Blackbird invested in the company has been amazing. They’ve built the business to the point of profitability, and we’re extremely proud and excited to see their continued growth.”

Lloyd said Mentorloop continues to grow and recently launched in the US. It now works with more than 170 organisations globally including Woolworths and REA Group and has matched more than 40,000 mentorships globally since its 2016 launch.

A spokeswoman for Folklore said the venture capital firm “remains a big supporter of the Mentorloop team”.

“Folklore has always respected founders’ rights to choose their preferred path for their company. Founders in Heidi and Lucy’s position, who have control of their destiny and have made their own funding decisions, should be celebrated,” the spokeswoman said.

Matt Allen, the co-CEO of fintech Tractor Ventures, is an investor in Mentorloop through his family office.

“VC funds are looking for outliers. The challenge is that there are few outliers, that’s why they’re called outliers,” he said.

“When you sold your investors a rocket, and it turns out it’s a great ride for the customers and founders, but it’s not a rocket, it makes for a very awkward position. But for Mentorloop it is slightly less awkward because they don’t have any of their VCs on their board.

“As an investor there are a bunch of businesses in my portfolio that are clearly not going to be the next Canva or Atlassian. But they can still be excellent businesses.”

Other start-up founders said that avoiding venture capital had been the right move.

Quad Lock began life as a Kickstarter campaign by Rob Ward and Chris Peters in 2011, launching as a bike mount for iPhones and evolving into an adventure technology brand that last year cracked $100 million in revenue.

Quad Lock co-founder Rob Ward: “When you’re not tied up in securing funding, your attention isn’t split.”

Co-founder and chief growth officer Rob Ward says that growing Quad Lock without outside funding forced its executives to be frugal with their resources.

“Since we didn’t have spare capital lying around, we had to be ruthless in our investments, only putting money into things that genuinely moved the needle,” Ward says.

“One of the most significant benefits of not taking VC funding is the absolute focus founders can maintain on solving the problem at hand and serving their customers.

“When you’re not tied up in securing funding, your attention isn’t split. You’re fully committed to understanding and addressing your customer’s needs, which is a huge advantage. This focused approach often leads to more thoughtful and customer-centric solutions.”

Lloyd said that venture capital did allow Mentorloop to move quickly in its early days, and that it remains the right option for some start-ups, particularly those with “unicorn” aspirations. Godfrey Dinh is the CEO of Futurerent, a relatively new fintech allowing property investors to access rental income early.

“Venture capital has helped us grow, establish a market and competitive advantages faster than any other approach,” Dinh said.

“The current state of the venture market has brought about a healthy focus on unit economics and the right balance between growth and the bottom line.”

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