Monthly Archives

July 2010

Twitter Weekly Updates for 2010-07-25

By | Weekly Twitter digest | No Comments
  • RT @unrulymedia: Foursquare looking for search deals saying their trending data would improve real time results #
  • Cameras mounted on Tokyo billboards detect age, gender and tailor messages #
  • Twitter Weekly Updates for 2010-07-18 #
  • Raising money for a venture capital fund is a bit like raising money for a startup #
  • Cameron’s ‘big society’ vision and small business culture #
  • Venture capitalists expect their industry to shrink #
  • Eating my supper in St James' park having my peace ruined by an over aggressive squirrel #
  • Congratulations to Facebook on reaching 500m active members #
  • Convenience can be a massive driver of success, especially on mobile #
  • Just been told by my PA that I have massive holes in my jumper on both elbows. When will I learn to notice these things myself? #
  • Microsoft post a solid set of results – there's life in the old dog yet #
  • Blogging from this iPad is a mare. No decent editor app (as far as I can tell) and the native WP browser editor struggles with touchscreen #
  • @PaulMiller I tried the WP app but couldn't work out how to copy and paste into it or create hyperlinks – so I grabbed my laptop… in reply to PaulMiller #
  • Summer break #

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Convenience can be a massive driver of success, especially on mobile

By | Mobile | No Comments

Earlier this week we held a session where Simon Morris, Marketing Director of our portfolio company Lovefilm shared experiences and brainstormed some ideas with a company in which we are thinking of making an investment.  One of the things he shared is that he has always built the marketing at Lovefilm around three pillars – range, convenience and value, as these are the main benefits that customers get from the service. 

As a customer of Lovefilm it is the convenience which I love.  We don’t watch that many films in our house so the range isn’t important and if we were to do the calculation of cost per DVD watched I don’t expect it would look like great value – but the convenience is great.  There is always a good film waiting for us when we do want to watch one, the postal returns are zero hassle and the Lovefilm site is a great place to store the list of films we want to watch (a list we always talked about keeping before we became Lovefilm customers, but never got round to starting).

I was reminded of Simon’s convenience point again this morning when I read that Amazon’s mobile sales are over $1bn for the last twelve months – my rough estimate is that puts mobile at 5-10% of total sales.  There are two main constituents to Amazon’s mobile business – book sales on the Kindle and sales via smartphones, and I would posit both of these are doing well precisely because they are so convenient. 

When I first got the Amazon app on my iPhone I tweeted with excitement about how quick and easy it was to buy stuff.  That was probably 6-9 months ago and I still got a buzz when I used my iPhone to buy Cormac McCarthy’s The Road at a party last Saturday night two minutes after it had been recommended to me.

Similarly the Kindle makes it easy to buy books and whilst Amazon are coy about precise numbers the device is clearly doing well. One thing they are saying is that in the US over the last three months they are selling c1.5 Kindle books for every hard cover book they sell (analysis includes hard cover books which aren’t available on the Kindle and excludes free Kindle books).

It is the here and now of mobile which makes it so convenient.  Being able to buy what you want immediately saves making a note to yourself or having some other system to remember what you want to do.

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Congratulations to Facebook on reaching 500m active members

By | Facebook | No Comments

I’m going to join what seems like the rest of the blogosphere in congratulating Zuckerberg and Facebook on reaching 500m active users (see Zuck’s post announcing the milestone here).  That is a phenomenal number of people and it is an amazing achievement to get there in six years. 

It is also worth noting their incredible track record of innovation – e.g. news feeds, the app platform, Facebook Connect, the Like Button, and their ad-targeting platform, and the quality of the tech team which has kept the site running at blistering pace throughout their growth and innovation (contrast that with Twitter).

And they are a proper business, with revenues estimated at $1bn+ this year, and still growing at near 100%.  From the bits and pieces I read I think they are near to profitability and I would expect that if they chose they could dial back growth and become profitable immediately.


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Venture capitalists expect their industry to shrink

By | Venture Capital | No Comments

You might have seen this graphic on Techcrunch last week.  It shows that VCs in the developed world expect their industry to shrink over the next five years.


The most dramatic rate of decline is expected in the US, but the picture in Europe is not much better, and crucially the industry over here is already too small.  The history of venture in Europe is one of rapid expansion from almost nothing to something like 3-4x the current industry size in the bubble, followed by an extended period of contraction which still hasn’t ended, and if this chart is right has another five years to go.

In the US the venture industry is still arguably over capacity, but in Europe it is hard to say that is the case and I am hopeful that over here at least the venture industry will do better than predicted in this survey (broad opinion surveys like this often lag turns in the market).  I think there is a good chance that 2010 will prove to be a great vintage year for investment, and that within the next five years the current crop of European funds will be showing sufficiently good results that the limited partners who provide the money to VC firms will be looking to increase their allocation to this market.

Cameron’s ‘big society’ vision and small business culture

By | Startup general interest | No Comments
David Cameron is a British politician, Leader ...

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Those of you in the UK will probably have seen or read about David Cameron‘s ‘big society’ speech over the last 24 hours. For those that haven’t his central message is that here in the UK we need to change the way we think about government and society from a centrally controlled model to one where responsibility and power are more devolved. I have to say that at the time of the general election back in May I thought that the British public faced a choice between two or three bad options, but since then I have been pretty impressed by Cameron, and that feeling was strengthened by this speech. His plan to reform society is big and ambitious, and will be difficult to execute – but I think it is what we need.  It is clear to me that our bureaucracy has grown bloated over the last fifteen years without delivering much improvement. I hope that pushing power and control out of Westminster will both improve services and the motivation of those that deliver them.

The public sector in the UK came into its current form after the Second World War and enjoyed its heyday in the 1950s and 1960s before hitting something of a crisis in the 1970s.  Since then successive governments have pushed it in different directions but have not really got the results that they wanted.

It is not uncommon to see a similar pattern in startups which get off to a great start, go sideways for a bit, and then lose their way despite repeated failed initiatives from management to turn things around.  When this happens there is often a lot of change at the executive level and rank and file employees often lose faith in the company and its leaders, which in turn causes them to think more about their own interests than what the business needs.  The situation I’m describing here is often referred to as one of ‘low morale’ or ‘poor company culture’ – terms you might have heard used to describe the public sector in the UK.

It is hard for a CEO (or Prime Minister) to turn these situations around and in my experience nothing happens quickly – but it can be done.  Very often part of the recipe for success is a bold vision and the confidence to give up control and push decision making out to the edge of the organisation (or into the community) – and that is what we saw from Cameron yesterday.  Bold vision alone is not enough though, it needs to be coupled with charisma and determination to win over the inevitable doubters and then consistent high quality decision making and leadership going forward.  I hope we get all of these in the UK.

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Raising money for a venture capital fund is a bit like raising money for a startup

By | Venture Capital | 3 Comments

Alan Patricof is one of the most experienced and successful VCs around.  He was one of the founders of Apax Partners which is one of the most successful venture and private equity companies in European history and his investment successes include Apple Computer and AOL.  Most recently he founded an early stage venture fund called Greycroft Partners based in New York and they have just closed their second fund.

Raising the money for that second fund was hard work, even for a man with Alan’s experience, and he has written at length on exactly what they had to do on Business Insider.  The whole post is well worth a read.  I’m going to bring out three highlights.

First the stats – they had to talk to a LOT of people:

We had 515 contacts, of this, roughly 250 passed for various reasons and 100 were non-responsive. We had 154 visits, 97 due diligence requests, 33 second visits, and 12 reference requests, to ultimately produce 9 institutional investors. 

That’s less than a 2% yield of all contacts and 6% of first meetings.

Second – the lack of courtesy shown by potential investors:

During the process, however, we learned a lot about various institutions and how they treat supplicants like us.  Some of the highlights that immediately come to mind: courtesy on call backs in a time frame they set but don’t observe, due diligence processes which promise a month or two and take almost a year, people who invite you to full committee presentations and only one person shows up after you take two days and travel over 1,000 miles to get there in a rainstorm.  And these are just a few of the examples.

And finally the wasted effort:

Two groups in particular went through extensive due diligence including:  independent credit checks on each of us, negotiating the LP agreement, requesting a seat on our advisory board, and finally getting us through their investment committees.  After all of that, they confessed that they were out of funds and were in the market raising their own fund of funds; this after countless meetings at their offices, calls to every one of our CEO’s, co-investors and personal references.

As Alan says towards the end of his post, going through this sort of humbling experience should make VCs more aware of their own treatment and response to entrepreneurs.

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Twitter Weekly Updates for 2010-07-18

By | Weekly Twitter digest | No Comments

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The changing maths of venture capital

By | Startup general interest, Venture Capital | 4 Comments

If you have been reading this blog over the past couple of weeks you might have picked up that I’m a big admirer of Steve Blank and his thinking about how to build startups.  Yesterday he wrote a blog post entitled Welcome to the Lost Decade (for Entrepreneurs, IPO’s and VC’s) which sets out the changes to the environment in which we are all working and explains how tough life is going to be for the startup ecosystem as a result.  As I said I’m a big fan of Blank, but I think he over states his case this time.  In the rest of this post I will pick out the salient points from Blank’s piece and then finish by saying why I think the situation isn’t as bad as he makes out.

Blank’s starting point is that the startups and their venture funds used to rely on the IPO markets to provide liquidity and latterly to fund the later stages of growth, but that the IPO market has been moribund for a decade.  As you can see from the two charts below the difference between the nineties and noughties is stark.



It is true that the picture has improved this year as H1 2010 saw 2x the total number of IPOs in 2009, and from our perspective the public markets are working much better, Tesla (in which DFJ is an investor) got out OK a couple of weeks back and we have a handful of other companies that might float soon.  However, whilst the recent uptick in venture backed IPOs sweetens the picture a little we are still a long way short of the 150-200 IPOs per year of the early 1990s, let alone the activity levels during the bubble.  Moreover, the macro economic picture remains unexciting and it is hard to see much change from the current status quo over the next couple of years at least.

As a result VCs making investments now, and by extension the entrepreneurs who take their money, must plan for exit via M&A and as Blank points out that means lower exit values.

I don’t think that means we are in a ‘lost decade’ though.  It does mean that making money out of startups for both entrepreneurs and their investors needs to be done differently, and will often be more difficult, but it is still very doable.

Here are the reasons why I remain optimistic:

  • The fundamentals for startups get stronger all the time – the pace of innovation continues to increase exponentially and startups’ ability to move faster than large companies is becoming more and more of an advantage
  • In many sectors the capital requirements to start and grow a business are decreasing
  • New sources of liquidity for shareholders in startups are emerging to fill the gap the IPO market has left – e.g. DST
  • The economy and IPO market will come back eventually (not that you should plan for it today)

That said, this is absolutely not a time to be complacent, and I think Blank is right to assert that a startup will have to be stronger to survive now than was the case 10-20 years ago.  As he says, capital efficiency is much more important than it used to be, and raising capital takes longer and needs more creativity and forethought than it has for a while.  But these problems are surmountable.  And for the entrepreneurs that figure out how, the prize will be big – competition is weaker today than it has been for a long time and businesses that are founded today will hopefully be exiting into the next boom some 3-5-7 years hence.

For VC funds this means that the optimum size just got smaller – more capital efficient companies and lower exit values both point that way.  That means living off fat management fees is increasingly a thing of the past which I guess makes life tougher – but that is probably a good thing as it puts the focus 100% on delivering great returns and generating carry.

Finally – I owe a thanks to Mark Gibson of Advanced Marketing Concepts for pointing me to Blank’s post.

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Foursquare founders took cash out in their recent Series B round

By | Startup general interest | No Comments

The news is out today that Foursquare’s founders Dennis Crowley and Naveen Selvadurai took home $4.64m of their recent $20m Series B.  As I’ve written a couple of times before I think this sort of cash out deal can be really helpful in aligning the interests of management and investors.

Last year I quoted Mark Zuckerberg on what ‘getting a bit of liquidity’ meant for him:

It meant that in making decisions about Facebook I didn’t have to worry about the short term. I could just work on making Facebook as good as possible, and optimize it for 10 to 20 years out.

Not ‘worrying about the short term’ has two important benefits.  Firstly it takes the pressure off compensation discussions, which can get intense, particularly if the founders have been working in startups for a while with payout or have recently switched from a high paying corporate job, and/or they have families and school fees to worry about.  Secondly, if founders already have some money on the side they are going to feel less compelled to accept the first half decent exit that comes along and will be more willing to hold on for the big result.

Cash out deals are much easier in larger rounds at higher valuations.  Otherwise it can be hard for the exec to take out a meaningful amount and still have the majority of her wealth tied up in the startup.  (Leaving the majority of wealth tied up in the shares of the startup is important for VCs both as a sign of confidence in the business and for ongoing motivation.)

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