Why Shuttleworth investment failed – eight years on Red Five Labs man speaks

It was touted at its time as ground breaking technology, one that would enable mobile apps to run on all smartphones regardless of a handset’s operating system.

So much so that SA entrepreneur Mark Shuttleworth (who in 1999 sold internet security company Thawte for $575-million to Verisign) and the Department of Science and Technology’s Innovation Fund jointly invested R4.5-million in the startup, according to a report at the time.

A year after the investment in 2007, the startup — Red Five Labs — became one of the first investments that Shuttleworth’s HBD Venture Capital exited from, when it was acquired by SA company Fed Group for an undisclosed amount.

In 2007 Red Five Labs became one of the first investments that Shuttleworth’s HBD Venture Capital exited from, but three year’s later it was shut down

As part of the deal the startup’s founders, Mike Welham and Dusan Babich (pictured above, from left to right, respectively), continued to work at the startup.

But just three years later, in 2010, Fedgroup shut it down.

‘Got it wrong backing Nokia’

Speaking to Ventureburn earlier this month Fedgroup CEO Grant Fields, who at the time of the deal served as Fedgroup’s development manager, revealed why the investment failed.

“What they (Fedgroup) got wrong was to back Nokia,” said Fields.

He pointed out that at the time there were three main smartphone players — RIM, Nokia and Samsung. Red Five Labs betted on Nokia becoming the main player, even though at the time the smartphone company was not big in the huge US market.

“We essentially drew a line in the sand that if we couldn’t get X amount of license deals by X date then we would shut it down,” he explained.

Fields admitted that Fedgroup made a loss on having to close the company and added that it hadn’t been turning a profit when Fedgroup acquired it.

He added that the staff were let go and that some moved on to become Google developers. Babich and Welham, who were involved to the end, moved on to co-found Device Magic in 2011 and were incubated in a US accelerator in Dallas, Texas.

A key lesson reckons is on the difficulty of scaling a technology company from South Africa (things like meetings were difficult to co-ordinate from SA) — when much of the market is in the US. Fields suggests it’s why Babich and Welham subsequently relocated to the US with their new company.

‘iPhone introduction changed everything’

Speaking to Ventureburn via telephone earlier this month, Babich was also frank on why the company he started with Welham failed.

“We didn’t see a future for the original business model due to the massive, disruptive change in the smartphone market and ecosystem brought about by the introduction of the iPhone,” he said.

He said his move to the US was motivated primarily by the difficulty regarding SA’s intellectual property (IP) laws, a lack of capital, access to executive talent and the ease at which he and Welham could serve their target customers by being closer to them geographically.

HBD fund exits

Knife Capital partner Keet van Zyl explained that The Red Five Labs exit by HBD Venture Capital was carried out before Knife Capital was established in 2010 — when the VC company then took over managing the HBD Fund portfolio.

Van Zyl added that as HBD is owned by Mark Shuttleworth “who is a private individual”, there is only so much that Knife Capital can disclose on that particular deal as well as other, and on things such as the extent of the positive fund returns.

Van Zyl said the subsequent R150-million HBD Fund  that Knife Capital took over and managed consisted of seven companies, namely:

• CSense (exit to General Electric in 2011)
• Fundamo (exit to Visa for $110-million in 2011)
• Clicks2Customers (exit to an investment consortium in 2012 and was subsequently rebranded to NMPi )
• Moyo restaurant group (In 2014 the company underwent business rescue and was then sold to Fournews who are the owners of News Cafe – see this story)
• SA Cab (sold back to management in 2014)
• FlightScope (management buy out in 2016 — Van Zyl and Van Heerden are still on the board)
• orderTalk (exit to Uber Eats earlier this year)

Featured image (from left to right): Red Five Labs co-founders Mike Welham and Dusan Babich (Screenshot composition)