Recent Posts

Archives

Categories

The best of times, the worst of times

I read two startling different commentaries on the health of the UK as a society this morning that made me recall the “best of times, the worst of times” quote from Dickens.

First up was a highly optimistic piece in the Financial Times titled Miserablism risks causing Britain serious harm which argues that we should all wake up to the fact that times are good right now and be wary of policies and politicians proposing radical moves that might well make things worse – e.g. price interventions and exiting Europe. This is the money quote:

Look at Britain as an informed foreigner might. Here is a country that responds to a secessionist threat to its existence by holding a free and fair referendum. It has evolved an economic model that is more hospitable to business than much of Europe and kindlier to the poor than America. It cuts public spending year on year without any civil disorder to speak of. Crime is falling. Unemployment is at 6 per cent. The politicians are small-time but basically honourable. The capital city is a miracle of the modern world.

Then I read the Guardian’s Bleak figures show a relentless slide towards a low-pay Britain which featured the graph below showing that real wages in Britain have now been declining for seven years in a row – only the third time that has happened in the last 150 years.

UKrealwagedecline

Between them these too perspectives capture the overall situation well. On the plus side the economy is performing well and society is stable, but on the downside, the spoils of growth are going to the rich, wage inequality is increasing and the social contract is in danger of falling apart.

The important question is what will happen next. The Guardian suggests two possibilities. The first is that unemployment is now reaching levels where there is little slack in the labour market and employers will find themselves having to increase real wages for the lowest paid. The second is that technological advances will continue to take jobs from mid-skilled workers, forcing them into lower paid jobs and driving real wages down. I’ve written about this before: Robots and artificial intelligence are replacing jobs.

Cycles in the economy and labour market will come and go, but the trend towards automation will run and run. For me the most likely scenario is that tightness in the labour market will force wages up over the next few years, but when the cycle turns again real wages will cycle sharply downwards. Our opportunity is take action now to help the situation. A couple of weeks ago rich Americans were worrying that The pitchforks are coming … for us plutocrats. That will be our fate too, unless we do something.

The solution is not to protect jobs or try to limit the adoption of technology, but to invest heavily in programmes that help people re-skill and get back to work. That would be the play that keeps us as when of best performing societies in the world. If we get through the current period of austerity successfully there might just have the money to do it.

Optimism and skepticism in evaluating startup investments

In a recent interview Marc Andreessen said:

I’m optimistic arguably to a fault, especially in terms of new ideas. My presumptive tendency, when I’m presented with a new idea, is not to ask, “Is it going to work?” It’s, “Well, what if it does work?”

That got me thinking. Andreessen is a smart guy who has a lot of experience with startups and who spends a lot of time thinking about the best ways to invest and build businesses. I don’t agree with everything he says, but when I don’t agree I always stop to think why. In this case I half agree, but think that only asking “Well, what if it does work?” is too simple.

I half agree because asking “Well, what if it does work?” forces you to think about how big something can get and to focus on the upside. The startup investment game is, as we know, all about finding big winners. For us that’s £100m+ exits. For Andreessen I’m sure it’s over $1bn. Thinking optimistically about the upside helps you find those big winners.

However, there’s no point in backing something that has no chance of succeeding, so it’s also important to think about whether an idea will work. In particular, it is important to think about whether the company will deliver it’s plan over the next twelve months (or at least something resembling it’s plan). This has two parts, asking “Does the plan work?” and asking “Can the team execute on the plan?”. Skepticism is helpful when asking these questions.

Time is plentiful when it comes to delivering the upside and it’s reasonable to assume that entrepreneurs can and will figure a way to make things happen – provided there are no fundamental reasons why they won’t be able to (e.g. it requires chip speeds we won’t see for another ten years). When it comes to delivering the next twelve months time is short and there is limited scope for experimentation and re-work. If Plan A fails badly everyone is going to wish they had done something else so it makes sense to think hard about whether it’s going to work. There will inevitably be lots of unknowns but identifying those assumptions up front leads to smarter investments and better plans.

Software is eating the pop world

I’ve just seen the video below of virtual popstar Hatsune Miku, a virtual popstar from Japan, as a guest on the David Letterman show. If that’s not enough for you check out this video of her performing live in front of thousands of fans in LA (caveat: the quality is poor and you have to wait until near the end to see her). She’s a blockbuster in Japan with hit video games, sold out shows, #1 singles and a virtual opera, and opened a tour for Lady Gaga in the US earlier this year.

Hatsune was created seven years ago by Japanese company Crypton Future Media as a visual representation of their song making software, i.e. a marketing gimmick, and developed into a phenomenon when people started remixing her tracks and an open source remixing community exploded online. Crypton Future Media says that Hatsune Miku fans have created over 100,000 original songs for her, over a million pieces of art and 170,000 YouTube videos. Google “Hatsune Miku fan site” and you get close to 150,000 hits.

The interesting question for me is whether Hatsune is a one off, or a sign of things to come?

From an emotional perspective it seems to me that absent human level artifcial intelligence engagement with a virtual popstar can’t be as rewarding as with a real person, but from the perspectives of engagement, participation and a feeling of co-ownership a virtual popstar community offers much more. I suspect we will see more of this.

Prioritisation: The difference between efficiency and effectiveness

The following quote is up on The Heretic today. It’s a great reminder:

Efficient people are well organized and competent. They check things off their to-do list. They complete projects. They get stuff done.

Effective people do all that, but they check the right things off their to-do list. They complete the right projects. They get the right stuff done.

I guess we all know this but great entrepreneurs always focus on the thing that moves the needle the most. No matter how hard or personally difficult, they take on that problem. Company needs profile: they take the stage. Distribution deal not working: they pound the streets looking for direct deals. Co-founder no longer pulling his weight: they have the difficult conversation. Biggest customer not profitable but investors don’t want to let go of the revenue: they take the hit. Burning too much cash: they act sooner rather than later.

Other entrepreneurs however, are clearly efficient but keep themselves insanely busy chasing the wrong opportunities of focusing on tangential tasks.

Prioritisation, then is the difference between efficiency and effectiveness. It’s important that from time to time we take stock and make sure we are spending our precious time on the right stuff.

Bubble watch: Elite tech CEOs are getting worried

techbubble

Venturebeat published an interesting survey this morning which found that 42% of the tech CEOs they interviewed see evidence of a bubble. The infographic above shows the companies they are most worried about.

The market is definitely hot right now, but in the UK at least it doesn’t feel like it did in 1999, nothing like. That said, entrepreneurs and early stage investors should keep in mind that current conditions are unlikely to persist indefinitely. It’s more likely that there will be a period of meaningful market downturn at some point in their 7-10 year journey. Some will get lucky and exit much faster than that, but it is unwise to plan for luck. Better then, to keep touch with the fundamentals of building something that people love and that has attractive economics.

The very best companies combine great fundamentals with rocket ship growth, and we all want to be part of those stories, but the difficult situation that arises in current markets is investors offering big rounds before the fundamentals are sorted. Taking the money buys more time to get things working but brings with it the risk of increasing the burn, losing flexibility and running out of money if the fundamentals don’t improve according to plan. Sometimes it’s better to raise a smaller round, stay flexible, and then go for the big round when everything is ready.

What investors look for in a startup

The post below first appeared as a guest post by me on the Web Summit Blog

———————————–

If you ask most VCs what they look for in a startup they will say great team, great product and great market. Then, if you press them for more detail most will say that for them the team is the most important (although I think they say that at least partly because it’s what entrepreneurs want to hear). Marc Andreessen wrote about this once. He was on the money when he said that for early stage investments having a great team is most important but for later stage investments the market matters more. That’s because when a company is young there is little in the company except the team whilst more mature companies have customers and a brand that tie them to a market.

Early stage investors like Forward Partners look for a minimum of a great entrepreneur and a great idea. Like many others we believe that at the heart of every great business there’s a great entrepreneur so that’s the first and most important thing to check off the list. A mistake that I’ve made in the past is to think that with my help an average entrepreneur with a great idea can be successful, but I’ve come to understand that that’s a conceit. All that said, it’s crucial that the great entrepreneur comes with a great idea otherwise the investment is likely to be wasted. There have, of course, been many instances where great entrepreneurs have pivoted away from their first idea and still been successful, with Kevin Systrom at Instagram being perhaps the most famous recent example, but that doesn’t happen often enough to bet on and it remains a mistake to invest in an entrepreneur, however good, if you don’t believe in their idea.

Much has been written about the character traits of great entrepreneurs so I won’t repeat that here (this post from Mark Suster has a good list) but I will say that in addition to those traits we want to see they have something special which gives them an unfair advantage for their chosen opportunity. Most often that’s deep domain experience. A great idea is for a company that can be a leader in a sizeable market, has enough upside potential to return the investor’s fund and can get far enough with the money to raise the next round.

As businesses develop investors start to think about execution as well as the idea and the team. The first evidence of good execution in my book is the work done to understand the customer and the problem, then slightly more mature companies should have prototypes and first releases of the product to show, and after that they should demonstrate traction and growth. Across all these areas the execution should evidence rigour, discipline and clear thinking.

Now you know what investors are looking for you might be wondering how to approach them. It’s been said many times before but the key is to build a relationship over time so that when you get to the point of asking for money you are asking somebody who already knows you, and hopefully likes you and your idea. The effort the investor puts into building a relationship with you is a good indicator of how likely they are to say yes when you finally come asking. The best way to to get a relationship started is with an introduction, but interacting on social media, networking at cocktail parties and attending office hours or other drop in sessions also works.

My final piece of advice is to understand that most good investors are incredibly time-poor – they are inundated with requests for calls and meetings and only have enough time to say yes to a very small percentage. Moreover, those ‘yesses’ will naturally skew to the people they already know and know well, making it tough to break in. It’s fine to ask for a meeting, but be prepared to begin the relationship with an email conversation. If you are approaching an institutional investor then people who are new to the firm and/or more junior often have more time, although maybe less influence.

Good luck!

Top 20 cities for venture capital – London in at #7

The table below was published by Martin Prosperity. The data is for deals of $5m-200m from 2010-13 and hence excludes lots of deals that are included in other studies which show a much larger market.

Given that San Francisco and San Jose/Silicon Valley are effectively one market the right way to think about this market is that 19% sits in the winning region, and the rest of venture capital activity is highly fragmented. Here in London we are 1.8% of the total market and just under 10% of Silicon Valley/San Fran combination. That said, we are growing much faster.

Screen Shot 2014-10-13 at 16.07.20

How hard should founders work?

This thread on Quora got me thinking about how investors should think about the work rate of the founders they invest in.

The first answer is that it shouldn’t matter.

If a founder finds a way to build a valuable business in two hours a week we’d be delighted for her. Everybody wins.

In a world of perfect information it would be that simple.

However, as we know, the reality of startups is that investors have to make decisions based on very little information and without much time to build trust. As a result we have to rely on proxies and inferences. And, even though it’s an input rather than an output metric one of those proxies is work rate.

Big caveat: founders should never measure themselves by the number of hours they work. They should focus on what they are getting done.

My belief, and I realise now that I’ve never seen a study, is that up to a point there’s a correlation between hours worked and success.

At the risk of making some people angry, I’m going to go out on a limb and put some numbers around this. Different people work with different efficiencies of course and all I can offer here are broad generalisations. Do remember though that I’m talking from experience with entrepreneurs who have achieved at least some level of success, most of whom are highly productive.

There were all sorts of numbers bandied around on Quora, and people often talk up the amount of time they spend at work, but from what I’ve seen forty or even fifty hour work weeks aren’t usually enough for entrepreneurs looking to build venture scale businesses. On the other hand weeks of more than eighty hours are too much for most people to sustain for any length of time. Building a startup is a marathon, not a sprint, and it’s crucial that family, friends and personal health aren’t forgotten.

People like Bill Gates and Elon Musk find ways to work for more than this for extended periods of time, but that’s truly exceptional. As an investor, I love exceptional, but working truly exceptional hours isn’t there only route to success.

So, my advice to would be entrepreneurs looking to build companies worth £100m+ is to be prepared to work 60-80 hours per week on average, but with significant fluctuations.

That’s not working for the sake of it, of course. But at any startup enjoying even moderate success the list of things that could be done is never ending.

I reckon my working week averages around sixty hours.

All that said, I’ve never heard of an investor asking how many hours a founder works. Rather we ask how the business is doing. When it comes to work rate we look for clues like response times to emails, late working sessions in the office, and things happening over the weekend. More generally we take comfort from little signs that founders are truly committed and are doing everything possible to win, and get worried if personal issues take priority when things aren’t going well.

I realise that working a 60-80 hour week isn’t for everybody and isn’t practical for some people who might like to. I’m not saying those people shouldn’t start companies, but they should think through this issue carefully.

Zulily – one of the fastest growing retailers of all time

I knew that Zulily, which Crunchbase describes as ‘A daily deal site for mums, babies and kids’. is an amazing ecommerce success story which IPO’d last year with a valuation in the billions. A friend of mine headed up their UK operations for a while, so I also knew that they were second to none in their use of data to drive a personalised flash sales shopping service to their customers and that their scale has allowed them to deliver an amazing level of personalisation.

However, I hadn’t until now, appreciated just how amazing their growth was or known that they are one of the fastest growing retailers of all time (according to Geekwire).

As you can see from the chart below they went from a standing start in Q4 2010 to a forecast $1.1bn in net sales last quarter. Maintaining growth of that scale for that long is truly remarkable, and it’s great that Zulily have shown it can be done in a physical goods business.

zulily-salesgrowth11-620x376

Standard termsheets

We have a standard termsheet that we’ve used on our last few deals and plan to publish in the near future once we’ve ironed out some final wrinkles. The thing with standard termsheets is that they go straight to the position where you would normally expect to end up after negotiation. Normal termsheets, by contrast, take a position that is favourable to the investor with the expectation that they will be negotiated down.

In our case we set out to be founder friendly and wrote a termsheet that has the minimal set of investor protections that we can get away with as an institutional investor – we need some protections because we have a duty of care to the people who invest in our fund. We looked at the other standard termsheets that are out there, Series Seed, Series Summit, etc and were either consistent with them or more founder friendly they are. We couldn’t use them as is because they don’t have enough detail on key items, like investor protections and founder vesting.

Since writing that termsheet we have used it on around four deals and shared it with a few more companies we have had discussions with. We have taken their feedback and tweaked the termsheet as appropriate with the result that on all terms bar valuation, option pool and details of founder vesting our termsheet is now, in effect, very close to fully negotiated before we send it to companies.

The purpose of a standard termsheet and the full set of standard legal docs that will follow is to make the investment process much quicker and cheaper. We hope to get the time from termsheet to completion down to a matter of days and save thousands in legal bills. It is frustrating to see time and money wasted on negotiating the same points on deal after deal with the same results.

So there’s a big prize to be had, but it requires that everyone takes a different approach to negotiation – i.e. to focus on the small number of key terms that matter which I mentioned above and not get bogged down in the detail of other terms.

I’ve found myself explaining that to entrepreneurs a lot recently (including today) and so I thought I would write it down here so that next time I can simply send a link to this post.