Monthly Archives

August 2011

Five characteristics of successful leaders/entrepreneurs

By | Startup general interest | 3 Comments

The characteristics listed below are adapted from a blog post by Harvard professor Rosabeth Moss Kanter title Five Powers that Get Ideas off the Ground (thanks to Judith Clegg for the pointer).  Lists of characteristics like this are useful as reminders of how we should behave and to provide frameworks for self analysis and coaching of others, but they are not exhaustive or prescriptive.  There is no shortage of advice floating around these days, including on this blog, and as I’ve been assimilating and dispensing it all over my eleven years in this industry I’ve come to the conclusion that the best approach is to develop a framework for pretty much everything that is important to your line of work and then use that as the basis against which to analyse new advice.  Some of it should be rejected, and some of it should cause subtle adjustments to your framework and then occasionally there may be a radical adjustment to the framework, but beware of those.  A lot of this process will be subliminal and the more experienced and successful you get the less you should be expecting to adjust your framework.

  1. Showing up – Rosabeth quotes Woody Allen’s famous saying that 90% of success in life comes from just showing up, and I agree.  In the context of leaders and entrepreneurs that means getting started on things and being visible, and that includes when things are difficult/might not work.  In fact, not putting off the difficult things is what separates effective people from the rest.
  2. Speaking up – we all know that great leaders make great speeches, and often those speeches come to define the period of leadership – think about Martin Luther King and you quickly think about his famous “I have a dream” speech.  It is still inspiring nearly 50 years later (if you haven’t heard it recently listen here – 9mins in is a good place to start).  More prosaically CEOs and founders are most effective when they are vocal within their companies shaping the debate and articulating the conclusions at team meetings.  I recently asked a former employee of successful UK SEO/SEM agency The Search Works why the company had prevailed over its competitors and his answer was that Nick Hynes, the CEO, had a special talent for articulating the vision and direction of the business and getting everyone at the company believing and pulling in the same direction.  Think about that for a moment.
  3. Teaming up – great companies aren’t built by individuals, they are built by teams.  Usually that is a team of co-founders and in just about every case there is a team of executives who have real power and operate as a team.  Delegation is a pre-requisite for success.
  4. Looking up – I’m going to quote directly from Rosabeth’s post here, as she nails it “Looking up: the power of values. Higher principles help people transcend the conflicts and concerns of the moment. Standing for something larger than mere self-interest gives leaders moral grounding and provides a basis for inspiring and motivating the work. Those who are honored as great leaders are not merely good at getting results efficiently, they are able to find grander goals that help people look up to see the big picture and set their sights higher.”
  5. Not giving up – much has been written about the importance of persistence, and for good reason.  It is something that is easy to forget when the going gets tough and reminders are useful.  As Rosabeth says “everything can look like failure in the middle”.

As I said earlier – this list is not exhaustive guide, and in particular it is important not to do these things well, rather than just do them.  It is following the spirit of the advice not the letter that makes the difference.  Authenticity is critical.

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Get inside the mind of this VC – interview on Jazz FM

By | Announcement | No Comments

Logo

A couple of weeks back I recorded a Desert Island Discs style interview for UK radio station Jazz FM.  It went out at 6pm last night as part of their Jazz in the City series and it is now available as a stream from their website.  For those that haven’t listened to Desert Island Discs the format is an hour long wide ranging chat punctuated by six tracks of my choosing.  On Jazz FM they have to be jazz tracks.

David Prever conducts the interview and we have an amusing chat covering my early career, bubbles, Dragon’s Den, and of course why I chose the six tracks.

Premature scaling – the best way to kill a company

By | Startup general interest | No Comments

For a while now the folks at the Startup Genome Project have been doing some excellent data driven work into what drives success and failure at startups, and earlier this year I wrote about their first report under the headline The ingredients for a successful startup.  Yesterday they followed that up with the release of a mini-report on premature scaling (download here).  According to their data 70% of startups scale prematurely in one of the what they see as the 5 core dimensions of a startup: Customer, Product, Team, Business and Financials, although most problems come when the team dimension is scaled too early.  As well as a new report, the Startup Genome Project also released a benchmarking tool designed to help companies avoid the mistakes of premature scaling. 

I have said many times that too much money can kill a company and that timing is everything for startups.  Both of these statements are related to the dangers of premature scaling, and hence I was immediately drawn to this report.  One of the most difficult tasks for entrepreneurs and investors is matching investment with the emergence of the market opportunity.  It is important to be the leader when the market starts to scale, but spending too much money before then is an exercise in misery and value destruction.  Note my careful use of language – a) leading when the market scales is important, not being first to market, and b) raising money ahead of a market opportunity can be ok so long as it isn’t spent, although it is rare to see a board deciding not to spend money that is in the bank.

The report makes good reading and will helps clarify the meaning and dangers of premature scaling.  It is full of useful quotes and charts.  My favourite quote is:

Quote about premature scaling by …
Michael A. Jackson, serial entrepreneur and investor

“Having been both an entrepreneur and investor I’ve seen many entrepreneurs (myself included) try to scale blindly. No one takes venture money to stay a small business and scaling successfully is what separates eventual industry leaders from long-forgotten startups in the deadpool. Far too often though entrepreneurs start scaling before they know what is going to work.

Premature scaling is putting the cart before the proverbial horse, and in the case of startups this can potentially relate to both engineering and operations. As an entrepreneur there’s always the temptation to grow the sales team at the first sign of revenue traction, but there is always the danger that this early traction is coming from the subset of the market that are early adopters and not the actual market itself. Additionally, too often I’ve seen startups ramp up sales before they’ve figured out the most efficient way to achieve profitability. A vicious cycle ensues wherein the more a company grows, the more it farther away from profitability it becomes. Teams need to be obsessed with the metrics that drive their businesses’ growth, constantly testing and challenging their assumptions.

For the engineering team, there’s the often obsessed about notion of having a robust platform that can handle millions of users before the startup even gets to 10’s of thousands on there. The team starts to worry about all the technical issues that they’ll have to deal with when success comes, but they lose track of what is actually going to make them succeed.

And I liked the cart below which illustrates the false comfort that can come from scaling user numbers for a consumer internet service before the business model and/or product are ready:

image

I also had a go with the benchmarking tool, which I think could be quite useful for a lot of companies, although less for the benchmark data (which was a little hard to draw insight from) but more as a tuition/reminder tool for companies interested in following the lean startup methodology.  I spent about 20mins putting in data for one of our recent investments and got some helpful pointers of things to think about both from a strategic and operational perspective.  I also think it could be useful for investors as a due diligence checklist.

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Apple’s market cap rose 115x under Steve Jobs

By | Apple | No Comments

Steve Job’s tenure at Apple has been little short of amazing.  We are all familiar with the run of fantastic products they have released from the iPod through to the iPad (and the as usual the world is desperate for the new iPhone to arrive as soon as possible), but the progression of the business is perhaps the most amazing thing of all.  A lot has been said about Job’s recent resignation as CEO of Apple and until I saw the chart below on Business Insider I wasn’t going to add to it, but 115x value progression in 17 years to briefly become the worlds largest company by market capitalisation is an achievement of breath taking proportions, and I want to call that out.

chart of the day, apple market cap 1996-2011, aug 2011

Regular readers will know that I’m more of an Android than an Apple fan and Job’s resignation doesn’t change that, but I am full of admiration for what he has achieved.

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Three mid-sized companies file for IPO – it will tell us a lot if they actually go public

By | Exits | 3 Comments

During my morning reading today I was surprised to read articles about one, then two, then three mid-sized software companies filing to go public.  The three are Eloqua, Jive Software and Brightcove, all decent businesses with good reputations, but they are not juggernauts like LinkedIn, Zynga or Facebook.

I was surprised at this news because the stock markets have taken such a pummeling recently, and many tech stocks have been hit particularly hard.  Last night I had dinner with the CEO of Zeus Technology, our portfolio company that was recently acquired by Riverbed, and he was describing how Riverbed’s share price has dropped 50% over the last month or so, and how Zeus’s competitors F5 and Cisco have seen similar drops.  Going public now seems unlikely to maximise valuation, and it will be interesting to see whether there is appetite for these issues at all and if there is at what level they price.

These facts will tell us whether the IPO remains open as a route to liquidity for venture backed businesses at all and also at what sort of valuation metrics.  If the news is good it will help underpin the valuation of investment rounds in equivalent but less mature tech companies.

We are in a funny market right now, with signs of chaos and meltdown in government circles and financial markets but relative stability in the private sector, for now at least.  In times like this people are always on the look out for signs of green shoots and often ready to invest heavily when they find them.  Additionally, the world is desperately in need of the growth offered by many technology companies.

My best guess is that the overall economy will lurch from mini-crisis to mini-crisis for the next few years without hitting severe problems or achieving much in the way of growth (there are downside risks to this scenario though).  During those years I think we might see a couple of periods similar to the one we’ve just been through where investors and corporates chase valuations for tech companies up to exciting levels.

If Eloqua, Jive and Brightcove get away at good valuations then we may get into one of those periods sooner than I would have thought.

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50 Questions: What are the key terms in a termsheet? (Part 1 of 2)

By | 50 Questions | 6 Comments

Thirtieth 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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My recent posts in this series have offered thoughts on what to write in pitch documents aimed at VCs.  If those documents are written well, and your business idea is a good one, and you are impressive, and you are lucky, and, and, and… then you will hopefully be on the receiving end of a termsheet, and ideally more than one.  A termsheet is usually a longish document of 3-10 pages with many clauses and terms.  In this post I list the most important of those and explain what they mean.  A lot of what you read below is drawn from the excellent Venture Deals: Be Smarter Than Your Lawyer And Venture Capitalist by Brad Feld and Jason Mendelson which I thoroughly recommend to anyone thinking of doing a venture deal.

First up, some categorisation.  The ‘terms’ in ‘termsheet’ can be put into four buckets:

  • Terms which drive the economics of the deal – the most important of which are valuation, liquidation preference and anti-dilution
  • Terms which pertain to control of the company post investment – the most important of which are board structure and protective provisions
  • Clauses which are legally binding on signature of the termsheet – the most important of which are exclusivity and costs
  • Everything else – which don’t matter that much

Second up, an explanation of each of the key terms.

Valuation

There are five numbers associated with the valuation, the pre-money valuation, the amount raised, the post-money valuation, the share price and the dilution.  They are linked by the following equations:

Pre-money valuation + amount raised = Post-money valuation

Share price = pre-money valuation / number of shares in issue pre the round

Dilution = amount raised / post-money valuation

So, if a company is raising £5m Series A round at a £10m pre-money valuation (sometimes shortened to ‘£10m pre-money’ or even ‘£10m pre’) then the post-money valuation will be £10m+£5m=£15m and the dilution will be £5m/£15m=33%.  If our hypothetical company had 1 million shares in issued before the round then the share price will be £10m/1,000,000=£10.

The dilution, which is also equal to the new investors stake, is the amount by which the existing shareholders see their percentage stake fall – so if prior to the deal our hypothetical company had four founders each with a 25% stake then their percentage holdings would all fall by 33% to 17%.  However, even though the percentage stake held by each of the shareholders would drop, the value of their holding in pounds may well have risen, as the value of the holding equals the number of shares they own multiplied by the share price.

In this example each of the founders owns 250,000 shares (one quarter of the shares in issue before the round) and at a share price of £10 their stake is worth £2.5m.  After the round when their percentage holding has dropped to 17% they still own 250,000 shares which are still worth £10 each and £2.5m in total.  At least on paper :).

Moreover, if the share price of the investment round is higher than a previous round the value of each shareholders stake will have increased despite the fact that the percentage stake has dropped.

The important thing to take away here is that during a VC round new shares are issued and because the value of a stake is a function of the number of shares held and the share price that value may have increased even though the percentage stake has dropped.  (The percentage stake remains an important way to quickly estimate the value of a holding in an exit scenario when the number of shares in issue remains constant, although any liquidation preference will have to be taken into account – more of that in part 2.)

This decoupling of value and percentage stake is a very important but somewhat counter-intuitive point for many, but it is a crucial one to understand for anyone who aspires to raise VC.

Many termsheets will include a cap table which describes the share structure after the round which captures much of the information and logic described above.  The post investment cap-table in our hypothetical example would look like this:

image

I will provide similar explanations of the other key terms in the second part of this post in a fortnight.

Social media changes what people say, and want, and expect

By | Conversocial, Social software | No Comments

As part of the preparation for yesterday’s post The art of social is starting to become a science I read a post from Joel Spolsky from back in 2004 in which he discusses how user interface of communications and networking services impacts what is said and how users behave.

Here are three of his examples:

1. Text messages

let’s look at a successful social interface. Many humans are less inhibited when they’re typing than when they are speaking face-to-face. Teenagers are less shy. With cellphone text messages, they’re more likely to ask each other out on dates. That genre of software was so successful socially that it’s radically improving millions of people’s love lives (or at least their social calendars). Even though text messaging has a ghastly user interface, it became extremely popular with the kids. The joke of it is that there’s a much better user interfacebuilt into every cellphone for human to human communication: this clever thing called "phone calls." You dial a number after which everything you say can be heard by the other person, and vice versa. It’s that simple. But it’s not as popular in some circles as this awkward system where you break your thumbs typing huge strings of numbers just to say "damn you’re hot," because that string of numbers gets you a date, and you would never have the guts to say "damn you’re hot" using your larynx.

2. ebay

When I first heard about ebay, I said, "Nonsense! That will never work. Nobody’s going to send money to some random person they encountered on the Internet in hopes that person will out of the goodness of their hearts actually ship them some merchandise." A lot of people thought this. We were all wrong. Wrong, wrong, wrong. Ebay made a big bet on the cultural anthropology of human beings and won.

3. Usenet

Usenet clients have this big-R command which is used to reply to a message while quoting the original message with those elegant >’s in the left column. And the early newsreaders were not threaded, so if you wanted to respond to someone’s point coherently, you had to quote them using the big-R feature. This led to a particularly Usenet style of responding to an argument: the line-by-line nitpick. It’s fun for the nitpicker but never worth reading. (By the way, the political bloggers, newcomers to the Internet, have reinvented this technique, thinking they were discovering something fun and new, and called itfisking, for reasons I won’t go into. Don’t worry, it’s not dirty.) Even though human beings had been debating for centuries, a tiny feature of a software product produced a whole new style of debating.

2004 was not only the year that Joel gave these examples, it was also the year that Facebook was founded, and since then we have seen a revolution in how people communicate with each other and increasingly with brands, companies and governments.

Reading these examples it becomes clear that when people are using Facebook and Twitter they will be saying (and therefore expecting) different things than if they were to pick up the phone.  Putting it differently, the old processes of communication won’t map cleanly onto communication using Facebook, Twitter etc. 

In the person to person arena this newness in the nature and content of discussion on social media, and ultimately the different behaviours of social media users, is what provokes the fear and distrust from other, typically older, parts of society.  Put simply they have no context by which they can understand what is going on, and worse, when they make the natural mistake of thinking about how those behaviours would have played out over old media the conclusions aren’t pretty.

For enterprises the implication is that the nature of engagement with customers changes.  A lot has been written already about the impact on brands and marketing – mostly focused on the need for brands to have integrity and engage in value added dialogue.  Going forward we will start to see similar changes in customer service and other enterprise processes like recruitment, and our belief that agile startups are best placed to help drive these changes is part of why we recently invested in Conversocial.  The interesting question now is how do we drive them fast.

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The art of social is starting to become a science

By | Uncategorized | One Comment

On Friday someone linked me to a Facebook developers page about Social Design (I think it was Christian Hernandez, Head of International Business Development at Facebook).  Facebook’s purpose in putting the page together is pretty obvious – they want people to write better social apps on Facebook so they are giving out some helpful pointers.

Their advice to devs building social apps is:

  • Use the existing community on Facebook rather than try and build your own community from scratch (surprise, surprise…)
  • Encourage new conversations by building “tools and experiences that give people the power to connect and share, allowing them to effectively listen and learn from each other”
  • Help individuals within the community build their own identity

Reading the advice I was struck that Facebook is making a first attempt to demystify the process of building social applications – i.e. to make it more science than art.  As new technologies emerge and mature the process of taking advantage of them often follows a familar pattern – at first some companies are successful at it and others aren’t and to the outsider it is often hard to understand why some succeed while others fail.  ‘Experts’ then emerge who promise help but are reluctant to explain their methods.  Many of them are only selling snake oil – some of you will remember when search engine optimisation was like this.  Then, as the technology matures and the processes become better understood exploiting it effectively moves from being something that only a few are able to achieve to something that everyone can do with good execution and sufficient resources.

I think social is getting towards that point now.  The advice from Facebook doesn’t go very far, but it gives clear pointers on how the science can be extended, by defining the characteristics of tools that successfully get people to share, listen and learn, and how to help individuals build their own identity and learn about themselves.

On a similar note, back in May Joel Spolsky, CEO of Stack Exchange, a company which manages 51 web Q&A communities, including the highly successful Stack Overflow, wrote a post about modern community building.  In it he talks about how today nobody really knows how to build a community and that he wants to hire a group of community managers and figure it out (emphasis mine):

This job will be sort of like being a community organizer at a non-profit. It combines elements of marketing, PR, and sales, but it’s really something different. I don’t expect that there are a lot of people out there who already know how to do this well, so I’m going to train them, personally. Not that I know how to do this, but we’ll learn together. Every workday is going to start with a huddle at 9am and a plan for the day’s activities and an intensive six hours of work. Every workday is going to end with an hour of learning… reading Kawasaki and Godin and Ries and Trout, talking with invited experts, meeting with members of the community about what worked and what didn’t worked. Everyone who joins the program (and survives for a year) will come out with an almost supernatural ability to take a dead, lifeless site on the internet and make it into the hottest bar in town. That’s a skill worth learning for the 21st century.

The people Joel hires, and others who figure out community building elsewhere will take their skills to new companies, and some of them will right books, and before too much longer any switched on company with a community suitable service will be able to figure out how to get their community humming.

What I’ve been describing here is part of the process by which social software and social media becomes as much part of the fabric of society as the telephone is today.

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I’m sad to see Autonomy bought by HP

By | Exits | 3 Comments

I have nothing but admiration for Autonomy, but my heart sunk a little when I heard on the news last night that HP was looking to buy them, and then dropped a little further when I read this morning that the Autonomy board is supporting the offer, making it pretty much a done deal.  I don’t think that anyone is to blame here – the £7bn offer is a full valuation for the business and a 61% premium to the share price yesterday, and the board would have had a hard time arguing that it was against the interests of shareholders to accept the offer – I just wish this deal wasn’t happening.

Here in the UK and Europe we need more large independent technology businesses if we want the startup ecosystem to grow to its full potential and if this deal completes we lose one of the few big ones that we have.

Here are the reasons why it is important to have large indigenous tech businesses:

  • It is easier for startups to get sales and technology partnerships with locally head quartered businesses than those based in the US – geographical proximity still counts for a lot
  • It is much, much easier to sell a small company to a larger one that is head quartered nearby – when I looked at this a little while back 90% of Cisco’s acquisitions had been in the US and they were if anything more international than their peers
  • Growing large companies locally creates more local wealth, much of which will flow back into the startup ecosystem
  • The best and most interesting jobs are at company HQ – when the HQ is local the indigenous workforce gets better training and experience, when the HQ is abroad some of our best people will emigrate (e.g. Jonathan Ives)

Once again, I think Autonomy is a great company, and they have contributed a lot to the British technology scene generally and the startup scene in particular – both via acquisitions and via spin-outs like Blinkx, I’m just sad to see them go.

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Ebooks driving growth and enabling innovation in the book industry

By | Content | 2 Comments

It is often the case that new media formats are greeted with suspicion amid fears that the changes they herald will undermine important creative aspects of society.  Often these fears are misplaced and it is the distribution channels of the old format that are under threat rather than the media itself, and after a period of decline the industry returns to growth and often hits a new peak.  Earlier this week I saw a chart which showed how the music industry evolved according to this pattern as the physical format shifted from vinyl through cassettes to CDs, and today I’ve seen data showing that ebooks are now driving growth at the overall market level in the book industry.

Last Tuesday the Association of American Publishers released a study which found that total US industry sales grew 3.1% to $27.9bn from 2009-2010 and that ebooks were 5.7% of the total at $1.6bn.  The press release gave ebook sales for the trade portion of the market and assuming a similar growth rate in consumer ebook sales then it is accurate to say that the overall industry growth is down entirely to ebooks, and that physical book sales declined.

Unsurprisingly there was also a significant shift from physical retail to online retail, with online retailers’ market share rising from 9.9% in 2009 to 14.3% in 2010.

The way I see it now that we have decent readers ebooks are simply a better proposition for consumers.  Books have become cheaper, more portable, and quicker and more convenient to get hold of.  It is unsurprising that they are growing the market.

When the format for media changes the unit of media consumption often changes as well.  In music the move to online distribution brought with it a shift from buying albums to buying singles.  We may be seeing the start of something similar in the book industry now with the emergence of Kindle Singles, a new idea from Amazon which they define as:

"Kindle books that are twice the length of a New Yorker feature or as much as a few chapters of a typical book."

It is early days, but this innovative new concept is looking like it might be popular.  Here are some soundbites:

I’ve been saying for some time that ‘dead tree books’ will soon go the way of stone tablets and papyrus, and that middle class families the world over will reclaim the wall and floor space that are currently occupied by bookshelves.  Now I can also say that we will have a stronger and more vibrant book industry as a result.

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