I’m a big believer in the power of meditation and mindfulness to bring about a big improvement in people’s lives. It’s made a big difference to mine over the last twelve months and I’m meeting an increasing number of people who have experienced something similar. I think there’s a very good chance that much as fifty years ago nobody much exercised and now most people do in fifty years time most people will be meditating.
For that to happen we need more research into the benefits of mindfulness and meditation and on how to make practice easy and accessible. Professor Mark Williams from Oxford University is one of the leaders in this area. I’m part way through reading his excellent book Mindfulness: Finding peace in a frantic world so when I was emailed about his fundraising campaign on Crowdcube I clicked straight through and watched the video embedded below. He is raising £500,000 to further his research into how mindfulness based cognitive therapy can help the billion people around the world who suffer from depression. I’ve contributed and it would be cool if you did too.
BrightSun have just published research on the number of seed funds in Europe. As you can see from the graphs below the number of seed funds is growing very fast whilst the number of later stage funds is flat.
Chart 1: number of European funds investing in rounds of $1m and less (blue line) and number of countries receiving investment (green bars)
Chart 2: number of European funds investing in rounds of over $1m (blue line) and number of countries receiving investment (green bars)
There are two obvious take aways here. I’m going to deal with the country point first. The number of countries where small funds invest is double the number of countries where large funds invest. If I was a ambitious startup with large capital requirements I would make sure I was in a geography where large funds invest regularly. Even if that meant moving the company. The chances of success on any other path are too low. If I was passionate about my country’s startup ecosystem I would aim to make good money out of my startup and then come home and invest the proceeds locally.
The second point is that the ratio of early stage funds to later stage funds has shifted from around 1:1 to 2:1, implying that the number of seed funded companies is growing much faster than the number of Series A funded companies and that we will have a Series A crunch here in Europe at some point. When you consider that a large number of the new early stage funds are accelerator programmes making 20+ investments each year then it seems almost inevitable that an increasing proportion of companies funded at the seed level will fail to raise Series A.
For anyone running an early stage fund or accelerator programme that means you have to work like crazy to be the very best of the 278 funds investing in rounds of $1m and less. That includes us at Forward Partners where we focus on two things – being attractive to entrepreneurs by being the best at helping them get to the next stage and on making great investment decisions by having a deep understanding of our target markets and companies.
For entrepreneurs raising money it means that if you have the luxury of choosing between investors you should select based on which one is going to give you the best chance of getting your next round away. At the risk of talking our own book, I think that comes from a combination of focus on making sure the fundamentals of the business are strong and connections with investors at larger funds.
The goal of most consumer focused startups is to become an automatic habit for their customers and I’ve written before about Nir Eyal’s powerful Desire Engine framework for building habit forming services (tl;dr: take users round and round a four step habit loop – trigger, action, reward, investment). Yesterday Nir wrote about applying this framework to turning users into visitors, advocating that companies should use the onboarding process to take users round the habit loop for the first time.
In practice that means:
- The trigger to click through to the site should anticipate the reward the user will get – e.g. advertising copy should describe what users will get out of the service, the Instagram Facebook inserted to the right is a great example.
- The action should be low effort – BJ Fogg has shown that people are much more likely to complete an easy step with a low reward than a more complex step with a high reward. Site designers everywhere have seen the benefits of reducing the amount of info collected on sign-up – this is why.
- Then there should be an instant reward – maybe telling the user something about herself, or something from their social graph. Research has shown that users respond better to rewards that are variable and carry a bit of surprise – e.g. what’s in this photo of me that’s been posted (we all click on those…)
- Finally, and perhaps counter-intuitively, comes the investment stage – it’s better to invest a bit of time in the service than finish the onboarding process as quickly as possible . When users do a bit of work to improve how a service works for them – e.g. fill out more detail on a profile, follow some friends, customise an avatar – then they are more likely to come back. They feel more invested and they have an expectation that the next reward will be better.
I love Nir’s work and I’m pleased to see him building a brand for himself and running the HabitSummit conferences. Hopefully he will hold one in London soon. Amsterdam just isn’t the same…
Yesterday I wrote about how building a startup is increasingly an exercise in disciplined application of process. Creativity and flair will always be important, but whereas that used to be most everything and charismatic sales driven entrepreneurs with huge personalities were common, these days implementation of processes like ‘lean’ and ‘customer development’ are increasingly important and the personality profile of entrepreneurs is changing. We used to get lots of Larry Ellison’s and these days we get more Mark Zuckerberg’s.
The reason for this is that many processes formerly regarded as the preserve of creatives have been broken down into process steps that non-creatives can follow. It turns out that Apple’s new product process is one of those. This is a quote from Leander Kahney’s recently published book on Apple design chief Jony Ive:
“In the world according to Steve Jobs, the ANPP would rapidly evolve into a well-defined process for bringing new products to market by laying out in extreme detail every stage of product development.
Embodied in a program that runs on the company’s internal network, the ANPP resembled a giant checklist. It detailed exactly what everyone was to do at every stage for every product, with instructions for every department ranging from hardware to software, and on to operations, finance, marketing, even the support teams that troubleshoot and repair the product after it goes to market.”
I remain in awe of Jobs’ ability to come up with products that hundreds of millions of people coveted – that was his genius, his magic spark – the point here is not to take anything away from that, but rather to point out that as far as possible everything downstream from the idea is engineered. The beauty of this is that it improves reliability and predictability of execution.
I’m thinking now that the venture capital could be similarly broken down into checklists and good process.
Yesterday Kissmetrics blogged A recipe of viral features used by the fastest growing startups. It’s a good read for anybody who wants to increase the number of free customers they are getting. Who wouldn’t want that? The list is written for software companies, but there’s something for everyone.
However, the paragraph that caught my eye though was about the nature of virality rather than how to generate it:
Virality is not a single feature. It’s a design principle. It’s not a result of good luck. It’s engineered. Forget about forcing users to use random share buttons. You must understand your audience and design a user flow that leads to sharing.
In other words virality is science not art. It comes by virtue of intelligence and hard work, not from luck (at least not usually).
Increasingly this is true for all areas of building a startup. The lean startup movement laid out an iterative process which uses customer feedback to minimise the role of chance in building a product people want, design thinking breaks down innovation into process steps, SEO is now well understood, as is enterprise software, and so on. Just on Monday I blogged about The Mom Test a book which makes it easy for anyone with discipline and a bit of get up and go to do great customer development.
My hope is that all great work I’ve listed will enable entrepreneurs (and their investors) to have lower failure rates, or at least lower the cost when failing. Here at Forward Partners we aim to be in the vanguard of that change, working with our entrepreneurs to bring practices to their companies which reduce the need for magic and luck and increase the chances of success.
As you can see from the chart above time spent accessing the web from mobile apps has now passed time spent accessing the web for PCs. Moreover, the trends are only going one way, which begs the question of when it will become the norm for startups to build an app before they build a website.
Up until now there have been a few ‘mobile first’ startups, but they have been the exception rather than the norm. I see that balance shifting. We are close to backing our first (maybe the first) ‘mobile first’ ecommerce business.
Remember also that the action is increasingly phones now rather than tablets.
I read The Mom Test this weekend. What a great book! When I started with Forward Partners I went out to speak with a bunch of our target customers, entrepreneurs, and I learned a bunch of stuff which helped shape our strategy of empowering great entrepreneurs with minority stake investments and real-world useful help – but I’d have learned much more if I’d read this book first.
It’s surprising how easy it is to ask bad questions during customer development. The Message of The Mom Test is simple, questions that ask for an opinion or (worse) solicits approval for an idea is dangerous. Most people are a) eager to please, and b) pretty useless at predicting what they will do in the future and these sorts of questions yield bad information which can offer false encouragement.
Much better are questions about what people do and how they have done things. Questions like these ask for facts and yield the unvarnished truth. Going back to my conversations with entrepreneurs, I would have been much better asking people for the story of how their companies got started, what problems they encountered and how they solved them (more on that in a second). Instead I explained what we do and asked whether that would have been of interest and questions about pricing. We did learn a lot from those conversations, but even at the time I felt I often felt I was questions that people didn’t really know the answers to. In Mom Test language, the answers I was getting were ‘fluff’.
I’ve given the very short version of the book (ask for facts about what people do, not opinions) but the whole book is well worth a read. As well as extra detail it provides a host of practical examples that make it easier to do high quality customer development. Many founders don’t read business books because they don’t have the time. This one is humorously written with 130 small pages with widely spaced type. If you’re one of the non-readers, this book is worth making an exception for.
One of the practical tips is to always know the ‘three big questions’ that you would ask potential customers. I think the three questions for us at the moment are:
- How are you making sure you are building something people want?
- How are you making sure you build something of quality (code/design/UX)?
- How will you find your next/first set of customers?
They are focused on the three major areas in which we offer operational help and will reveal if people need help at all, and if they do what sort of help they require. I elected not to go with questions about startup problems generally and fundraising specifically because our knowledge in these areas is already much stronger than in the three areas above.
One of the other practical tips in the book is to do your customer development work casually in chance encounters. If you run into me at a conference or networking event you may just hear me ask the questions above. I plan to be asking them a lot.
I’ve just re-read the a 2012 report by the Kauffman Foundation about the contractual relationship between venture capital funds (often called GPs, short for General Partner) and their investors (often called LPs, short for Limited Partners). Kauffman is a major investor in venture capital and they were (and still are) unhappy with the standard arrangements between GPs and LPs, and also with LPs for not pushing harder for change. In fact they were unhappy enough that they titled the report “We have met the enemy …. and he is us”.
The standard contract between GPs and LPs is the so-called “2 and 20″ arrangement, where the GP gets an annual management fee equal to 2% of the fund size and a 20% ‘carry’ or share of the profit. The main problem with this arrangement is that the partners in venture capital funds, i.e. the GPs, can make a lot of money from the management fee even when they generate poor returns. This is particularly the case with larger funds and when a GP has multiple funds under management.
The Kauffman Foundation makes two recommendations to address this problem that we are implementing here at Forward Partners. The first of these is to “Eliminate the black box of VC firm economics” – i.e. for LPs to insist on seeing details of carry, compensation, general expenses, and investment by GPs in their own funds, before making investment commitments. The second is to shift from a 2% management fee to paying fees based on a firms budget.
Both of these seem very reasonable to me. If a company we were thinking of investing in didn’t want to share details of its finances we would worry that management might be wholly aligned with our objective of maximising the share price and I’m sure we would feel the same way if we were investing in funds. Similarly, all our portfolio companies work out what they need to spend to achieve their objectives and have that as their budget and it makes sense to me that VC funds should be run in the same way.
Transparency and alignment. Both very important.
When I talk about our approach to investing I often say that the next generation of successful companies will be most notable for their amazing products. That contrasts with previous eras where great sales and marketing capabilities and great engineering were often more important than product (think about the great enterprise software success stories of the 1990s…).
Whatsapp, which following last week’s $16bn acquisition by Facebook is now the largest startup M&A deal in history, makes a good case study. This is from a post about the company and exit from their investor Sequoia:
From the moment they opened the doors of WhatsApp, Jan and Brian wanted a different kind of company. While others sought attention, Jan and Brian shunned the spotlight, refusing even to hang a sign outside the WhatsApp offices in Mountain View. As competitors promoted games and rushed to build platforms, Jan and Brian remained devoted to a clean, lightning fast communications service that works flawlessly.
The note pictured above is apparently taped to one of the founder’s desks and it sums up what they Whatsapp is about: great user experience. They process 50bn messages per day with 99.9% uptime and a service so good that 72% of active users come back daily.
And they do that with 32 people. Amazing.
Finally a note on Whatsapp’s valuation – the $16bn price tag ($19bn including employee retention bonuses) is best understood in the context of Facebook’s valuation ($180bn as I write this). If Whatsapp as an independent company, or more likely in the hands of Google, could have become a powerful competitor that took 10% of Facebook’s business then this is money well spent.
I’ve just read about an interview with Laszlo Bock, head of hiring for Google. Here’s what they look for in candidates:
- Cognitive ability – the ability to learn, to process on the fly, and to pull together disparate information
- Emergent leadership – the ability to step up and lead when necessary and to step back when it’s best for others to lead
- Ownership – taking responsibility for solving problems
- Humility – the ability to step back and accept other people’s solutions and to learn from failure (rather than attribute it to shortcomings of others or lack of resources..)
- Expertise – the least important of the five
Interesting things that aren’t on the list
- Good grades
- Traditional leadership (e.g. Captain of the Chess Club)
These are pretty good lists for anyone to use, and they’re not just intuited, they are data driven. Google being Google scores candidates on multiple dimensions and correlates the scores with performance on the job. Over time they have found that the criteria above are the best predictors of success post hire.