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 Venturebeat reported yesterday that US startup valuations have reached ten year highs. You can see from the charts above that median valuations have been increasing at all stages from seed through to Series D or later. Series A valuations have increased more slowly than other Series’ which shows that there is a bit of a squeeze at this level, but suggests the ‘crunch’ isn’t that dramatic.
The bigger questions are whether this data indicates we are in a bubble and what might happen next. I guess the first thing to observe is that when anything hits a ten year high there is a reasonable chance that the next movement is down. The next observation is that the generally improving economy and strong exit environment (60 venture backed IPOs so far this year) are justifications for some level of increase. Whilst there are examples of high valuations that investors may end up regretting and I suspect that the general upward trend won’t continue much longer I see no signs that we are in for a hard correction. If prices go up again at the same rate for another year or two then I will revise my opinion, but I don’t think we are there yet.
In our experience Europe valuations remain more muted, although they have also been increasing (if anyone has good data I’d love to see it). At the Series C level and above startup financing is an increasingly global market but below that level inter-continental deals still aren’t that common and the laws of supply and demand have limited price rises in the under-financed European startup market. Moreover, government investment in the startup ecosystem continues to play a significant role here, and that capital will have to be replaced by private capital at some point, which will keep the supply of capital at levels that mitigate against big valuation increases. Tax incentive schemes are a bit of an exception to this analysis and whilst they are very welcome, I acknowledge that they are causing distortions in some parts of the market in some geographies.
As I’ve written before here at Forward Partners we work with entrepreneurs to help them launch and scale their companies in two different ways. About half our investments are in companies at true startup stage – i.e. founder + idea, nothing built – and half are in slightly more mature companies, up to late seed stage when there are maybe 5-10 people in the company.
Right now we’re looking to invest in up to two amazing new entrepreneurs or founding teams at that true startup stage. You will either be building an ecommerce brand that people will love, or supplying software and services into the ecommerce sector. We want people who are passionate about their idea and fully committed to pursuing it, but the idea doesn’t have to be fleshed out in detail. What’s important is that you have a clear vision of the future and a good understanding of the dynamics which are creating the opportunity.
We think about ecommerce in the widest sense, including innovative product companies that sell direct and businesses building new ways to buy things online. Good examples of things we like from our portfolio include:
- Hailo - a new way of booking taxis that people love because the product is a joy to use
- Wool and the Gang - a fashion brand that people love which has an innovative community based manufacturing model
- Unbound - a crowdfunding platform that offers fans a new and better way to connect with and buy from authors
- Appear Here - a market place for short term lets on the High Street that works with ecommerce companies
- Driftrock - a platform for marketing apps for SMEs (including ecommerce companies)
We have a simple application process and our quick due diligence process is designed to add value even if we choose not to make an offer. If you get through that you will be offered up to £200k in a tranched deal, typically £25k, £75k, and £100k. We will build a picture together of the progress that will unlock the next tranches, but won’t tie them to milestones (we’ve learned that attempting to predict what the business will look like with the specificity that milestones require is a fool’s errand). We’re all about keeping things simple and transparent, so the offer would be for ordinary shares with other standard terms, and to keep it balanced and fair tranches two and three would only happen if you and Forward Partners want them to. Both sides are free to walk away.
Whilst cash is important what really sets us apart is that we offer more than just investment. You will be invited to come and sit with us in our offices and our expert team of ecommerce startup specialists will be at your disposal at a subsidised day rate. We are practitioners of lean startup and design thinking and have developed a number of tools and processes which help companies build a deep understanding of their customers, build products people will love, and execute quickly and efficiently. See the Forward Thinking section of our website for more details.
Every company is different, but the rough template we work to is to speak with customers and build MVPs to test assumptions before launching a product around month three, gain enough traction to begin Series A discussions by month six, and then close the round by month twelve.
If that sounds exciting then we’d love to hear from you via the application process on our website. We will get back to you within a week.
Please pass this post on to anyone you know who might be interested. Referrers of successful applicants will have our eternal gratitude and be offered a nice lunch or bottle of wine  .
It’s a bit of a cliche these days to say that startups should get out of the building and talk to customers, yet not everybody does, and fewer still do it well. I think that’s because it’s easy to think that you already have a good feeling for customers, because talking with them is time consuming, because if you don’t do it the right way it’s easy not to learn anything, and because it takes some people out of their comfort zone. None of these are good reasons to avoid what we see as an essential discipline which often yields huge insights, and we encourage our portfolio companies to make customer conversations a big part of their early work and then a consistent ongoing activity.
Steve Blank just posted a great example of how powerful talking with customers can be. He’s into week nine of his life sciences accelerator programme and his post tells the story of Tidepool, an open data and software platform for people with Type 1 Diabetes. By week six they had spoken with over 70 patients and medical device manufacturers and the conversations transformed their business and pricing model. Initially they thought they were in a five sided market and needed to concern themselves with patients, app builders, researchers, healthcare providers and medical device manufacturers. Through their conversations they learned that they could pursue a drastically simplified two sided market of patients and device manufacturers. That level of simplification dramatically increases chances of success, but it wasn’t the only thing they learned. Their conversations also revealed that Tidepool would reduce device manufacturers’ churn allowing Tidepool to claim part of the accompanying cost savings for themselves which raised their per user revenue expectations from $36 to $90.
As Steve Blank says “there is no possible way that any team, regardless of how smart they are could figure this out from inside their building.”.
Our portfolio company ParcelBright offers another good example. The founder Daniel Lipinski knew in his gut that there is a significant opportunity in helping small ecommerce businesses ship parcels and customer conversations enabled him to change from a service that targeted developers to selling straight in at CEO level and he’s now generated his first revenues, all without writing a line of code. My colleague Dharmesh is writing a blog post that will tell the story in more detail.
Regular readers will know that I’m interested in robots. I think they will transform many elements of business and society over the next twenty years so I was very interested to read about Jeff Bezos announcement that Amazon has been experimenting with drone delivery and hopes to put the service live as early as 2015.
Aside from the amusing question of whether Bezos deliberately timed this headline grabbing announcement to generate publicity for Amazon on the eve of cyber Monday, it’s interesting to ponder how much this will change things. The drones will apparently be able to deliver packages weighing up to 5lbs in 30 minutes. Assuming the cost is negligible (it will be free if included as part of Amazon Prime which looks to be the case) then to my mind for many people buying from Amazon with a few clicks on a smartphone and having goods in your hand within the hour without leaving the sofa or kitchen table is going to be a no-brainer. The decline in physical retail will accelerate and other ecommerce businesses will have to find a way to compete. It may well be that Fedex and UPS start operating a drone delivery service that allows other businesses to match Amazon. That might be a startup opportunity.
I was also interested to read Makezine’s analysis of the hurdles Amazon will have to beat to launch drone delivery:
- Battery power
- Weather
- Theft
- Navigation
- Safety
- The FAA
They describe each of these in a bit of detail, and they all seem surmountable. Getting regulation from the FAA is perhaps the most difficult to predict, but I’m sure it will come eventually.
Drone delivery is on it’s way.
 This chart comes from the OECD who are widely respected for their forecasts. By 2060 they predict the Eurozone will be the fourth largest economy in the world after China, India and the USA. The USA will have fallen from first place to third. This change will bring profound shifts in global politics and trade rules. That’s inevitable given that China and India have very different ideas to the USA and Europe about what constitutes ‘fair’ trade.
2060 is still a long way off though, and the rules of the trade game will change only slowly. Those starting companies now can reasonably expect that the usual 5-10 years to get to scale and/or liquidity will be played out in an environment not too dissimilar to the one we have today (although there is a clear opportunity to predict and pre-empt the new environment). Those starting companies in five to ten years won’t have the same luxury. For those of us in the investment game this analysis suggests China and India will loom large in our strategies for either our next fund or the fund after.
 The chart above shows that the ratio of businesses started per head in the UK to the US is maybe 3.8:7.6 – i.e. about 0.5 – whilst the ratio of VC investment as a percentage of GDP is 0.04:0.17 – i.e. 0.2. That tells me that the UK venture industry needs to grow 2.5x to match the US in size relative the economy and population.
I’ve been saying for a while now that the UK startup ecosystem is underfunded. It’s nice to put some numbers around it.
I pulled this chart from Saul Klein’s excellent presentation to Dublin Web Summit earlier this year.
I think it’s generally accepted now that in ecommerce faster sites convert better. For many startups, though, investment in improving site performance need to be weighed up against other initiatives that can improve growth or profits. Here’s some data that can help in that decision (courtesy of VentureBeat).
 These are meaningful numbers, but I was a little surprised they aren’t higher. At the early stages improving things like merchandising, design, email campaigns may have a bigger impact. That said every good ecommerce company has a fast site and speed impr0vements shouldn’t be put off for too long.
Amazon has long pursued a strategy of winning by pricing low. Many of you will have experienced that strategy first hand with regular price reductions from Amazon Web Services, but it goes right across their business. Their approach has led to strong revenue growth but few profits which has analysts sharply divided – some believe they will never make large profits and the shares aren’t worth much whilst others believe that they are building controlling positions in market after market which will put them in great position to improve margins over time. I’m in the latter camp.
I just read the following story about how their low price ethos played out when they entered the DVD market in 1998. It’s a great case study about the importance of playing to your strengths, having a clear mission and running sustainable strategies. Stay with it through the first paragraph…
If you have bigger lungs than your competitor, all things being equal, force them to compete in a contest where oxygen is the crucial limiter. If your opponent can’t swim, you make them compete in water. If they dislike the cold, set the contest in the winter, on a tundra. You can romanticize all of this by quoting Sun Tzu, but it’s just common sense.
I worked on the launch of the Amazon Video store, Amazon’s third product after books and music. At the time of the launch, DVDs had just launched as a product category a short while earlier, so the store carried both VHS tapes and DVDs. The day Amazon launched its video store, the top DVD store on the web at the time, I think it was DVD Empire, lowered its prices across the board, raising its average discount from 30% off to 50% off DVDs.
This forced our hand immediately. Selling DVDs at 50% off would mean selling those titles at a loss. We had planned to match their 30% discount, and now we were being out-priced by the market leader on our first day of operation, and just before the heart of the holiday sales season to boot (it was November, 1998).
We convened a quick emergency huddle, but it didn’t take long to come to a decision. We’d match the 50% off. We had to. Our leading opponent had challenged us to a game of who can hold your breath longer. We were confident in our lung capacity. They only sold DVDs whereas we had the security of a giant books and music business buttressing our revenues.
After a few weeks, DVD Empire blinked. They had to. Sometime later, I can’t remember how long it was, DVD Empire rebranded, tried expanding to sell adult DVDs, then went out of business. There were other DVD-only retailers online at the time, but none from that period survived. I doubt any online retailer selling only DVDs still exists.
The key takeaway for me is that Amazon’s mission of being a low cost supplier coupled with the knowledge that they were financially stronger than DVD Empire made the decision to match the price cut a no-brainer and hence easy to take quickly, whilst DVD Empire probably should have known their bluff would get called.
LPs, the investors in VC funds, have a difficult job to do, largely because they have to work with poor quality data and only a small fraction of VCs deliver the returns that make them worth investing in. The problem is made worse by the fact that LP demand to invest in the handful of serially successful VCs well outstrips supply and most LPs have to invest most or all of their venture allocation in other VC funds.
The CB Insights Investor Mosaic sets this out very well. They also describe the factors that they think LPs should use to make those tough decisions:
- Past performance – unlike most other asset classes in venture capital past performance is a good predictor of future performance. CBInsights calls this ‘Performance Persistence’.
- Network centrality – “how connected a VC firm is with other VC firms in the industry, as networks have been proven to be a critical driver of VC performance”
- Brand – “brand is important in venture capital as firms with great brands and reputations see higher quality dealflow, gain entry into emerging industries and can also achieve better economics because they are a preferred source of capital for company founders.”
- Investment discipline – “VC returns have been shown repeatedly to be tied to discipline. Discipline spans fund size as well as sector, geographic and stage preferences. Disciplined stage and sector investing fosters learning opportunities and the development of stage and sector specific knowledge and skills. Discipline also helps to keeps a venture fund’s loss ratio low which is important as they are ultimately stewards of LP investment funding.”
- Selection aptitude – “a measure of dealflow quality and selection prowess for each investor. It highlights each investor’s ability to source and ultimately select high quality investments and then shepherd them to favorable outcomes. While the platitude that 1 of 10 VC investments is a homerun is often thrown around, the reality is that some venture capital firms are significantly better at hitting homeruns then the rate of 1 in 10. Conversely, several VCs are much worse.”
- Illiquid portfolio strength – “this score measures the quality of current, non-exited companies in an investor’s portfolio and also looks at the investor’s entry point into the company.”
This is a really good list and at Forward Partners we aspire to be great on all these dimensions, but for me selection aptitude stands out above all the others as a driver of success. It is the least measurable (aside from looking at past performance) and as a result LPs often focus more on the other drivers. To my mind that’s a mistake. The analogue with VC investing is being comfortable assessing entrepreneurs without a track record of success, and getting that right is one of the best ways to get big wins.
It’s widely accepted now that simpler is better when it comes to website design. Here’s why (culled from Why Simple Websites are “Scientifically” Better on ConversionXL):
- A 2012 Google study found that users judge a website ‘beautiful’ or not in 0.02-0.05 seconds and that visually complex websites are consistently rated less beautiful – unsurprising given the little time available to process complexity
- Simple websites require less physical work from the eyes and brain
- Our short term working memory can store and process 5-9 chunks of information at a time – simple websites ensure those 5-9 slots are filled with the right things
One of the best ways to make a site simple for users is to have it conform to their expectations. Ecommerce sites should have the elements that people expect in the places they expect to see them – e.g. big image of the product front and centre (check out the asos home page).
That said, great design is an increasingly important driver of business success, norms evolve, and it isn’t at all true that designers should simply copy others in their category. They should, however, be aware that too much deviation from prevailing norms can result in users spending valuable cognitive resources figuring out how to use the site leading to lower conversions. That said, deviation from norms can sometimes to be very powerful. As ever with startups, there is no one-size-fits-all answer, but the point here is that bold designs carry a risk that should be carefully weighed up against more incremental innovations.
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Prior to joining Forward Internet Group I was a partner at DFJ Esprit
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