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Steve Denning, one of the leading business thinkers pushing the business world to abandon the outdated idea of maximising shareholder value has published an interesting article on Forbes titled Why do managers hate agile?
That immediately made me think of my first experiences with agile as a board member of software and web startups shifting away from waterfall development to agile to improve productivity. On the one hand I was excited by the prospect of more efficient development and getting away from late delivery and poor quality software that I was used to, but on the other hand I struggled with the lack of predictability and commitment inherent in the agile process. As board members we needed to plan for the next round of fundraising, and that required knowing when product would be released and revenues could be expected to increase.
Reading Denning’s article I see that the trade off between predictability and productivity that I describe above is what companies everywhere are struggling with now agile as a methodology is being adopted across the enterprise and not just in development. Managers have generally been trained to deliver predictability and are generally held accountable for hitting their forecasts, making it hard for them to go down the agile route.
The good news for agile fans is that this battle is only going one way. As the world changes faster and faster the advantages of just-in-time agile methods and customer focus in generating quality output are getting greater and greater. Agile methods are also more attractive to the best employees.
That said, predictability is still important to shareholders and hence for companies looking to raise money to maximise growth. The net effect of this is to make the job of CEO and senior managers more difficult – they have to ‘manage’ self-organising teams and try to predict the output. That takes a high degree of trust and a thick skin to take the flack when things go wrong. Choosing shareholders who understand the trade-offs and can tell the difference between systemic poor performance and a blip will help.
I just read novelist Neil Gaiman’s Eight rules of writing. Numbers five and eight are priceless.
5. Remember: when people tell you something’s wrong or doesn’t work for them, they are almost always right. When they tell you exactly what they think is wrong and how to fix it, they are almost always wrong.
I love it! Generalising beyond writing, I would say trust what people have to say about feelings, but be careful with their predictions. Diagnoses sit somewhere in middle. We all know our own feelings, and don’t go wrong there very often, but if a subject is of great interest to us, as for example our company or it’s market might be, then most well meaning attempts to help will fall short because the would be helper has less understanding than we do. We must always be ready for people to call us on our blind spots though.
8. The main rule of writing is that if you do it with enough assurance and confidence, you’re allowed to do whatever you like. (That may be a rule for life as well as for writing. But it’s definitely true for writing.) So write your story as it needs to be written. Write it honestly, and tell it as best you can. I’m not sure that there are any other rules. Not ones that matter.
This I like because self-confidence is an entrepreneur’s greatest asset. That said I don’t think this applies totally to startups, which have to operate within the limits of commercial feasibility. The penultimate sentence is as important as the first though. Honest confidence is extremely powerful. When dishonesty creeps in confidence can quickly become arrogance.
The chart above is from the ever useful Criteo State of Mobile Commerce report.
It’s good to see UK shoppers turning to their phones to shop more than the rest of the western world because UK companies will innovate faster on mobile as a result. We already produce more than our fair share of ecommerce giants and so long as the UK shopper keeps adopting new technology faster than Europeans and Americans we will most likely keep doing so.
I just saw this chart in a Morgan Stanley investor note with the subtitle eCommerce Hits it’s Stride. Firstly it’s good to see that top investment banks continue to see a lot of growth ahead in eCommerce, but more exciting is the notion that an inflection point is coming towards the end of this decade. If that’s true then growth for ecommerce businesses will peak around 2020. Company valuations are highly geared to growth, so we can expect them to peak around the same time. That makes 2015 a great time to be investing in eCommerce startups.
Jason Calacanis just published a good post on the changing definitions of Seed, Series A, and Series B investment. I’m going to quote his definitions in full:
2004 definition
— Pre-funding: You talk about your idea & write a business plan.
— Seed Round: You build a prototype of your product.
— A Round: The funding necessary to launch your product.
— B Round: The funding necessary to get product traction.
— C Round: The funding necessary to scale your product.
2014 definition
— Pre-funding: You build a prototype of your product.
— Seed Round: The funding necessary to launch your product.
— A Round: The funding necessary to get product traction.
— B Round: The funding necessary to scale your product.
2015 definition
— Pre-funding: You talk about your idea, you build a prototype & launch an MVP.
— Seed Round: The funding necessary to get product traction.
— A Round: The funding necessary to scale your product.
— B Round: The funding necessary to get founder liquidity, build groovy headquarters, and make competitors give up (or not start in the first place).
You’ve seen the pattern here, what used to be Series C is now Series A, what used to be Series B is now seed, and what used to be Series A is now ‘Pre-funding’. All this is being driven by increased capital efficiency. In 2004 it took until Series C to scale your product because it took a lot of money. Now you can do that with Series A. (There has been some inflation in round sizes, but the main story is definitely capital efficiency).
In his post Jason goes on to give advice to founders and angel investors and talk about his incubator The Launch Incubator and the consistent theme is that there is no support for pre-launch companies anymore. Founders who can’t launch an MVP will struggle to get funded, angels shouldn’t invest in pre-prototype companies, and The Launch Incubator is looking for companies with an MVP to take into their 12 week programme.
I think this leaves a massive opportunity to support founders who are pre-launch. There are lots of great entrepreneurs with big ideas that don’t have the technical talent to build a prototype or MVP. Investing at that stage is tricky because the company needs to quickly and cheaply build product and get traction, but the key is having the people in-house who can help the founder make that happen. That’s what we do at Forward Partners.
I was scheduled to give the embedded presentation in one minutes time to the London School of Economics SU Alternative Invesments Conference but they are running late, which gives me a chance to put it online. You saw it here first 
This will be the second time in a week that I’ve presented to an audience of students. It’s good to see such a high level of interest in startups and venture.
I just came across a post that Hunter Walk wrote last May titled Five Mistakes New VCs Make. Number three is a peach, and isn’t just restricted to new investors:
3. Imagining You Can “Fix” a Team/Product/Market
New VCs, especially those with an operating background, can see a company for what they want it to be rather than what it is. They use their own brain to fill in the blanks on an opportunity versus really understanding how the founders think. They see that the product is a little raw but imagine that if they invest and spend a few hours a week with the team, it’ll be okay because they can fix it!
Perhaps the most common flavour of this mistake is investing in a company with a fantastic market opportunity and a team they don’t fully believe in. It’s especially easy for thesis based investors to make this mistake when they find a company that perfectly fits their thesis. The usually secret plan is then to fix the the team with a couple of key hires.
In reality the only person who can fix a company is the person who is running it. Investors can help, and I certainly like to think that we do, but the key is that the founder knows the gaps and solicits assistance. If that’s happening then what we have is a company working to overcome it’s challenges and there isn’t really anything to fix.
There’s a good piece up on Forbes today which offers the following advice about choosing board members:
- Look for integrity and communication skills
- Do due diligence, and then do some more
- Make sure they are committed
- Don’t expect everything from one person
That’s all good advice, and you can read the post for more detail (linked above). There’s more good stuff on the subject here too.
One thing that I think is important which doesn’t get mentioned very often is to make sure you think the same way about strategy. You want challenge, which means you don’t want board members who think in exactly the same way as you do, but you don’t want them to think too differently either. It’s likely that you will hit a fork in the road at some point and if you come to a different conclusion to your board member then you may have an issue. It’s hard for a board to function well when there are fundamental disagreements over strategy.
I always advise talking through future scenarios as a way to gauge whether disagreements in the future are likely.
We’re walking personality machines but computers beat us at our own game
Michal Kosinski, Computer Science Professor at Stanford
Kosinski wrote these words in a paper which describes a study which found that computers processing Facebook likes are better at predicting personality than subjects’ colleagues, family, and sometimes even than the subjects themselves.
The study itself was not terribly complicated going on. Kosinski, Wouyou and Stillwell correlated answers to a personality test with Facebook Likes and used that to predict the personality traits of others.
Something interesting came out though, which is that computers were more intelligent than humans in a narrow but significant domain. The key to success was data – both access and ability to process – and computers will have increasingly more of these as time passes.
Ray Kurzweil and others have predicted that computers will comprehensively pass the Turing Test at some point in the next decade and this study offers a glimpse of how that might happen.
Over the last couple of days a lot of people have been linking to Jerry Neuman’s great essay on the history of venture capital. It’s US focused, starting when the venture industry started in the 1970s and analysing all the up and down cycles of investment and returns since then. It’s a long read, but highly recommended if you are a student of the industry.
What follows from here leads on from what I see as Neuman’s two main conclusions:
- when investors stop taking risks returns plummet
- the best returns have come from taking market risk rather than technology risk
That chimes with my experience. When I’ve seen VCs go after ‘safe’ 3x deals rather than chase 10x deals it hasn’t worked because the success rate doesn’t go up enough to compensate for the reduced returns, and investing in technology is difficult because it’s hard to ascertain whether progress is being made and it’s too easy to invest good money after bad.
You may now be thinking that venture should be about taking technology risk, but when you look at history that’s not been the case. Neuman discusses this in a bit of detail, but the headline is that the majority of great venture winners took market risk not technology risk. When VCs invested in Apple the technology already worked they just didn’t know if anyone wanted computers. Similarly with Google and another search engine, or Facebook and another social network, and so on. If this feels counter-intuitive it’s because as an industry we are guilty of romanticising the idea of big technology bets, I think because they sound more exciting than bets on new markets.
Neuman doesn’t go into this, but perhaps the defining feature of startup financing over the last decade is that it’s become much cheaper to assess market risk. That’s partly because of declining costs and partly because we’ve developed new and better techniques. I’ve written about both these developments at length on this blog before so won’t go into them now but the end result is that companies can now eliminate a lot of risk from their business plans and hence generate a lot of value for shareholders with their first £250-500k investment. That’s why we choose to play at these very early stages.
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