Launched in 2011 by Fotolia co-founder Thibaud Elzière & associate Quentin Nickmans, eFounders falls into the broad category of what has been dubbed ‘Company Builders’. The term, which encompasses anything from Andreessen Horowitz to Rocket Internet, broadly refers to firms or companies who provide on top of investment a layer of services, from development to a full-fledged executive team member.

Focused on Software-as-a-Service (SaaS) startups who sell to SMBs, eFounders has put out a total of 7 companies: Mailjet, PressKing, Mention, Muxi, Front, AirCall & Textmaster. Muxi has been shut down since January 2013, and AirCall is currently in between CTO’s (update: I previously stated that AirCall was ‘on hold,’ and have since updated following information that, while the company is seeking a new CTO, they are still active).

The things that worry me

eFounders picks ideas they love – they even claim to value ideas over execution – then they look for a CEO & CTO to lead the startup, with eFounders acting as the ‘third cofounder.’ In addition to being a third cofounder, they come in as a seed investor – 150K€, which the other two cofounders can allocate as they wish (reasonable salaries for both founders, marketing, etc.) – as well an in-house product, design, and development team which will help them conceive and deliver the first version of their product.

eFounders says that the real value they provide is in the first two years of a startup’s existence – pre-Venture, pre-Accelerator, the first 100 clients – which is how they justify taking 50% equity in the company (formerly 66%, though I’ve heard some startup founders have 20% in total after their next seed round). eFounders Partner Quentin Nickmans cites Betaworks – the company builder & investor behind hit game Dots, who acquired Digg & Instapaper, and who formerly worked on Bit.ly & SocialFlow – as an equivalent model, though not much is disclosed about Betaworks’ stake in their companies.

I entirely agree that, given the services, funding, and executive team (either Thibaud or Quentin commit a given amount of time to being full-time on a given startup at the beginning, until the CEO & CTO become autonomous), the amount of equity they take is justified. The part that worries me is that the churn rate of founders in eFounders companies is a bit too high for me.

Mention co-founder & former CEO Edouard De La Jonquiere recently departed from the company, replaced by Matthieu Vaxelaire, a former eFounders Junior Partner – this despite the fact that Mention is more than 2 years old – the point which eFounders insist is where it adds real value. Of course, this decision was a board decision, which includes Mention’s investors Alven Capital & Point Nine Capital; however that a co-founder who raised less than €1 Million for his startup was able to be voted out of the company should be worrying to entrepreneurs considering joining an eFounders gig. Team members inside said that De La Jonquiere’s stake was between 7-10% in the company.

Interesting side-note on Mention: since the CEO change, Mention’s pricing has gone up. See here (July) and here(current). Not necessarily a bad thing, as clearly the new CEO’s role is to focus the product positioning and increase revenue.

Mailjet, too, has seen its fair share of executive change-ups. The startup is on its 3rd CMO, and brought in a new CEO, Alexis Renard, during the last round of funding. The Mailjet team is growing fast, but multiple customer complaints around the quality of the product suggest that the problem doesn’t like in the Marketing or Executive decisions, but in the Product & Technical decisions. Perhaps that elusive third cofounder is to blame?

This doesn’t fly in the US

eFounders has changed its model quite a number of times – almost every deal is unique in its structure, with the common part being that eFounders be considered both as a cofounder & an investor – however, the most recent change comes after eFounders’ latest startup, Front, was accepted into Y Combinator.

One of Y Combinator’s rules is that all founders attend YC – as eFounders is a co-founder, that meant that this majority stakeholder would have to attend, which was impossible. eFounders had the choice of either opting to reduce its equity stake in the company (from a reported 66% to 50%), or Front wouldn’t be accepted into YC. The decision was made and Front is currently in the YC bath (after launching at Paris Founders Event in April, of course).

Speaking with Quentin Nickmans, he pointed out correctly that VCs clash all the time, and the negotiation on these points is part of the game. I agree – I’m sure Betaworks would have similar issues to deal with, though I’m not sure whether Betaworks considers itself a cofounder – however, when I asked Nickmans whether future eFounders companies would encounter the same issue (i.e: whether they planned on lowering future equity agreements in order to align with the YC request), he said that eFounders would always weigh whether YC was valuable for the given project. That means that, if eFounders decides to keep its 50% agreement and it doesn’t fly with YC in the future, that they will either 1) only take projects they think will work better outside the YC ecosystem (as a mail app, Front fits better in YC than, say, Mention, which targets SMBs and not the B2C public.

The model is evolving

The key thing to note is that eFounders, too, is a startup – and I think this is where much of the misperception comes from. It’s hard to look at someone who is an investor (yes, they are also cofounders, but fellow entrepreneurs see $$), and think “those guys look like they’re still figuring out their model.” Additionally, the problem with many ‘new VC models,’ is that startups don’t get to adjust their agreements with eFounders as they progress – if you agree to the ‘wrong’ model, you can’t opt for the new one (although Thefamily does have some interesting deals with regards to returning equity if founders aren’t happy).

My biggest concern with the model is that eFounders provides most of its perceived value in the beginning; however, they make decisions (like new CEOs) beyond that time, and their carry-on is long-term, even if their investment is short-term. If VCs clocked out 2 years into the relationship (not that eFounders ‘clocks out’ per se), I’m not sure many investments would be as successful as they are.

The ‘Company Builder’ model is clearly attractive, although it’s hard to identify the difference between “equity for services” (developer for equity, media for equity, PR, accounting & Lawyer services for equity) with someone who is really on your side. Ultimately, my gut tells me that the people who build the vision of the company should maintain the bulk of the equity initially – currently, eFounders takes 50%, and the CEO & CTO maintain 25% each (I presume it’s split equally). This may be a suitable formula for many, who don’t want to bootstrap, or would like a team to help them – but are the people that are attracted by this model really the ‘cofounders’ of the company, or are they early employees with a high amount of equity.

Causation vs. Correlation

I should note that it’s not concretely aligned, the eFounders equity model, and the flight of the founders; nor is it any indicator that both Textmaster & Mailjet’s latest fundraisings were smaller, bridge financing rounds, as compared to their previous rounds. Nonetheless, I can’t help but wonder if there’s not something inherently wrong with the Company Builder model – the Founder/Investor interest alignment, the Sweat Equity to Real Equity ratio, the ‘company as a founder’ model.

Both Quentin & Thibaud are very talented individuals, looking to scale up their individual ability to build companies into something that can build multiple companies at once with a common building block each time. Their focus on SaaS is smart – each new company allows them to share customers, and learn form their customers’ problems in order to identify the next block in the SaaS world that they should fill in. Thibaud Elziere invested in Algolia for just this reason. The eFounders team recently expanded to include Alex Delivet, who, among other hats, organized the SaaS conference “B2BRocks,” a move which will allow eFounders to expand their SaaS umbrella.

As with my previous articles on TheFamily & NUMA, the point is clear: right now, the model isn’t perfect, but all three are still seeking the right model. The key is that startups be aware that these entities, however, stable they look, are just as fragile as the projects that entrepreneurs wish to build, until the day where they find the perfect product-market fit.

Image courtesy of Dan Taylor of Heisenberg Media, from our “Paris Startup Scene” photo essay