Venture tech firm BlueChilli accused of not delivering on its promise to startups; BlueChilli responds

A number of sources have told Startup Daily that Sydney-headquartered venture technology firm and startup incubator BlueChilli has not delivered on its promise to numerous startups in its portfolio, with one source saying it is “doing more damage to the Australian startup scene than good.”

Launched in 2012, BlueChilli was, in many ways, built on the philosophy that Australia’s startup ecosystem needs a solid foundation, or to use Nitro Founder Sam Chandler’s metaphor a “great primary school system”. BlueChilli was born with the aim of providing early-stage startups a range of services including technology development, funding, strategic assistance and mentorship.

Numerous sources – each of whom requested to remain anonymous – have informed Startup Daily that the services BlueChilli provided to some of its startups have allegedly been “sub-standard”. They referenced the quality of technology development services offered by BlueChilli, the ongoing costs startups were charged for such services, and the lack of strategic support that the company publicly states to provide.

According to one source, BlueChilli’s development costs have “exceeded expectations” that startups within the company’s portfolio had. Although quotes are specified as ‘estimates’, the final cost of development “often exceeded the budget” by up to 200 percent, said multiple sources. They added that the reasons for this is because there were “regular misunderstandings” between founders and developers, there were “always fixes that needed to be fixed”, and the timeframe from day one of development to launch was longer than forecasted, allegedly taking up to 12 months.

“They say we’ll take care of all the tech for you, but they’ve never gotten the tech right,” one source said.

“They definitely don’t follow the lean MVP approach,” said another.

Yesterday, Startup Daily spoke with BlueChilli’s Founder, Sebastien Eckersley-Maslin about the issues put forth by sources regarding the company’s development services. The question Startup Daily asked is: “Many sources have told Startup Daily that the technology development services provided by BlueChilli hasn’t been up to standard, that development takes longer than forecasted, and exceeds budget. Are you aware of these complaints and what have you done to resolve the issue?”

Eckersley-Maslin responded, “There seems to be an assumption in your statement that if a project runs over budget, or over time, that is only the developer’s fault.”

He explained that BlueChilli offers clients an outsourced development team and that clients control the feature set, and subsequently the budget and development timeframe.

“If changes are made to the functionality requested, then this will of course have an impact on budget and time. We also rely on the relevant founder to provide information to us, and undertake their agreed tasks required during development. If they don’t fulfil these obligations, then budgets and timeframes can be exceeded,” said Eckersley-Maslin.

“Like any business, we can’t please all customers all the time. We do however have an internal process to manage complaints and ensure that the customer is happy. If developments/budgets look like they are going to be exceeded, then we work with the customer to make decisions as to whether we proceed on that basis, or make other changes to the development scope. In the end the customer has his or her hands on the lever, and makes the relevant decisions.”

Eckersley-Maslin said he refutes the claim that development has not been up to standard: “Just look at the many example applications and websites we have worked with (you can find them via our website). They are fantastic and our team is proud of them! The quality of our work is in the public domain and speaks for itself.”

Startup Daily cannot counter that point, given we have written about and analysed many of the startups in BlueChilli’s portfolio including MoneySoft, LIME, StarPower, and GiggedIn, among many others.

Since last night, BlueChilli deleted the logos of FoodOrbit, Geepers and Stylerocks from its portfolio page, now presenting 27 of the 39 companies it claims to be affiliated with.

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BlueChilli portfolio of startups, cached version

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BlueChilli portfolio of startups, cached version

Regarding development inefficiencies, the details around technical errors were not provided by the sources. However, Startup Daily discovered a tweet submitted on January 23rd of this year by @stylerocks: “Q: is a 21% error rate for the checkout for an ecommerce site acceptable @BlueChilliGroup?” Some of the responses to that tweet include, “it’s unacceptable & disgraceful”, “that’s shocking! no way!” and “Your site designers should be fixing that pronto!” Stylerocks is one of the first startups to go through BlueChilli’s incubator programme. At the time of this tweet, BlueChilli was responsible for the development of Stylerocks.

StyleRocks jewellery on Twitter   Q  is a 21  error rate for the checkout for an ecommerce site acceptable  BlueChilliGroup

@StyleRocks on Twitter

After visiting www.stylerocks.com and checking the site’s source code (see image below), it becomes apparent that Stylerocks is no longer affiliated with BlueChilli – instead, it runs on Bigcommerce. On BlueChilli’s online portfolio of startups, it stated yesterday that Stylerocks is “now independent” with its “own tech team” (see image below). Startup Daily tried to contact Stylerocks’ founder, but they did not respond.

StyleRocks source code - Bigcommerce highlighted

StyleRocks source code

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Stylerocks – Project Overview, cached version

BlueChilli company WISH Registry was also contacted, but hasn’t responded at the time of this article’s publication. A number of sources told Startup Daily that Version 1 of WISH Registry – the startup that would have allowed people to create wishlists – has never been launched. Although there is no publicly available evidence of a complete Version 1, on www.wishregistry.com, it states that BlueChilli is amidst building Version 2: “We are building WISH Registry Version 2 with enhanced features & services!”

Wish Registry - V2 coming soon

Wish Registry, screenshot

According to the BlueChilli website as of yesterday, startups that have exited (/are now independent from BlueChilli) include Geepers and Divvy. Although the venture technology company regularly distributes press releases to Australia’s business media, including Startup Daily, it has never publicly announced any exits. Startup Daily tried to contact Geepers and Divvy, but no-one in the companies were able to comment on the circumstances or terms around the exits.

BlueChilli exited Geepers

Geepers exit

Divvy Exit

Divvy exit

To add further clarification around the matter of exits as well as unhappy customers, Eckersley-Maslin said, “I can quite easily point you towards the many happy founders who have participated in the Blue Chilli programme. Many have gone on to raise angel funding and Series A funding. We have also had partial exits (which unfortunately we cannot discuss).”

On that note, Startup Daily also spoke to multiple sources within the BlueChilli incubator, who echoed Eckersley-Maslin’s sentiment, saying they are “content” and “happy” with their relationship with BlueChilli. These sources didn’t add any further comments and requested not to be identified.

Other sources informed Startup Daily that a number of BlueChilli startups have allegedly engaged in legal action with the incubator. According to these sources, Founder of BlueChilli, Sebastien Eckersley-Maslin “acts as the Director of both BlueChilli and the startups in its portfolio”. On Eckersley-Maslin’s LinkedIn page, it states that he is the technical co-founder as well as an investor in nearly all of the startups stated in BlueChilli’s online portfolio (see image below), though it doesn’t state ‘Director’.

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Sebastien Eckersley-Maslin’s LinkedIn Page, screenshot

If Eckersley-Maslin acts as the Director of both BlueChilli as well as the startups in the company’s portfolio, then in board meetings, there is a potential conflict of interest if all directors need to vote on a decision regarding BlueChilli’s services. In such a case, Eckersley-Maslin would be obligated to exclude himself from the vote because he has an interest in the outcome.

According to S.181 of the Corporations Act, “A director or other officer of a corporation must exercise their power and discharge their duties (a) in good faith in the best interests of the corporation; and (b) for a proper purpose.

One source put forth the following question: “Who is he [Ecklersley-Maslin] acting in the best interests of – BlueChilli or the startup?”

In the 1991 case of Blackwell v. Moray & Anor, the court held that the person appointed to the board of directors of a joint-venture company was not acting honestly in putting forward the interests of both companies. A note made by Cohen J states:

“The abandonment of any proper consideration of relevant facts, the admitted failure to exercise an independent discretion and the mere doing of what was thought the majority shareholder wanted cannot, in these circumstances have amounted to the bona fide exercise of the discretion required of a director”. (Duties and Responsibilities of Directors and Officers, Prof. Bob Baxt, 2009, p. 53).

“Exercise of independent discretion” means that directors cannot promote his/her personal interest by making or pursuing a gain – for example, company profits or shares. They cannot improperly use their position as a director (in breach of S.182 of Corporations Act) to gain certain advantages to themselves as shareholders. However, the distinction between knowing that certain conduct might or will advantage a person and intending by the conduct to advantage the person can be very elusive.

Eckersley-Maslin told Startup Daily that he does in fact “sit as a director on the Board of some of the startups we are involved with (but not all).”

He said he is “more than aware of his obligations” to mitigate conflict of interest in cases he is both the shareholder and director in a business.

“I should also say that my obligations are no different to the founders and seed investors.  Many of them have their own interests and also sit on the board of their companies. These interests are not always aligned. So they have the same conflict of interest obligations that I do,” Eckersley-Maslin added.

Sources speculated that some of the startups that have allegedly pursued legal action wanted to take back ownership of the businesses. The main reasons for this, as explained by the sources, is because the ongoing costs of development supposedly exceeded the budget that was established early in the incubator/startup relationship.

None of the sources were able to clearly articulate what business model BlueChilli operates on. In August last year, the following open question was posted on Quora: Startups in Australia: Are Australian incubators Pollenizer and BlueChilli giving a fair deal to new startup founders & do the same deals exist outside of Australia? In a response, Eckersley-Maslin summed up the BlueChilli model as follows:

“You [startups] contribute $50-75k, we [BlueChilli] chuck in about $150k worth of services and resources and we take an equity stake commensurable to the risk you present to us – the more experienced you are, the less we take – but it’s usually 20-30% and we dilute like everyone else. (Compare that to getting a single tech-cofounder in for 50% equity and paying them a salary of $60k a year).”

“We have a structured three phase approach to working with our founders to take the business from an idea through development to a market ready product (“MVP”) to bootstrapped growth and channel distribution, to Angel funding and Scale, to hiring the team to take it forward to raising Series A funding.”

Further to this, Eckersley-Maslin told Startup Daily, “As you are aware, our model is to provide software development services and other services to startup founders, at heavily discounted rates, and also take an equity position.”

“In addition we also use our experience to provide guidance to founders, introductions and various other business and corporate services. To date we have helped over 40 startup founders towards achieving their dreams, and been granted equity in their businesses, with many more in the pipeline.”

One source told Startup Daily that the “resources” BlueChilli claims to provide is unquantifiable: “[Startups are] signing away money and equity in exchange for development, mentorship, marketing advice, access to capital network, etc. But these are all unquantifiable. They’re taking a quantity of money and shares in exchange of something that is intangible.”

In regards to the issue around resources BlueChilli provides, the source explained what they believed to be the problem: “I think a big part of the problem is that the startup founders have no visibility of spend, nor what’s happening with development, the amount of time being spent on the product … They are the CEOs of their companies, yet they have no ability to manage all that. They have little control.”

Eckersley-Maslin was quoted earlier in the article saying the opposite: “The client controls the feature set, and consequently the budget and development time frame … In the end the customer has his or her hands on the lever, and makes the relevant decisions.”

In a BlueChilli blog post, entitled Three Ways to Build and Fund a Tech Startup, Eckersley-Maslin wrote, “Unlike the digital agency situation, we don’t make any money until you do – so our objectives are 100% aligned.”

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Numerous sources allege this is untrue, with one saying BlueChilli charges “lots of money for small things” like consultations developers have with each other, even without the involvement of the founders themselves.

Eckersley-Maslin refuted this accusation as well, saying “Our hourly rates are well below market, which is priced to take into consideration our equity position. If our prices were truly “exorbitant”, then why would we have had the success we have?  Why would founders continue to engage us if we didn’t provide value and if we didn’t deliver?”

“We do generally charge on a time basis. Our founders are made aware of this at the commencement of development, and sign contracts on this basis.”

When asked about how the perception that BlueChilli makes “significant profits” from the ongoing service costs it charges could have come about, Eckersley-Maslin said he couldn’t comment: “Without knowing your sources, I can’t really comment as to how they had a perception! BlueChilli is very transparent with all costs with our founders.”

One source told Startup Daily that BlueChilli “implies” that its partnership with companies like Deloitte means startups get access to free services.

However, on BlueChilli’s website, under the partnerships section, it states the following to potential BlueChilli partners:

“BlueChilli works with a variety of partners and freelancers to deliver essential services to our startups, including legal, accounting, growth hacking, public relations, SEM and more. In return for offering concessional rates for our early-stage startups you get the opportunity to build close relationships with fast-growing businesses that might be the Next Big Thing.”

This statement indicates that BlueChilli startups are required to pay for the services they need.

When asked about what attracts startups to BlueChilli, one source said “media traction”.

“The media has painted a very positive image of BlueChilli. This is not to blame you because you’re not the only one. Other publications have done this as well,” the source said referring to StartupDaily.com.au.

Another source answered the question with: “claims made on BlueChilli’s front page is quite compelling”.

On the company’s homepage, there are four key statistics presented: “11 millionaires created”; “over 16 industries”; “39 companies”; and “selected from 4,000 applicants”.

In July this year, a BlueChilli blog post referenced one of the key statistics presented on the front page, clarifying that the founders were millionaires on paper.

“Some have called out the “11 millionaires created” stat on the new BlueChilli homepage as a ‘vanity metric’ and asked if really, those startup founders are just ‘paper millionaires’. Well, of course they’re still paper millionaires — the earliest of them has only been operating their startup for two years. (Some would say being “just” a paper millionaire is a whole lot better than not being a millionaire at all.)”

Eckersley-Maslin explained via email that BlueChilli cannot provide a list of the millionaire companies, as confidentiality prevails. “It’s up to those relevant individuals to disclose their new found wealth.”

He added, however, that the number is “based on a valuation at their most recent [capital] raise.”

One source argued that given Australia is still in its early stages of building a strong and self-sustaining startup ecosystem, “incubators cannot be expected to be perfect”.

In an article published on The Sydney Morning Herald, Sydney-based business consultant Greg Twemlow argued that without regulation of its incubator programmes, Australian policymakers run the risk of “unethical exploitation” of startups. He wrote:

“Unlike California, Singapore and the UK, Australia has allowed tech incubators to proliferate without any substantive level of control, coordination and guidance from our federal government and the venture capital community. As a result, a majority of startups camped in incubators could be wasting their time and facing a significant opportunity cost.”

“As a business consultant I frequently see that startups are putting too much faith in incubator programs when they should instead be entirely focused on building their product, relationships and market understanding.”

“In the past few years we have seen slick operators making grand promises and giving what amounts to false hope.”

Although startup founders aren’t oblivious to the fact that training, technology development and other services are provided in exchange of ongoing fees and a sizeable chunk of equity, one source said that founders are easily distracted by the “high chance of success” that incubators promise.

In the aforementioned article, Twemlow advises startups to maintain “a healthy scepticism of incubator training schemes” because they are “good at renting out real estate” and have “a great way of keeping participants busy” without necessarily progressing with real work of building their product, establishing a product-market fit, and acquiring foundational customers. One way of practising caution, Twemlow wrote, is to speak to past “graduates” about their experiences of the programme and what impact it had on their startup.

Twemlow is not saying that all incubators are bad. In fact, he commends Sydney-based ATP Innovations, which took home top honours at the NBIA awards in New Orleans, Louisiana, winning the title of Randall M. Whaley Incubator of the Year Award 2014 at the International Conference on Business Incubation held in May. The incubator was also named Dinah Adkins ‘Technology Focus’ Incubator of the Year. Industry peer professionals were impressed by the incubator’s delivery of business building services and its successful track record of building high-growth technology companies with global reach.

BlueChilli has also won awards of its own. In 2013, it was named Deloitte’s 7th fastest tech company (Asia Pacific Fast 500), BRW’s 9th most innovative company, and was a finalist in City of Sydney’s Business of the Year Awards in 2012.

Although Twemlow does not refer to BlueChilli anywhere in the article, it was met with some criticism from the Australian startup scene. Joel Macdonald, Co-Founder and CEO of Liquorun, which is affiliated with BlueChilli, was swift to submit in his own opinion article to The Sydney Morning Herald, suggesting that Twemlow “hasn’t been speaking with the right startups or incubators in order to form his opinion.”

Macdonald stated that “‘unethical incubators’ have not been [his] experience, nor that of the tech startup founders [he speaks] to on a daily basis.” He praised BlueChilli in the article, saying that without BlueChilli, he would have ended up spending twice the amount of money on the business idea with limited product validation.

“The focus on the science behind the minimum viable product (MVP) approach of the incubator has saved us a lot of time and money and kept us growing,” Macdonald wrote.

“Our incubator also gave us access to a larger network of investors – one our founders may never have reached, and even if they had, certainly not in the same short time. They invested not only because they had confidence in the business and its founders – they already knew the rigorous development approach BlueChilli applies to the startups they select.”

Liquorun has not yet responded to Startup Daily’s email media enquiry that was sent through its website.

It should be noted that a majority of startups fail. The most commonly cited statistic is: ‘80 percent of new businesses fail’. A 2013 infographic from US-based law firm Allmand Law indicates that more than 90 percent of tech startups fail. Whatever the actual number is, there are likely to be founders who want to rationalise their failure.

“It’s easy to blame someone else,” one source said. “But incubators have a moral responsibility to tell startups their idea sucks. Startups should be asked to validate their idea with an MVP, before going into the development phase.”

At the start of the 2014, CB Insights gathered a collection of over 100 “startup failure post-mortems” which explained why the companies didn’t succeed. A majority of the post-mortems were written by startup founders themselves, who candidly share the harsh realities of startup life as well as lessons learned throughout their journey.

CB Insights analysed each entry to identify prevalent problems and recurring themes. The result was a “Top 20″ list of the most common reasons why technology startups fail. As per image below, the top five reasons for startup failure include: no market need (42 percent), ran out of cash (29 percent), not the right team (23 percent), get outcompeted (19 percent), and pricing/cost issues (18 percent).

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Further down his article, Liquorun’s Macdonald alludes to the idea that incubators cannot be held responsible for the success of a startup. He wrote, “the success of your startup should not be dictated on purely who incubated it. There are so many factors you need to get right.” He also points out that founders need to do their own due diligence and partner with the incubator that is best suited to their interests.

Multiple sources agreed with this sentiment, with one adding that “startups need to run contracts through a lawyer prior to signing them”.

“It’s easy to find yourself in muddy waters if you don’t understand what you’re signing.”

Another source attributed part of the problem with BlueChilli’s model and performance to “lack of structure” and “no proper roadmap”.

However, Eckersley-Maslin’s response to the aforementioned open question posted on Quora, implies a different story:

“We have identified 156 steps that must be taken by business to get to Series A and we work with our founders through each of these steps through practical workshops and processes. We even have a book that teaches you all this.”

The core of the problem, the source identified, is that BlueChilli lacks “the right people with the right skill sets”.

“BlueChilli cannot continue to operate the way it is. But the principle of BlueChilli is a great principle. With the right team and the right structure, it would be successful and would do good for the startup scene,” the source added.

Disclosure: More than a dozen sources have been referenced in this article. None wanted to be identified for various personal reasons.

Shoe String Media has engaged in Ad Hoc strategic partnership activities with BlueChilli Group as well as BlueChilli companies past and present. These activities pre-date December 2013. Due to the professional nature and relationship founder of Shoe String Media, Mat Beeche has formed with key personnel of BlueChilli and founders of BlueChilli Group companies past and present, all materials and evidence collected by Mat Beeche mentioned in this article were given to the writer, who has no personal affiliation with anyone mentioned in the article in order to construct an objective, unbiased story.

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