Monthly Archives

September 2011

We were on Bloomberg TV

By | Announcement | 4 Comments

Yesterday morning I did an interview for Bloomberg TV.  I’ve shared my thoughts on CNBC before, but this was my first time on TV with make up, and that somehow makes it more proper, don’t you think?

The piece is very short but they referenced The Equity Kicker twice.  Without doubt they were interested to have me in the studio because of this blog, and more importantly because you all read it and comment.  Without an audience and participation I would be less interesting.  That’s why I used the pronoun ‘we’ in title to this post.

Google+ and Facebook both storming ahead

By | Facebook, Google | 2 Comments

Despite recent commentary to the contrary it seems very clear to me that both Google+ and Facebook are making great progress.  (For negative commentary see Google+ … ‘Worse than a ghost town’ on MediaShift and At last, we’re logging back on to the real world from our old friends at the Daily Mail.)

The case for Facebook is made crystal clear by the chart below.  Even in their most mature market, the US, they are still showing great growth as measured by market share of time spent online.  Note this is a different (and better) measure than number of subscribers or active users as it also takes time on site into account.  In countries like the US Facebook must be pretty close to saturation in terms of user numbers, so their growth going forward will come from increasing the utility of the service to drive up frequency of logins and length of session.  Most (if not all) of the features announced at f8 last week will improve both these metrics.  Personally, I’m using Facebook much more to now that I have curated lists of people to follow, and I’m checking the top right hand box in my profile to see what people are listening to on Spotify so often that I’m thinking about turning it off 🙂

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Google+ is earlier in it’s evolution, and the jury is still out on the long term viability of the service, but I bet they are pleased with the progress so far.  Growth has been staggering in the last couple of weeks, with traffic up 1,269% in the last seven days, and 50m users now on the service.  To put that in context Google+ has been live for 88 days, whilst it took Facebook and Twitter over three years to reach that milestone.  Moreover, Google will increasingly use Google+ profiles in its search engine results page, encouraging people to populate their profiles and post their content to Google+.  I updated my Google+ profile this morning after discovering it is the fourth result if you search on ‘brisbourne’, and I’m still thinking about whether I should syndicate my blog there.

For me though Facebook is still far the better service, both for reading and publishing content.

Big picture, it is great that these two companies are fighting each other on the basis of innovation, but the way these juggernauts use their existing reach to drive new features means that new startups need to find ways to partner with them and live within their ecosystems.  All out competition to Facebook and Google from socially oriented startups is getting harder and harder.  The speed with which Google got to 50m users and the fact they got there via home page promotion is evidence of this point in spades. 

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3D printing – rapidly getting easier

By | 3D | 5 Comments

We first started to get interested in 3D printing a year or so back, and at that I played with a number of the services on the market, but the experience wasn’t easy, and 3D printers in the home still seemed some way off.

Both those things are now changing fast.

The usability challenge was that the modelling tools were difficult to use and the integration with 3D printing services was difficult.  In just 20 minutes earlier today I modelled the design below on 3dtin and then exported it to i.materialise where I was able to send it off to be 3D printed.  Hopefully it will arrive in a couple of days.

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3dtin was incredibly easy to use, so much so that I could see my seven year old daughter modelling stuff as part of her schoolwork or to play with at home.  The ‘so easy a child could use it’ also struck the folks at Origo, who are planning to make a 3D printer for children (prototype picture below).  I want one of those.

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3D officionados amongst you will have noted that Makerbot recently raised $10m to grow their home assembly 3D printer kit business, so we have affordable 3D printers in the home already, although their product is best for early adopters who are good with a screwdriver.

I believe that 3D printing will be more revolutionary than 2D printing.  The possibilities are almost limitless, and it now feels like the timing for the market is almost on us.  A friend of mine (David Brown, founder of buy.at) recently bought a Makerbot and he emailed me saying he was coding for it in the dark with his headphones on, and that it felt like 1993 all over again.

(For those that are wondering Man, is my wife’s maiden name and the F is short for Fiona.  I went for Man rather than Brisbourne because it is shorter.  Considerably so…)

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Respect to Facebook’s record of bold execution

By | Facebook | No Comments

imageIf you have been anywhere near the internet over the last week or two you will have noticed the big changes coming out of Facebook. First they had smart lists, and then over the last couple of days at their f8 conference they have announced a slew of other initiatives, including deep integration with media players like Spotify and Netflix, richer and more varied share/like buttons, a revamped news feed, and user timelines

These developments are the latest in a long list of bold moves from the worlds largest website, some of which have been successful (newsfeed, Facebook platform, Facebook credits, Facebook Connect) and some less so, most notably the failed advertising initiative Beacon.

Overall though there has been many more successes than failures and several of these new developments took Facebook to a whole new level.  The introduction of the newsfeed changed gave social networks a vibrancy and immediacy that they had previously lacked, the Facebook platform brought a plethora of new apps and use cases and spawned the multi-billion dollar social games market, whilst Facebook Connect and the Like Button have boosted the size and power of the interest graph in ways that we are only just starting to understand, but which are undoubtedly hugely powerful.

Oh, and in the meantime they have grown revenues to an estimated $3.1bn this year with a very respectable 30% profit margin.

It is too early to know whether these new initiatives will work or not.  There are some who are complaining that Facebook is getting too complicated (I had some problems myself populating Facebook lists, and sorry to those of you who got an email suggesting I thought you worked at DFJ…), but my gut is that these issues will be ironed out and people will learn to use and love most of the new features.  In particular I think more fine grained control over sharing from smart lists will bring huge usability benefits and deep integration with news, music and video services will bring huge discovery benefits.

Most of all though, I’m impressed that Zuckerberg et al have continued their record of bold innovation.  Most companies start feeling that they have got too much to lose when their turnover gets to $50-100m and choosing the safe options.

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The rise of the creative classes

By | Community, Innovation, Work life balance | 12 Comments

image I have just started reading The Rise of the Creative Class by Richard Florida.  It was first published in 2002, making it a pretty old book by the standards of today’s fast changing world, but the central idea is still powerful today, and it is new to me. 

Having read the title you won’t be amazed to learn that the big idea is that the rise of the creative class is one of the defining characteristics of the modern era.  I am only part way through the book, but I’ve read enough to get the gist, and I think the notion that the creative class is increasing in size and importance helps us understand a lot about today’s society and helps us to predict what might happen next – e.g. the rise in individualism, more casual work practices and dress codes, and the rise of creative consumer habits like blogging. 

That said I think the rise of the creative classes is one of several trends that are defining the modern world and isn’t as central as Florida would have us believe.  Other important trends include the increasing pace of technological development and the increase in living standards. 

Time for a definition – the creative classes include anyone who is creative in their work.  That ranges from musicians and artists, to architects, to architects of new financial instruments to scientists, to teachers and, of course, to entrepreneurs.  That adds up to a lot of people – 38m in the US in 2002 by Florida’s estimate, which was 30% of the workforce.

There are two other big groups in society are the working class and the service class – and the most important difference between them and the creative class is that workers in the working and service classes are hired primarily to execute somebody else’s plan, rather than to create something of their own.

I think the concept of the creative class has power because it helps explain the rise and possible future direction of the following phenomena:

  • The emergence of new technology clusters – all creatives, including entrepreneurs, need hang out with others in order to do the best work, and so creatives of different types congregate in hot spots for their activity.  For tech entrepreneurs that is Silicon Valley and to a lesser (but increasing) extent London, New York, Berlin and Tel Aviv.
  • The success of a plethora of web services that facilitate the expression of creativity – Tumblr is perhaps the latest to really take off
  • An increasing desire to balance quality of life with monetary rewards
  • The rise in individualism – creativity comes from individuals, not systems (although putting the right structures in place can help foster creativity, ref the rise in nice offices with ping pong and free fruit..)
  • The rise of the experience economy – creativity is fuelled by stimulation of the senses

These five are the product of a relatively small amount of thought, and the full list would be much longer.

It is not all good news though.  I suspect the rise in individualism is partly responsible for the rise in inequality.  As society places an increasing premium on people like Steve Jobs with their ability to deliver big change through creative genius then those people will command bigger packages, as will the next level down, and even the people who step up to the plate and fail.

A stress on creativity is also at odds with many of the traditional structures in society which evolved to support a very different type of worker.  I am thinking of institutions like the family, the welfare state, and the church whose upheaval over the last twenty years can be understood as a consequence of the rising importance of the creative creative class.

Big shifts like this have huge implications in both commerce and politics, but for me the important thing is to realise that whatever your view as to whether it is good or bad, it is a powerful trend and one that will continue.  That is the context in which we should seek to optimise our commercial and political operations.

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50 Questions: What are the different types of instruments VCs use to invest?

By | 50 Questions, Venture Capital | 7 Comments

Thirty third 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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You won’t be surprised to hear that VCs don’t use banjos, guitars or any other musical instrument to invest, rather we use ‘investment instruments’.  Investopedia defines an investment instrument (aka a financing instrument) as “A real or virtual document representing a legal agreement involving some sort of monetary value. In today’s financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset.”

Put slightly differently investment instruments are legal documents which determine how much an investor invests and how much they should get back, when, and under what circumstances.  Each one is individually negotiated, but they can be grouped into categories.

The vast majority of VC investments are in one of three categories of investment instrument:

Very occasionally you will also see VCs make investments in straight forward debt (i.e. with no conversion rights, see below), but this is rare and I won’t go into detail here.

In the remainder of this post I will describe the most common types of preferred share, ordinary share and convertible debt investment, but as noted above each deal is uniquely negotiated and there are an infinite number of possible variations, but I will keep it simple and not describe many of them here.

Preferred shares are the favoured option of most VCs.  They operate as shares in the company, in that they give the holder ownership over a portion of the company and a share in the proceeds of any exit, but they have extra rights on top.  These rights typically give the investor some or all of, more money on exit than straight forward ordinary shares, more control over the company, and assurance that they will receive regular information about the development of the company.  See my previous posts on key clauses in termsheets for more detail on these rights (Part 1 and Part 2).

Most VCs like to invest in preferred shares when they can because they typically provide better returns for a given valuation and they give some protection in the downside scenario where the entrepreneur radically changes their plan and pays no heed to the interests of the VC – e.g. by running a lifestyle business with no intention to exit.  This protection is important because most VC investments are for a minority stake.

Hot companies that are being chased by all the VCs are sometimes able to insist that the investment is in ordinary shares.  These shares give the investor similar benefits to preferred shares in upside scenarios but offer much less in downside scenarios, and for this reason are often regarded as better by entrepreneurs, particularly those who don’t really trust VCs.  I would argue that if trust is absent the basis for a good ongoing relationship is also absent, and both parties should think hard about whether they should be going into business together.

There is a common confusion in terminology that is worth noting.  The most important difference between ordinary shares and preferred shares is that preferred shares typically get more money on exit, at least in some scenarios (again see my term sheet posts for more details) and for this reason sometimes shares that are technically preferred shares and have extra control and information rights, but no extra economic rights get referred to as investments in ordinary shares or ‘ords’.

The third common instrument for VCs is convertible debt.  In this scenario the investor makes a loan to the company, typically complete with an interest rate and a repayment date, but crucially it is expected that rather than being repaid the loan will convert into equity when the company raises its next round.  When a loan converts it is as if the loan holder invests cash at the time of the conversion and the loan instrument is replaced by the instrument of the round, typically preferred shares or ordinary shares.  The valuation for the company and hence the share price is set by the new investor, but the conversion terms usually say that the loan holders get a discount to compensate them for the extra risk of investing earlier.  A discount of 20-30% is typical.

Convertible loans are common in two situations:

  • In seed investments where the price of the company is very hard to establish, in this situation a maximum valuation for conversion (a cap) is typically agreed.  The advisability of using convertible debt for seed investments is hotly debated (see the related articles below).
  • When a company runs out of money and its existing investors want to give it a little extra runway so it can achieve some value milestones and raise money from a new investor.
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Facebook increasingly seen as competitor to content companies

By | Content, Facebook, News | 8 Comments

I have seen two comments in the last couple of days making the point that whilst content companies of all flavours are happy for the traffic they get from Facebook they are increasingly conscious that time spent on Facebook is time not spent on their own properties, and hence generating ad revenues for Facebook rather than the owner or publisher of the content.

The first was a comment on this blog from Nicholas Lovell:

TV companies are beginning to view Facebook as a competitor, not a partner. If a TV company builds a major brand (say Downton Abbey) that generates a lot of likes on Facebook, then advertisers can pay Facebook to advertise against that audience. The TV company invested in the IP, took the risk, but Facebook got the reward.

The second was a post this morning on Forbes:

Is Facebook a friend of news companies, or is it a rival? No matter how much success publishers have piggybacking off its traffic, they can’t escape the cruel math: The more of their time consumers spend on Facebook and other social networking hubs, the less they have left over for news sites.

This is in some ways a repeat of the argument Google had with the news industry which initially welcomed traffic from Google search, but later began to see Google as a threat, largely because people could read the headlines in Google’s search results and then had no need to go to the news site at all.

My feeling is that Google has effectively won that battle, mostly because news publishers can’t live without its traffic (would welcome thoughts here though).  I think the Facebook vs content industry showdown will play out differently because it is less of a zero sum game.  News and TV producers can improve their products by making them more thoroughly social whilst Facebook will improve its data assets (increasingly their key asset) if they do so.  The consumer experience can then take place either inside or outside of Facebook.  The big question will be the extent to which they share revenues.  Google refused to share, but Facebook is both asking more of its partners and getting more in return, so I think they will cut deals.

According to the Forbes article mentioned above on Tuesday the WSJ is launching a news product that lives entirely within Facebook which sounds very cool:

it’s … about reimagining newspaper reading as an inherently social experience. Users choose whose streams they want to follow — the official ones produced by the paper’s, and each other’s — and that determines what stories they see. The most-followed users can compare their rankings on a leaderboard and earn prizes — possibly including their own WSJ-style stipple portraits. “It’s really about the users being elevated to editors,” says Maya Baratz, the Journal’s head of new products.

And apparently it will look like this:

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Social media bringing TV ad budgets onto the web

By | Advertising, Facebook | 4 Comments

Over the weekend I saw the Smirnoff ad below on TV (or at least one very similar to it).  It is remarkable because it is 100% focused on promoting engagement with the Smirnoff brand rather than selling the underlying products, and because the call to action is to go to their Facebook page and join in their global nightlife exchange.  This is a good, and still relatively rare, example of a large company shifting priority from selling product to building engagement with the brand to promote advocacy.  I think the best brands will now start to move decisively in this direction, to the extent they are not already.

Then this morning I read Tim Bradshaw’s article in the FT about Facebook and Diageo striking an advertising deal (Diageo owns Smirnoff), which contained the following interesting points:

  1. Diageo have been successfully experimenting on Facebook for a year and are now ramping up their spend with a $10m deal.  They have tracked the impact of campaigns on offline purchases and seen increases of up to 20% for Smirnoff and Baileys.
  2. In the last year Diageo has increased its digital marketing budget by 50% to just under 20% of total media spend.

For the eleven years I have been investing in adtech we have been looking for the catalyst that will entice FMCG brands to start bringing their TV ad budgets online.  This is pretty compelling evidence that social media engagement is that catalyst.  The interesting thing now will be to watch how it scales.

Note that this development is also part of the transition from bought media to earned media.  Smirnoff is getting its customers to do the talking by offering them cool nightlife opportunities, and it is working  – just take a look at their Facebook page.

Smirnoff – Nightlife Exchange from Rockbarn Media on Vimeo.

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Understanding how you will work with your VC

By | Startup general interest, Venture Capital | 2 Comments

Roger Ehrenberg of IA Ventures has a thoughtful post up today about VCs adding value to their portfolio companies.  Firstly he talks about the importance for a VC to know in their own minds whether they are a firm that seeks to make money by clever stock picking alone, or through a combination of picking the right companies and adding value post investment (we at DFJ Esprit are in the latter camp):

If I view venture investing as an exercise in asset allocation, e.g., if I assume I can’t add real value beyond my dollar investment, and therefore focus 100% of my efforts on investment selection and portfolio diversification, this would create one type of portfolio. Conversely, if I view myself as being able to have a material positive effect on my portfolio companies, then I’m less concerned with diversification and more focused on creating opportunities to build concentrated positions in companies with high expected returns. Either can be a rewarding path, but I think it is really important to know who you are

His killer point comes towards the end of the post when he notes that if you are a value add investor then you should only be investing in entrepreneurs that want your help, and you should therefore have a thorough discussion prior to investment about how the relationship will work and the value will be added.  Otherwise there is a potential mismatch in expectations between the two sides which could cause tension in the relationship.  The most common source of tension comes when the investor works to add value but the entrepreneur doesn’t see the benefit, leaving the investor feeling like they have wasted their time and maybe that the entrepreneur is missing a trick, whilst the entrepreneur starts resenting the investor for wasting the company’s time.  This dynamic is so common that it isn’t funny.

The answer, clearly, is to align expectations, but that is easier said than done.  Having an open and honest dialogue prior to investment about what assistance is needed can be tough though as both parties are in sales mode.  The company is trying to show itself in the best light whilst the investor is typically focused on building a positive working relationship with the entrepreneur and getting the deal closed rather than building the best platform for working together afterwards.  I think (hope) that I get a little better at this with every deal that I do, but it isn’t easy, and I don’t think I’ve got it nailed yet.

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The CEO’s job in a larger startup

By | Startup general interest | No Comments

Simple descriptions which capture the essence of complex concepts and objects are powerful tools for self analysis and monitoring. They work particularly well within teams of people because they are easy to remember and refer back to.

A long-time favourite of mine in the startup world is Patrick Dunne’s mantra that the role of the board is:

  • Right strategy,
  • Right resources, and
  • Stay out of jail (i.e. good governance, make filings etc)

I often refer back to that when boards start straying off piste, for example into operational matters.  (Boards sometimes need to involve themselves in operational matters, but the point is to make sure it is a short-lived involvement.)

A week or so back Seth Sternberg, CEO and co-Founder of Meebo, wrote a post on Techcrunch about the role of the CEO in a 200 person startup with a similarly powerful (and very similar) reduction.  He sees the job of the CEO as:

  • Strategy
  • People
  • Resource allocation

It makes sense that as companies get larger the CEO’s job starts to mirror that of the board, albeit without the governance piece.

The other interesting thing to note is that in sharp contrast to the startup stage there isn’t anything about rolling up the sleeves and getting involved, rather everything has been delegated.  As startups grow above 30-50 people CEOs and boards should be consciously thinking about evolving the job of the CEO to the one Seth describes.  If that is difficult, for example because there is too much firefighting to be done, then that should be regarded as a symptom of a deeper issue that needs fixing before the company can really scale.