Monthly Archives

May 2011

The ingredients for a successful startup

By | Startup general interest | 4 Comments

There are a couple of research reports out today which indicate the impact of a number of different variables on the likely success of a startup.  As with cooking in the kitchen, having the right ingredients doesn’t guarantee success, and equally a good cook can make a great meal out of almost anything, but high quality raw materials undeniably make success more likely both in the kitchen and in the world of startups.

However, in the kitchen it is generally well understood which are the ingredients where quality will make a difference, whereas in startups the relative importance of factors like the age of founders and the balance of the founding team have largely been matters of conjecture and ill-informed debate.  As an aside, in my opinion most business literature suffers from the difficulty of getting high quality data and is over-reliant on anecdote and case study, which is where the startup world has been.  Until now…

First up is a report called the Startup Genome which aims to ‘crack the code of innovation’.  The full report is worth a read, but here are a couple of highlights about the characteristics of successful startups:

  • Solo founders take 3.6x longer to reach scale stage compared to a founding team of 2 and they are 2.3x less likely to pivot. [I.e. teams are much better]
  • Balanced teams with one technical founder and one business founder raise 30% more money, have 2.9x more user growth and are 19% less likely to scale prematurely than technical or business-heavy founding teams. [We all new that a mix of technical and business founders is best, but maybe not this much better…]
  • Founders that learn are more successful: Startups that have helpful mentors, track metrics effectively, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth.
  • Startups that pivot once or twice times raise 2.5x more money, have 3.6x better user growth, and are 52% less likely to scale prematurely than startups that pivot more than 2 times or not at all. [Interesting to note that few successful entrepreneurs get it right first time and that too many pivots is a clear negative indicator]

And here are a some common mistakes:

  • Founders overestimate the value of IP before product market fit by 255%.
  • Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely.
  • Startups that haven’t raised money over-estimate their market size by 100x and often misinterpret their market as new.
  • Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves.

The message here is clear, assuming the data is right, some founders would do well to reign in their natural bullishness a little (remembering also that founders who learn are more successful).  As I’ve said many times before, the most common way that venture backed startups get into trouble is scaling before the market is ready for them.

And finally, to the second report, which comes in the form of a blog post on Techcrunch from Adeo Rossi, founder of  He is reporting on data from the Founder Institute which had a couple of interesting findings:

  • Older age has shown in the data to correlate with more successful entrepreneurs up to the age of 40, after which it has limited or no impact. [I buy this overall, experience helps, but suspect that if the data was cut for truly revolutionary ideas and some of the more innovative market segments younger people might come out better.]
  • Fluid intelligence is a largely genetic trait that measures one’s ability to quickly learn a rule set and apply the learned logic to solve problems. It can also be referred to as abstract thinking
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Twitter Weekly Updates for 2011-05-29

By | Weekly Twitter digest | No Comments

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Why discounted cash flow analysis isn’t appropriate for startups

By | 50 Questions, Venture Capital | 4 Comments

image Bill Gurley put a great post up on Tuesday which discusses valuation drivers, and why different businesses achieve very different revenue multiples.  It is no coincidence that he covers much of the same ground as I did in last week’s 50 Questions post on barriers to entry.

The whole post is a good read, but the piece I want to pick out is his explanation of why discounted cash flow analysis isn’t appropriate for startups.  I consider myself a financial purist and would value businesses on discounted cash flows if I thought it worked, but I don’t and wrote about my reasons for not doing so back in March.  This excerpt from Bill’s post is a simpler and less technical explanation than mine (and hats off to him for that 🙂 ):

Those of us with a fondness for finance will argue until we are blue in the face that discounted cash flows (DCF) are the true drivers of value for any financial asset, companies included. The problem is that it is nearly impossible to predict with any accuracy what the long-term cash flows are for a given company; especially a company that is young or that might be using an innovative and new business model. Additionally, knowing what long-term cash flows look like requires knowledge of a vast number of disparate future variables. What is the long-term growth rate? What is the long-term operating margin? How long will this company hold off competition? How much will they be required to reinvest? Therefore, from a purely practical view, the DCF is an unruly valuation tool for young companies. This is not because it is a bad theoretical framework; it is because we don’t have accurate inputs. Garbage in, garbage out.

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Free ticket to the Money in Mobile Forum June 14th

By | Announcement | 2 Comments

Mark Littlewood, the organiser of Money in Mobile forum has kindly offered a free ticket to the reader who can come up with the best question to ask on the day.  He put it like this:

I thought it might be fun to offer a ticket as a prize for an Equity Kicker reader – they are such a sparky bunch.

To win a free guest pass to the Money in Mobile Forum on 14th June. Drop us a note to [email protected] by Monday 6th June saying who you are, and the question you would like to ask a speaker –

The person posing the best question will come to the event as our guest and get to ask the question.

Thanks Mark!

Money in Mobile Forum awards

By | Announcement | 2 Comments


I will be a judge at the Money in Mobile Forum on June 14th.  Mark Littlewood of the BLN always puts on a good show and this one looks to be no different.  The theme of making money out of mobile is an important one and Mark has got a decent line up of speakers (including my co-author Nicholas Lovell).  There is also a startup competition for companies that fit the following criteria:

  • Are privately held
  • Have paying customers
  • Make money for them
  • That’s it

(this is what I will be judging, along with a few other VCs and other notable folk).

The entry process is designed to be quick and easy, and you can apply here.  The winner gets the kudos of being picked as a winner, an iPad, and a free ticket to the event.

If you are a startup that fits the criteria above and are looking to build your network with VCs then applying for this competition would make a lot of sense.  Winning it would be even better 🙂

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50 Questions: What does a VC care about?

By | 50 Questions | No Comments

Nicholas Lovell just put up a great post answering the question What does a VC care about? It is the latest in our series of 50 Questions you should ask before raising venture capital.

He covers the topics of obsession with downside risk, exit and other matters, but I particularly liked his comment on the increasing absurdity of thinking too much about exit strategy:

Some investors, particularly those with a mergers and acquisitions background, obsess about who might buy your company.

At one level, this is farcical. The technology industry is growing so fast that if an investor has a 5-7 year investment horizon, the likely acquirors may not have been born yet. In my world of games, Zynga is only four years old, but has made 14 acquisitions in the last 12 months.

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What the Tweetdeck and Ubermedia/Twitter saga tells us about dependency

By | Exits, Twitter | 5 Comments

You have probably seen the news today that Twitter has acquired Tweetdeck for $40m, ending a month or two of wrangling between Twitter and Ubermedia over the business.  As well as being an interesting saga in its own right and a good result for Tweetdeck the whole affair is a good illustration of the perils of being too dependent on a company like Twitter.

Dependency on another company is never desirable, but it isn’t necessarily something to worry about too much if the partner is stable and profitable, and the relationship is mutually beneficial – e.g. Zynga is ok on Facebook.  However, if the partner has yet to find a stable business model or there is any hint of exploitation then then their policies are subject to change in ways that can undermine their erstwhile partners.  Look at the way Twitter’s acquisition of iPhone client Tweetie last year undermined other Twitter iPhone clients and the way Google’s changes to its search algorithm has hurt content farms and other aggregators.

Tweetdeck’s exit was pretty decent.  At some stage I am sure they were hoping for a bigger outcome, but given they only raised $3.8m I’m sure Ian Dodsworth and his investors have all made good money.  I think they were able to achieve this result despite their dependence on Twitter because of the scale they had achieved and because Ubermedia was/is becoming a pain to Twitter and was keen on acquiring Tweetdeck.  The latter condition is pretty hard to plan for and needed to be present for Tweetdeck to get the result it did.

Ubermedia is run and backed by some very smart people, but from what I know it is now hard to predict great things for the company.  They are as dependent on Twitter as Tweetdeck was, but unlike Tweetdeck they obviously felt they needed to fight Twitter to maximise growth, and Twitter has put them in their place both by the Tweetdeck acquisition and by suspending their apps for violating the terms of service.  It is hard to see Twitter acquiring them now.  This Business Insider article does a good job of detailing Ubermedia’s chequered history.

So in summary, of the two Twitter dependent businesses discussed here one achieved a decent result and the other still has an unclear future.  That doesn’t sound too bad, but Tweetdeck did very well to build competitive tension around its exit and I’m left thinking the same as I did before I wrote this post, that dependence on companies like Twitter brings risk to a company and is best avoided/mitigated.  It is for this reason that Tweetdeck’s strategy was to become a social media dashboard.

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Welcome Conversocial to the DFJ Esprit portfolio

By | Announcement, Conversocial, DFJ Esprit | 6 Comments

News just broke on Techcrunch that DFJ Esprit has invested £1.5m in Conversocial, whose social media management software helps companies increase engagement and manage interactions with their customers on Twitter and Facebook.  The screen grab below from their home page shows the central dashboard which allows for efficient handling of social media including posting comments, replying to comments, delegation, and tagging, and on the right you get a glimpse of some of the analytics they provide.

imagePenetration of social media into enterprise processes and the transition from bought media to earned media have been investment themes of ours for some time now and were initially interested in Conversocial because it plays nicely to both these trends.

We have known and liked the founder and CEO Josh March for some time now and have met every six months or so for the last couple of years to check in.  Our interest picked up recently after he and I were on an entrepreneurs ski trip together in February and the way he was talking about his recent wins made me think he was close to nailing a good product-market fit.  We got together pretty quickly after that back in London and over the subsequent series of meetings we got increasingly excited about the team, the product and the market. 

I’ll say a little about each of team, product and market, but I’ll start with the team which is probably the most important of the three for a business at this stage.  We were keen to invest in Josh and Dan (Dan Lester is the other founder) because they are ambitious, super smart, know social media backwards, work hard, are great listeners and all round nice people to work with.  They have bootstrapped the company up to this point and have a great culture inside the business which values hard work, integrity, capital efficiency and only recruiting the very best (Dan is famous for his five hour interviews).  As you can imagine, we have spoken with a lot of people about Conversocial and without exception they have only had nice things to say about Josh and Dan.

The product has also had rave reviews.  It demos well, and when one of our interns used it himself for a couple of his ecommerce sites and gave it a strong thumbs up for ease of use, speed to process comments and the feature set generally, and these sentiments were echoed by the customers we talked with.  It takes a lot of work to make a complex system simple to use and the Conversocial team have done a great job in this regard.  The other features that customers like are the analytics which help them measure the effectiveness of their social media activity and benchmark it against competitors, and the integration with their other customer databases.  Both of these features are early in their evolution and I’m looking forward to seeing them develop so enterprises can embed social media (and Conversocial) more deeply into their existing processes.

Finally, the market is also exciting – at heart this investment is a bet that people will increasingly insist on engaging with companies on social media and that the companies will see the benefits they can get by agreeing to engage on Facebook and Twitter, and by doing it well.  We see that as a pretty safe bet. 

At the next level of detail, we have come to view software for managing social media as splitting into three segments with different customers and use cases.  The first and most developed is social media monitoring software, and you might have seen that Salesforce recently acquired the market leader in that space.  The second most developed is Facebook apps and other brand management tools where the leading companies have maybe $10-20m in revenues, and the third is using social media to promote engagement to achieve a blend of marketing and customer service objectives.  It is in this third emergent area that Conversocial plays and in our assessment has a leadership position.  I used the qualifier ‘in our assessment’ because social media software is still a young and immature market and most of the players still claim to be able to play in all the sub-sectors.  However, we think that the use cases and feature requirements are too different for a single company to dominate and that there will be valuable companies created in all three.

Investing is, of course, the easy bit.  The next phase of being there to help grow the company and for the founders and investors to actually make some money is both more challenging and more fun.

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The worlds leading social businesses: an infographic

By | Social networks | 3 Comments


This great infographic was created by interactive agency JESS3 and published on Techcrunch this morning.  As well as being a great quick capture of the state of the social media universe it is a good reminder of a couple of points that we all know but need bearing in mind:

  • There are very few truly large social businesses, if you take out Skype and the email services there are only nine with 50m active users or more.  That is a tiny fraction of the number of startups in this sector that aspire to this sort of scale.
  • China is a massive market – Qzone is a Facebook equivalent owned by Tencent that I wasn’t even aware of until recently.
  • Mobile has huge scale – 5.3bn devices is apparently 77% of the world’s population (although that doesn’t account for multiple sims per person), and most of the services on the chart have a significant proportion of their users on mobile.  Facebook has nearly 250m mobile users.
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Twitter Weekly Updates for 2011-05-22

By | Weekly Twitter digest | No Comments

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