Nic Brisbourne's view from London on technology and startups

Forecasting in venture capital

By | Startup general interest, Uncategorized | One Comment

Good VCs need to be good forecasters. We need to predict which companies are going to succeed and second guess future trends so we can develop our firms to stay ahead of the curve. Deloitte have just published an interesting synopsis of Tetlock’s Superforecasting which gives us some insights into the types of people we need to recruit and the habits we need to cultivate to be good at the forecasting game.

The main and most surprising insight is that deep expertise doesn’t produce more accurate predictions. Tetlock ran prediction competitions over five years with multiple teams and found that the best predictions came from people with the following characteristics:

  • broad expertise
  • open minded
  • sceptical of deterministic theories
  • cautious in their forecasts
  • quick to adjust their ideas as events change
  • embrace complexity
  • comfortable with a sense of doubt
  • highly numerate (but don’t use sophisticated mathematical models)
  • reflective
  • learn from their mistakes

This is a good list for VCs too. One thing that stands out as a little different for me is that the best investors get behind big themes – e.g. the internet, open source software, SaaS, ecommerce, mobile, marketplaces – which feel a bit like the deterministic theories that super forecasters are sceptical of. However, even with these it’s important to keep an open mind and back off quickly if they aren’t playing out as planned. Mobile is a great example. As a category it’s yielded some amazing companies and investments, but many investors went too early and lost money – me included. I made my first mobile internet investment in 2000 in a business that was years ahead of it’s time helping banks to get their services on WAP phones. I’m not saying I’m a super forecaster, but I did learn from that and backed off from mobile until after the iPhone.

The other interesting point from Tetlock is that prediction skills can be improved by good sharing and debating within teams and by training focused on thinking in terms of probabilities and removing thinking biases.

 

 

 

 

Two types of intelligence and the current state of AI

By | Startup general interest | No Comments

paintings

These pictures were painted by a robot called Pix18. He or she (it doesn’t feel right) is a decommissioned factory robot trained to paint by picking up a paintbrush and painting on canvas. That’s pretty remarkable and shows how advanced AI is getting.

However, despite what we see here creativity is still largely beyond non human intelligence. Singularity Hub just published a great interview with Hod Lipson, professor of engineering at Columbia University and the director of Columbia’s Creative Machines Labs, who is pushing the next frontier of AI.  He posits that there are two types of intelligence:

  1. Convergent intelligence – Taking in large amounts of information and making a decision – e.g. whether to invest in a stock or pull out at a roundabout
  2. Divergent intelligence – Starting with an idea, or with a need, and then diverging to create many new ideas from it- e.g. designing a new robot different to anything we’ve seen before

You’ve probably guessed the punchline already. Machines are good, and increasingly better than humans, at convergent intelligence but not so good (yet) at divergent intelligence. That’s why we have automated trading and self driving cars, and will soon see robots flipping our burgers and slowly taking over all routine tasks, but still need humans to solve messy problems where there’s fuzziness around goals – e.g founding a company.

More interestingly Lipson contends that to crack divergent intelligence our AIs must become self-aware and reflective. That’s the key to the creative process. And once machines are self-aware and reflective they are arguably conscious. Some of them will certainly seem conscious.

The moment when we have divergently intelligent machines is perhaps the moment when the AI explosion occurs, with all of it’s massive potential upside, downside and uncertainty. I’m hugely excited by this future. If you are I recommend reading Hod Lipson interview in full.

Fundraising is a numbers game

By | Startup general interest, Uncategorized, Venture Capital | 4 Comments

These are Forward Partners dealflow stats for the first four months of 2016

  • 832 leads
  • 47 first meetings (6% of leads)
  • 8 second meetings (17% of first meetings)
  • 2 deals (25% of second meetings)

We met an additional 53 companies at FP Office Hours. In some ways they are like first meetings and they do sometimes lead to deals, but they are only 15 minutes long and many of them are speculative in nature so I excluded them from the analysis.

I imagine other investors have a similar leads:meetings:deals ratios and the headline here is that it’s only once you’ve got to a second meeting that there’s a reasonable chance of getting investment, and even at that point it’s only 25%. Getting a first meeting is an achievement in itself which often makes it feel like the prospects of getting investment are better than they are, but that feeling can lead to dangerous complacency. The numbers say you need four second meetings and as many as 24 first meetings to have a good chance of a deal.

Raising money is best thought of as selling equity in your business, and the fundraising process is a sales process. Unless you have strong relationships it’s a numbers game.

If you do have strong relationships then it’s about how strong they really are – e.g. if you know investors well enough that you are in effect coming in at second meeting level then you only need 4.

The smartest founders have a strategy for their fundraising and build a plan which they execute with discipline. They know who their targets are and which investor is their favourite, and they make sure they have enough names in their pipeline.

 

The consistency of Amazon’s revenue growth is amazing

By | Amazon | No Comments

Amazon just posted strong Q1 results and investors sent their share price up 11%. If you’ve been reading this blog for some time you will know I’m a huge admirer of the way Jeff Bezos has built his business. One of his mantras has been to re-invest profits to drive growth and the growth he has achieved is remarkable for it’s consistency over the last ten years. As you can see from the chart below Amazon has delivered on the proverbial hockey stick that startups put in their business plans, and they’ve done it at serious scale.

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One unfortunate side effect of prioritising growth over profits is that it’s never been totally clear whether Amazon could make profits if it wanted to. Believers believed they could, and sceptics sold their stock. What’s new is that in the last couple of quarters Amazon has posted record profits. That could be because they have run out of good investment options, or it could be, as Benedict Evans speculated, that Bezos wanted the increase in share price that profits would bring so that his employees’ options are worth more.

Screen Shot 2016-05-03 at 20.52.40

Being a VC isn’t about having all the answers

By | Startup general interest, Uncategorized | One Comment

This tweet really hits home for me. As VCs and board directors we’re often assumed to have great knowledge about startups, and that’s fair enough given we’re there to help. However, we end up feeling under pressure to live up to the assumption, i.e. to look competent and to be able to help.

As I remember all too clearly, that pressure is particularly intense for younger VCs who are building their experience. We all know that sometimes the only route to success is to ‘fake it till you make it’ – and that applies just as much in venture as in other industries.

None of this is to say that it isn’t great being a VC, it is. Just not great all the time.

So what should we all do?

  • Investors: take Steve Schlafman’s advice and realise that going and finding an answer from someone else is almost as good as knowing it yourself, and a lot better than guessing. CEOs can usually tell anyway. Believe me.
  • CEOs: instead of asking for opinions or advice ask investors for examples of similar situations to the one you’re facing.

 

The world’s most successful pivot

By | Facebook | No Comments

Screen Shot 2016-04-28 at 13.17.10

Facebook has just posted another impressive quarterly result, and that comes on the back of relentless innovation in their consumer facing and advertising products. Bots running on Messenger make the headlines, but the speed and regularity with which they release new services to help advertisers target better is breathtaking. It’s good for startups too, because it takes a while for larger companies to wake up to the new tools. With Instagram, Whatsapp and Oculus they are also building up a track record of visionary M&A.

So there’s lots to admire about Facebook.

But most impressive of all is the way they pivoted from desktop to mobile in 2012 – you can see the results in the chart above. Desktop to mobile is a massive shift, and not only did Facebook transition their audience, they made the product better, as evidenced by the increased amount of daily usage. Most companies fail to make the switch entirely but for Facebook it was the catalyst for a 5-6x increase in revenue.

Apple is now like Alphabet and Microsoft – it’s core product is ex growth

By | Apple | No Comments

The wires this morning were full of stories about Apple’s Q2 results. iPhone unit sales were down 16% on the year ago quarter and there is widespread speculation that the growth might be over. We talked about it a bit in the office earlier on and whilst a few of us think the iPhone 7 might have something cool about it that could revive growth none of us think there’s much further for the iPhone to go. It’s already been improved through nine versions since 2007 and there simply isn’t much left to do.

iPad and Mac computer sales were also down and there’s little reason to hope for a return to growth in either of those two product lines.

Alphabet and especially Microsoft, the world’s second and third most valuable companies have been in this position for a while. They have responded by pushing into whole new areas to generate revenue growth, but with patchy success. Microsoft had massive hits with the Xbox and enterprise software, but missed with Bing, MSN, and mobile. Google has a similar record with Android and Google Apps counting as big hits, but repeated misses on social. Meanwhile both companies have newer projects aplenty.

Facebook, the world’s sixth most valuable company has arguably moved into a similar position recently and is making big bets like Oculus and Whatsapp (although the latter is arguably an extension of its core business).

Historically Apple hasn’t made many big acquisitions, which is why the world was surprised when they bought Beats for $3bn. Going forward I expect their M&A strategy to become more like the other tech giants, because without bold plays their revenues and profits will decline and their share price will suffer. Badly.

If I had to guess I would say many of these acquisitions will fall into their ‘services’ category, which is Apple’s one area of growth right now. It’s where Beats sits and cross selling services to their loyal customer base is a very obvious thing to do.

Knowing your customer is key to conversion rate optimisation

By | Startup general interest, Uncategorized | No Comments

Conversion rate optimisation is a hot topic these days. Google Trends identifies it as an official “breakout” term meaning searches for that phrase are up over 5,000% over the last few years.

image21-568x310-1

We’re looking at an arms race here. Most of these people searching will be improving their conversion rates which will enable them to pay more for traffic and still hit their customer acquisition cost targets, and unless you match them you will find it hard to compete.

The chart above comes from an article I was reading this morning with nine principles for conversion rate optimisation. They are principles you can use before you have enough traffic to run meaningful AB tests.

  • Speed – Amazon estimates that for every 100ms increase in page load time there’s a 1% decrease in sales, and more generally page load times over 2-3s leads to massive customer drop off.
  • Singularity/Simplicity – pages with only one goal and no clutter convert much better. A Whirlpool email campaign improved clickthrough by 42% when they reduced the number of calls to action from four to one.
  • Clarity – meet your audience’s expectations with a plain language statement of how the customer benefits from the call to action and clear design
  • Identification – know your audience’s aspirations, lifestyles and opinions and reflect them in your design and copy
  • Attention – sites have eight seconds to grab a user’s attention. Headlines are the most useful tool and should generally be less than 20 words.
  • Desire (a subset of attention) – show the user what’s in it for them. Likeability, social proof, hero images and customer logos are good tools.
  • Fear (a subset of attention) – show the user what they lose by not taking the call to action, particularly effective when the pain of the customer problem has been made clear. Urgency (order in 40mins to get delivery by Wednesday) and scarcity (only 5 left in stock) fall into this category.
  • Trust – people trust sites that look good, show customer service contact details, and have customer testimonials. They make their minds up on trust in 50 milli-seconds.

The eagle eyed amongst you might have noticed there are only eight items on the list, that’s because I combined a couple. There’s much more detail and lots of good examples in the original post, which is well worth a full read.

 

Six of these eight tips (singularity, clarity, identification, attention, desire and fear) require that you know your customer, yet a remarkable number of founders start building their products and sites without developing that understanding. Your intuition probably isn’t good enough. What’s more remarkable still is that every entrepreneur we talk to knows that understanding their customer is important and most of them have done some superficial research, but only a minority have a deep enough understanding to make the calls that will give them the conversion they need to kickstart their business. That’s one of the reasons many businesses founder just after launch.

The tools to get the understanding are available to everyone so there’s no excuse. All it takes is well some well structured customer interviews.

Questioning WeChat as a model for conversational commerce

By | Startup general interest | No Comments

WeChat is often held up as an example of where conversational commerce could work here in the west. It’s a messaging app with huge numbers of users, many many of whom interact with services and buy things without the inconvenience of leaving the app. Ergo Messenger, SnapChat, Whatsapp, Telegram, Kik, etc. etc. could do the same and cue a tonne of excitement about how that might happen.

I live in London in the UK so I can’t use WeChat, but I’ve just read a post by Dan Grover, a man who does. More than that he’s a product manager on the platform. Not only does he have intimate knowledge of WeChat he’s also schooled in understanding how customers behave and why.

His conclusion is that WeChat evolved into the all-singing, all-dancing behemoth it is today not because there’s a natural evolution from messaging to conversational commerce, but because they had lots of users and they exploited that strength to move into commerce and other adjacent spaces. Moreover, most of the services on WeChat work by firing up a card inside the app which functions like an app or mini-web page – in these examples the commerce simply isn’t conversational.

As Dan sees it (and he was there watching) WeChat was mostly successful in capturing the commerce opportunity because of  “enhancements [to the app] made running counter or orthogonal to the idea of conversational UI”.

If you want more of this go and read his post. It’s a long one, but the examples of how WeChat works and how conversational commerces is being developed in the west will really ram the point home.

I don’t like writing negative posts and I’ve written a couple now that are down on the bot/conversational commerce opportunity but I wanted to summarise and capture this info about WeChat for posterity.

As an aside, it’s terribly easy to see success in a different country and incorrectly assume it can be copied. It’s an easy mistake to make because the intoxicating success is highly visible, but it’s hard to find out the detail of how it was delivered – that’s why posts like Dan’s are so important. However, building a deep understanding of the customer is the best way to avoid building a duff copy-cat, and has the added bonus of being the best way to start a company more generally.

The danger of over-funding and herd investing

By | Venture Capital | No Comments

I’ve just found time to read Bill Gurley’s On The Road To Recap. I won’t add to the volume of good posts saying that he’s right to point out that the unicorn financing market is entering a dangerous period where all manner of pressures and biases will cause people to behave badly and mistakenly put off adjusting to the new reality in late stage funding.

Instead I’m going to highlight his warning about what happens when markets get over-funded:

Loose capital allows the less qualified to participate in each market. This less qualified player brings more reckless execution which drags even the best entrepreneur onto an especially sloppy playing field. This threatens returns for all involved.

In 2014-2015 the unicorn market was over-funded, sparking intense competition, high burn rates, and as we are starting to see now, ultimately damaging returns.

This is a movie we’ve seen many times before, although it is usually an industry sector that gets over-funded rather than a stage of investing.

I first noticed it in late 2000 when the fund I was working for was invested in one of six high profile and highly funded enterprise portal businesses. It seems crazy now to think that software for enterprises to build intranets (remember them) was such a big deal, but we all piled into these companies giving acquirers multiple options to acquire similar businesses and driving M&A valuations down for everyone. I think one of the companies made it to IPO but even they struggled when IBM and other large tech players bought their competitors.

Other examples include mobile games, DVD rentals, and cloud storage. It’s likely to happen in bots and AR/VR next.

The most commonly repeated pattern is for VCs to over-invest in sectors that are obviously going to be big. It’s most egregious when there’s a long period of elapsed time between when it’s obvious a market will be big and the market actually takes off. Most everything that moved from the internet to mobile looked like this, and was hard to make money from as a result.

The lesson here is to not invest in the obvious stuff, either by investing before it’s obvious (but remember that being too early is as bad as being too late) or by giving it a miss altogether. Instead it’s better to look for less popular areas that you understand well, that are growing, and where the fundamentals are strong. That takes the courage to be different and the confidence to hold your nerve, but if you’re short in these areas maybe investing isn’t the best career for you anyway.

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