Monthly Archives

March 2011

50 Questions: How does a VC evaluate a company’s product?

By | Uncategorized | One Comment

Seventeenth in a series of weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.

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clip_image002One of the big trends in startup financing is that value is being created earlier in the life of a company and the VCs who want to invest before the value inflexion point increasingly need to evaluate companies that have yet to generate meaningful revenues, and therefore before the strength of the product has been validated by customers to any great extent.  In this situation we evaluate the product in the following ways:

  • Detailed look at the limited customer data available, maybe from an alpha or beta release, or free trial.  75% of new product launches fail and many VCs find it hard to invest without at least this minimal level of customer validation of the product.  (The major exception being when they have previously backed the founder.)
    • How customers are using the product.
    • The benefits they get from it.
    • What they say about it.
  • View a product demo and compare it with other competing products.  Application speed, user interface, ease of use, and fit with existing practices are the things I look for.  Product demos are increasingly common in first pitches.
  • Analysis of the feature set compared with the competition and the customer requirement.
  • Solicit the view of trusted experts – typically these will be members of the VCs extended network who have knowledge of the startup’s market and they will opine on multiple areas of the business, including product.  This includes discussion with prospective customers.
  • Online research – what do people say on Twitter, Quora, blogs, etc.? have any analysts commented on the company or its competition?
  • Assessment of the product management function.  The key things to look for are experience, passion for the product, understanding of the customer problem (many of the best products are built by founders because they themselves needed the product and would have been customers and hence have an intimate understanding of the requirements), and the extent to which the organisation obsesses about having great product.  The younger a company is the more focus there should be on product.
  • Assessment of the likely profitability of the product – particularly its gross margin potential.
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DFJ Esprit prize for winner of Geek’n’rolla startup competition: offer of £50k investment

By | Announcement | 9 Comments

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Yesterday Mike Butcher twittered that he had forgotten to get a prize for the winner of the startup competition at the Geek’n’rolla conference today.  Reading that, we at DFJ Esprit scratched our heads to see if we could help and thought it would be kind of cool to offer the winner a £50k investment.  Mike also thought it was a good idea, and a plan was hatched.

I’m happy to say that the winner turned out to by DueDil which is a pretty cool company, that by chance we have started to get to know recently.  Hopefully they will take up our offer and become part of the DFJ family.

For those of you that want the technical details – the precise offer is of a £50k loan convertible into the next round at the price of the next round, subject to legal due diligence, but no strings beyond that.  I wish we could’ve made a clean promise without a ‘subject to’ but we need to make sure that the company and principles are bona fide before we invest.

Entrepreneur friendly Britain

By | Uncategorized | 7 Comments

I’m very pleased to say that the UK is becoming an incredibly entrepreneur friendly place, largely courtesy of a number of government initiatives.  The statistic being bandied around Whitehall is that 1.3m of the last 2.4m jobs created in the UK were created by startups, and something like 80% of those were created by top 6% of startups (more exact stats would be welcome).  Ergo the UK needs more high quality startups and government should be doing everything it can to create the best environment for that to happen.

There is nothing new about this argument (except maybe the statistic) but for the first time government seems to really believe in it.

The first evidence of this new government attitude came back in November when Prime Minister David Cameron launched the East London ‘tech city’ intitative, got a boost earlier this month with the tech-friendly Startup Visa and then we saw a whole lot more in the budget last week:

  • Tax relief for angel investors under the EIS scheme increased from 20% to 30%
  • Restrictions on size of EIS and investments by VCTs into individual companies increased from £1m to £10m
  • Restrictions on size of qualifying companies to relaxed in a 2102 Finance Bill
  • Big increases in the R&D tax credits
  • 100% increase in entrepreneurs relief to £10m (lifetime limit)

And on top of these financial measurements it appears the government might finally be getting serious about reducing red tape for business.

Then yesterday was also a good day for UK entrepreneurs:

It will take time to build an entrepreneurial culture here in the UK, and the government can be a big help by making it easier for businesses to succeed and by publicly supporting the idea that the entrepreneur is to be valued.  It is great to see that they are doing a good job in this regard.

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Choosing a company name

By | Startup general interest | 12 Comments

I’m often asked to opine on potential names for companies, both at the formation stage and when they are considering a change of name, usually following a shift in focus.  Having this morning read what Techcrunch described as the seminal post on the subject of choosing a company name which was written by VC Rich Barton in 2009 I thought I would share some thoughts.

Firstly a comment on how to go about choosing a name: Do it quickly!!

My experience across the naming of choosing the names for Reuters Venture Capital when we span out from Reuters and DFJ Esprit when we span out from Cazenove has cemented that advice in my mind.  When it takes a long time to choose a name people form strong opinions and some of those people inevitably end up feeling disappointed and like their view hasn’t been taken account of.  This is a particularly acute problem when potential names are shared with friends and family and it then becomes embarrassing to go back home and say ‘we chose that name that you thought was stupid, and we didn’t choose the one that you and I thought was great’.  Additionally, thinking about choosing a name is a distraction from real business.

Further, whilst some names are better than others ultimately it is the product and execution which counts so prolonged deliberation in the hope of coming up with a perfect name is unlikely to be time well spent when the focus could be on other areas that create value more directly.

That said, there are some company names that are just obviously bad, and it is worth taking enough time to make sure you don’t end up with one of those.  Bad names are the ones which make people wince or laugh when you test them out – watch out though – if you test with enough people you will get bad reactions eventually, often of a ‘it rhymes with something rude/inappropriate’ nature.  Don’t be put off by one pseudo-funny put down.

Turning to the positive, I favour names which give a clue as to what the company does, but are not too literal.  I think these sorts of names are the most memorable and getting people to remember the name of a company is one of the biggest challenges for cash strapped startups.  From our portfolio healthy snacks service Graze.com and movie rental service lovefilm.com have both benefited from semi-literal names.  Names that are too literal are somehow harder to remember (and I say that as someone who has to remember a lot of company names).

The counter argument as espoused by Rich Barton is that most of the best consumer brands have invented their own word.  He argues that whilst building recognition for a new word company name takes a long time (Expedia took eight years to achieve unaided awareness over 50% in their target market) the early pain, and financial risk, is worth it if you really want to create a game changing brand as new words have a unique ability to define new categories – just look at Kleenex, Ebay, Nike, etc.

It may be right that inventing a word maximises the potential impact, but in my opinion it makes life more difficult in the early stages of a company’s life, and that is the time when success or failure really occurs, and it is worth sacrificing potential impact on the upside for an easier life early on.

Beyond that I would say keep the name short, avoid names that are difficult for people to spell, avoid names that give a misleading idea of the company’s product, and finally (obviously) have decent URLs and social media handles available.

UPDATE: As Neeta Patel pointed out in the comments it is also wise to make sure the name works in multiple languages.

SECOND UPDATE: taking from all the comments:

  • People should be able to pronounce the name without fear of getting it wrong – thanks Harry
  • Keep it short – 6-8 letters – Jason Calcanis advice, via Will Reeve

And check out the post from Calcanis (sort of) for a host of practical tips on choosing a name and getting a URL

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Twitter Weekly Updates for 2011-03-27

By | Weekly Twitter digest | No Comments

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A good week for Google

By | Advertising, Google | 4 Comments

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A couple of weeks back I wrote that Google was getting its mojo back on the back of a couple of exciting product announcements they made in February.  This has been another good week for the same reason:

  • In-app billing is (finally) coming to Android – this is huge, the health of any business ecosystem is dependent on the ability of participants to make money and Android developers have struggled on this front.  In-app billing opens up the virtual goods avenue and will be a real boon for the platform and hence for Google.
  • Launch of videos within Adwords (see picture) – more speculative this one, but the internet still hasn’t attracted its fair share of ad dollars away from TV and this format will reduce the imbalance.  It should improve the effectiveness of Adwords and be easier for media planners to buy.
  • Chrome 11 beta allows you to talk to your computer – less money here, but this is surely the way of the future

After a difficult period and a re-shuffle at the top Google is innovating again.  That is good to see.

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Groupon has a bad Feb – a sign of things to come?

By | Advertising | 3 Comments

A question on everyone’s lips at the moment is whether the $billion valuations that a number of the top private internet companies are attracting are here to stay.  My answer is that all of them look toppy, but some could turn out to be justified by strong revenue and earnings growth over the next couple of years.  When pushed as to which is the strongest and which the flakiest I plump for Facebook as the strongest (now at $85bn) and Groupon as the flakiest of the group.

Before I go further I want to say that Groupon is a fantastic business.  The company has an amazing track of awesome execution, has 70m users, and has broken records for the speed of its growth in both revenues and valuation.  Plus it is reported to be very profitable and the smart guys at Google were prepared to buy the company for a lot of money.  My comments below may seem critical but they are made only in the context of ultra high valuations.  For sure Groupon is worth a lot of money – just maybe not the $5bn paid in Feb on Second Market or the rumoured $25bn at IPO.

The bear case on Groupon has two elements:

  • People are churning off Groupon email lists at a high rate and whilst they are doing a great job of adding new subscribers at a faster rate that can only go on for so long before they hit the limits of the online population.  People get tired of having the offers in their email every day.
  • The service brings lots of customers to Groupon’s small business clients, but not much value – although not many of them have worked that out yet.  The discounts and Groupon margin mean the customers aren’t profitable on their first visit and not enough of them turn into regular customers to make it all worthwhile.

Against this backdrop I was interested to see the following Groupon revenue chart on Techcrunch this morning:

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These are US revenues only, which is presumably Groupon’s most mature market, and thus the market most likely to be feeling the pinch if the bear case outlined above has merit, and February showed a big fall from March.  One data point doesn’t make a trend (you need two for that :D), but given the potential fragility in Groupon’s business model and their IPO aspirations it will certainly have set some alarm bells ringing.

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Y Combinator’s latest class – business/consumer split is pretty even

By | Startup general interest, Venture Capital | 3 Comments

image Yesterday was Demo Day for Y Combinator‘s latest crop of startups and All Things Digital has a brief description of 24 of the 43 presenting companies.  Apparently 19 of the presentations were ‘off the record’ and were not included.  Additionally, one company didn’t present because it was already under termsheet for a Series A investment and hence prohibited from pitching to investors.

These are now some of the hottest startups on the planet.  All have been through the Y-Combinator selection process and then programme and many will now be chased down by some of the US’s best VCs.  Additionally, all have been offered a $150k convertible loan by DST/Ron Conway.

So I thought it would be interesting to see which sectors the smart money is looking at.  This isn’t a full snapshot of the market, as it reflects Y Combinator’s focus on both capital efficiency and internet related businesses, but I think it provides some guide as to which sectors are likely to be hot for the next year or two.

And the answer it that the split between consumer and business focus is pretty even.  Ten of the twenty four are clear consumer plays, five are productivity tools that target individuals in the workplace and hence straddle the consumer/business boundary, and nine are clearly targeted for sale to the enterprise (software tools and enterprise software).

I haven’t looked back at previous classes, but I think they were much more heavily consumer focused.

And the picture is of Jof Arnold of Fitfu presenting at Demo Day yesterday.  Fitfu is one of the British teams in this year’s class (maybe the only one?).  I’ve been a long time user of his excellent personal fitness apps on my iPhone.

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Details of the NYT scheme suggest paywalls won’t save the news industry (on their own)

By | News | One Comment

image The New York Times released details of their paywall last week and they are a) complicated, and b) full of holes that people can exploit to avoid payment.  I’ve been saying for a long time that paywalls aren’t the answer and the fact that after a year of work the NYT have come up with a solution that is inelegant and has enough holes that most people will avoid payment has only strengthened my conviction.

How the paywall works:

  • Users will get free access to up to 20 articles per month, to get more they will have to become a subscriber
  • Of that 20 no more than five can come direct from a search engine referral in any given day
  • But links from social media (including blogs, Facebook and Twitter) will always be open.  They will count towards the 20 per month limit, but users clicking on a social media link will be shown the article even if they are over their limit of 20 for the month.

On top of that the pricing is complicated, with different prices for different regions in the states as well as different bundles of offline and online, and as Daring Fireball says and Apple and others have shown, pricing should be simple.  As an interesting aside, NYT have decided to sell through the Apple App Store and swallow Apple’s 30% take, but they won’t sell through the Android app store.  So the only places you will be able to subscribe are iTunes and the NYT websites.

I’m guessing that the ease of exploiting the social media loophole is pretty obvious to most of you.  Techcrunch does a good job of listing different ways of doing so, but amongst the most obvious are create a blog that links to every NYT story, or create a Twitter account that collects all the NYT feeds in one list (already in existance at @FreeNYT, one week before the paywall goes live).  It is also possible to hack through the paywall, e.g. by creating a browser extension that fakes referrals from other publications or pretending to be a Googlebot (details of how here).

The reason that the NYT have created such a tortuous scheme is of course that they realise that without wide distribution the value of their brand and business will fall quickly.  Wide distribution means people need to be able to find them on Google (at least to an extent) and know they can share links that people will be able to access.  However, these are precisely the reasons why a paywall is the wrong way to go, and why I can’t see news companies making much money out of them.  Paywalls could be a useful revenue stream, but only to compliment advertising on their free properties and other schemes to make more money from their biggest fans and heaviest users.

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Removing the paid link from my left sidebar

By | Advertising, Announcement | 3 Comments

Some of you may have noticed that until today there was a link in my left sidebar for Credit Land (link now removed at request of Credit Land).  After reading the recent chatter on the trouble that JC Penney got into for buying links and then finding numerous statements from Google’s Matt Cutts that they will punish sites that sell links which pass their Google Page Rank I decided to take the link down.

To explain, Google looks at the Page Rank of sites that link into any given site as part of their search algorithm so they are sensitive to attempts to manipulate results by paying for links.  In a touch more detail, links from sites which have a high page rank are particularly useful in getting the linked-to-site to rank better on Google, and hence SEO folk reach out to sites like this one and try to buy links.  When I took the link I knew I was taking a chance with Google, but thought it was unlikely I would get noticed.  However, it looks like they have noticed.  My Page Rank has fallen from a peak of 7 or 8 out to 10 to 5/10 today which will be reducing the positions my posts appear in Google and reducing my traffic.

I’ve had the link up for the past couple of years and given all the money to charity.  I won’t disclose the precise amount because Credit Land probably don’t want to the amount they pay disclosed, but I will say it is in the low £000’s.  Whilst that isn’t a huge amount of money it has gone to local charities where I live in North London which are small enough that the amounts received has made a difference.  The beneficiaries have been CARIS which runs a nightshelter for homeless people every winter and Conewood Nursery in Highbury which provides a subsidised service for families that wouldn’t otherwise be able to afford to have their kids looked after during the day.

They are both good causes and I’m grateful to all of you for driving the Google Page Rank higher and making the donations possible by reading and linking to this blog.

I’ve experimented with a few forms of advertising over 4.5 years I’ve been writing this blog, including paid links, affiliate links and Adsense, but the paid link was the only one that generated a meaningful amount of money without requiring me to plaster ads all over the site.  Now that I’ve taken that link down we are back to an ad free site, which shows how difficult it is to monetise blogs with the level of traffic I get (15-20k uniques per month, 200-250k page views).  I’m still open to ideas though.

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