Monthly Archives

October 2011

A common misconception about venture capital

By | Startup general interest, Venture Capital | 7 Comments

Third Panel, Exeter 2011 Day 3The Friday before last I was on an investor panel at the Like Minds conference down in Exeter.  As I’ve mentioned before I do these panels in the hope of making the process of raising money more widely understood and therefore easily accessible, thereby encouraging more entrepreneurs to start companies.  You can find a liveblog of the panel here, and the picture on the left shows me on stage at the event with Sam Sethi of

After the panel session one of my co-panelists, Chinwag’s Sam Michel, repeated something I had said back to me, and that something has been running round my head ever since.  Last week was supposed to be a holiday, although I ended up going to the US for two days, and for us holiday time is family time, and I try to keep the work to a minimum, which means no blogging.  Hence this is my first chance to share the thought.

Hopefully by now you are almost overcome with a desperate eagerness to know what it was that Sam chose to repeat back to me.  The sharp eyed amongst you will have deduced from the title to this blog post that it relates to a common misconception about venture capital.  In fact, ‘misunderstanding’ might have been a better word, and I toyed with the idea of using ‘Why venture capitalists are misunderstood’ as a headline….. (that’s a joke 🙂 ).  The words were (more or less):

Venture capital is for accelerating the development of existing companies rather than funding them at the true startup stage

Sam’s point was that too many people in the UK and Europe think that VCs should fund, or do fund, the true startup stage.  The unfortunate consequence of this misconception is that time is wasted trying to get meetings and investment from VCs, and all to often this turns to dislike of, or even contempt for, the VC industry.  A common perception is that the VC industry is flawed because it doesn’t take enough risk.

That’s unfortunate.

I work as a VC because I believe that for the right companies a timely investment of say £5-20m can accelerate growth and make the difference between being a highly valuable market leader and a much less valuable smaller player.  The caveat ‘for the right companies’ is crucially important though – only a very small subset of companies are in the right place at the right time with the right product and the right team to have a shot at owning a market.  For the rest it is a mistake to raise venture.

Also unfortunate is that VCs are responsible for this misconception.  Not in any deliberate way, but rather because as an industry we haven’t traditionally felt the need to be clear about what we do and don’t do.  One of the challenges is that presenting a clear picture requires getting across a complex message – some VCs do fund the true startup stage, or at least they do so occasionally, whilst most others, including my fund DFJ Esprit, do a small number of seed deals each year.  These are not true startup companies, they usually have at least an early product we can look at, but they are not that far along either.

The fact that sections of the entrepreneurial community believe the VC industry is doing a bad job isn’t good news for anybody.  It can only lead to fewer people starting companies and fewer companies capitalising themselves properly.  It probably also has negative consequences for government policy.

Hopefully this post has made things a little clearer.

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The state of mobile: real activity, but still early days – some stats

By | Uncategorized | 6 Comments

Mary Meeker gave her now customary data rich presentation on the state of the internet to the Web 2.0 Summit in San Francisco earlier this week.  She remains optimistic that we are headed into a wave of innovation and value creation driven by mobile, social and local.

I’ve picked out four of her charts that show where we are in mobile advertising.

This first one shows that the number of smartphone ad impressions is growing fast quarter on quarter and that big companies are now migrating budgets to the platform.


This second chart shows why – we are (finally) transacting over our mobile phones.  It is much more attractive to advertise on the platforms people are using to buy stuff.


But this third chart shows that advertising spend on mobile is way behind media consumption on mobile.  It is a safe bet that publishers will find a way to make their properties work for advertisers and the spend will catch up.  Remember also that mobile consumption is also growing fast.


And finally – this chart shows that smartphones are still only a small percentage of the mobile subscriber base.  All the interesting action described above happens on smartphones and as the penetration increases mobile activity will increase across the board.  One caveat though – this chart shows global figures, and smartphone penetration in the developed world is much higher, around the 50% mark.


Facebook is driving the enterprise

By | Conversocial, Facebook, Social software | No Comments

The diffusion of social through society is going to touch all of our lives in many ways over the next five years and the software that enables it is one of our investment themes.  Our portfolio company Conversocial fits into this theme.  Its software helps enterprises take advantage of Facebook and Twitter to better care for their customers.

Marc Benioff is also a big believer in this theme.  It explains the huge emphasis that Salesforce put on their Chatter product and their recent acquisition of social media monitoring service Radian6, and he was on stage at the Web2.0 summit in San Francisco waxing lyrical on the significance of Facebook (from Techcrunch):

“I really think that Facebook is becoming a vision of what the consumer operating system is”, he said. “Everything I want, I’m beginning to see on Facebook”


“I’d like to be doing as many amazing things as Facebook is”, Benioff said, continuing on to say that Facebook is essentially driving the direction in which the entire industry is going, especially that of enterprise, which Benioff has been selling for some time now…. Benioff is quick to say that the social revolution is coming to enterprise software, that it is inevitable, and that those who don’t get on board are going to fall by the wayside. It is of utmost importance for enterprises (and let’s be honest, every company out there) to listen to their customers. And, as Benioff perceptively surmised, their customers — across the board — are on social networks, which is exactly where they should be interacting with them.

Facebook is going from strength to strength to the extent that it is hard to see where it stops.  I am starting to think it will evolve into a powerful global monopoly that it will end up being regulated as a utility.  That vision of the future implies a level of global policy co-ordination far in excess of anything we have seen to date, but then I think a globalisation of regulation, and eventually government, is inevitable if the world continues on its current path.

50 Questions: How should an entrepreneur approach negotiation of the key terms?

By | 50 Questions, Startup general interest | One Comment

Thirty-sixth 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.


My last post in the 50 Questions series was a mathematically dense explanation of how anti-dilution clauses work.  This week I’m relieved to be back writing prose!

The most important term in the termsheet is without doubt the valuation.  My advice here is to follow standard practice and let the VC be the first one to come up with a number.  Letting the other side go first is text book best practice for negotiations – you never know, but you might just get a higher valuation than you were expecting.  Most VCs will press hard for some kind of indication prior to putting in an offer, and if you feel you have a good handle on market rates for your type of company then giving an indicative range can help the process along, but I would avoid giving a precise figure. 

Advisors have the best feel for market rates and when they are leading a deal it is common practice to guide investors with a valuation range.  It is much less common in deals without advisors and I think that is because in these situations the board is less confident that they will get the range at the right level.

In some situations there is a genuine floor beneath which the current shareholders aren’t willing to take an investment.  In that case it is worth telling prospective investors as soon as they get serious.

Beyond valuation my advice is to stick pretty closely to standard market practice.  If the termsheet being offered is plain vanilla (i.e. 1x participating preference share, weighted average anti-dilution, standard consent rights) then the best approach is to agree it pretty quickly and focus on getting to completion.  If a VC starts out with standard terms it is likely because they want to do a quick and fair deal, and trying to move the terms from fair to entrepreneur friendly probably won’t work.  If, on the other hand, the termsheet is full of non-standard clauses that advantage the investor then I would work hard to get the deal back to market norms.

The third and final point is that if there is anything non-standard that is important then you should get that on the table early.  I would avoid being aggressive, but at the point when the investor starts talking about issuing a termsheet it is worth saying something along the lines of ‘one of the things we would really like to see is XYZ’.  Then (if she is so inclined) the investor can build your request into her models early and hard to change expectations won’t get set in the wrong place.

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By | 50 Questions | No Comments

Last week Nicholas Lovell wrote another post in our series of 50 Questions you should ask before raising venture capital.  This time he answers the question What should I try to achieve in the first meeting?

The piece of advice I most appreciated is not to go “all testosterone-fuelled sales maestro” and try and browbeat a VC into investing by ‘handling all her objections’.  Even if you were to wear the partner concerned down (the chances of which are vanishingly slim) this approach will do nothing for the other partners who also need to agree.

Two great comments on strategy at startups

By | Uncategorized | One Comment

I started life as a strategy consultant, which has left me with an appreciation for the power of letting strategy drive your business, but also an appreciation of how difficult that can be to do well.  Len Jordan from Madrona Venture Group has a guest post up on Techcrunch which describes a couple of common mistakes:

Firstly, on seeing the difference between errors in the strategy and problems with execution:

4. Strategy mistakes are harder to admit than execution mistakes.

It’s hard to admit when a strategy is flawed. It’s very easy, on the other hand, to decide that the market, customer and product thesis is correct but sales-and-marketing execution is weak. I’ve seen too many companies delay making a tough strategy choice by first trying to fix the flaw through a change in execution. If execution is flawed, fix it, but look beneath the veneer to make sure the substance underneath is sound.

Assuming the problem is in execution rather than strategy is I think common for three reasons:

  1. People round the board table feel more ownership of the strategy than the execution and it is therefore easier to point the finger at say sales or marketing than it is to admit to making a mistake.  Additionally, if you have venture investors they will have sold the investment to their partners on the basis of the strategy you have, and if it changes they will lose credibility internally.
  2. Strategy changes are more fundamental and harder to make than execution changes.  The whole company needs to re-oriented and sold on the new vision, rather than simply fixing a single department.
  3. Changing the strategy is scary because the new strategy might not work either, whereas if the problem is execution you know that if you fix it you are home and dry.

Secondly, on only having one strategy:

5. The average of two strategies is usually not a strategy.

Whether you have a board or not, you have to commit to a cohesive strategy. In tennis you can play at the net or the baseline, and both can be great strategies, depending on the circumstances. The average of the two — playing in the middle of the court (commonly referred to as ‘no- man’s-land’) — is the worst place to play and is never a good strategy. Too many startups split the difference: They continue with the old strategy, add a new strategy (like a new product), under-resource both and fail at each.

I think it is well understood now that focus improves the chances of success at startups and strategy is no exception.  Yet too many companies keep multiple strategies alive because they feel more comfortable with multiple avenues to potential success.  I’m all for giving yourself the best chance of getting lucky, but it is important to understand the costs vs the benefits.  Over estimating the value of a low probability high impact event is a very natural human tendency (it is why lotteries exist) but it can be cancerous for startups.  Alastair Mackintosh, my first mentor at Gemini Consulting once said to me “strategy is as much about deciding what you are not going to do as what you are going to do” – I still think that is great advice and is very applicable here.  Keeping too many options is always a drag on time and headspace.  Much better to pick one strategy and nail it.

Finally – you may have notice that the quotes from Len’s post are numbered 4 and 5.  The other eight are also well worth reading.

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Know where you are in the cycle, but don’t let it knock you off course

By | Startup general interest, Venture Capital | No Comments

Roger Ehrenberg of IA Ventures put up an interesting post on Friday about the importance of staying focused on your business and not getting distracted by the overall macro-economic picture or whether we are in a bubble or not.

I agree with this up to a point.

Roger titled the post ‘Know thyself’ and he starts with a seven point process for building a company which neatly captures what has become regarded as best practice over the last five years or so:

  1. Have a plan
  2. Speak to lots of smart people about the plan
  3. Iterate the plan
  4. Execute the plan
  5. Constantly critique the plan
  6. Adjust the plan as necessary
  7. Rinse, repeat

Which he summarises as “In short, know thyself and stay true to the mission. … And if your mission, over time, proves to truly suck, then it’s time to ditch the mission and reassess”.

I fully agree with that, although I still run into a surprising number of companies that don’t see the net benefit of having open conversations about their plans.  It has been said a thousand times before, but these days ideas are cheap and execution is everything.  For most businesses the gains to be had from sharing ideas to speed the iteration process and improve execution far outweigh the risks of plagiarism.  And if you think your company is one of the exceptions take the time to think it through again to be sure you aren’t arriving at the conclusion for the wrong reasons (fear of rejection, natural reticence to share etc.).

Where I depart a little from Roger is with his assertion that entrepreneurs and VCs alike pay ‘way too much attention” to the discussion in the market about whether there is a venture bubble and the prospects for micro-VCs, large venture funds doing seed deals and so on.  I agree that the first and last thing entrepreneurs should think about every day is running their company, but it is important to keep an eye on the wider market as the direction of the economy and the fundraising market need to be factored into strategy.

Roger’s post reads like a reaction to entrepreneurs and VCs spending too much time reading blogs and gossiping about the state of the venture industry, and he isn’t advocating ignoring the world outside of the office, saying “Worried about the macro environment? If you’re a company then raise 2-years of cash, not 9-12 months.”, and that is a fair point.  I do, however, think that it is important for anyone deciding on future exit potential or likely ability to raise money down the line to have a good handle on the markets that will provide the finance.  The challenge for venture backed startups is to optimise speed of growth against the constraint of dilution that comes from the cash required to finance that growth.  That optimisation is hard to pull off without a good understanding of the venture markets.

Moreover, I don’t think that is possible to quickly get a handle on the venture markets.  The venture world has almost as many opinions as it has practitioners and it remains a murky and mysterious world (despite the efforts of many to introduce some transparency, including roger and myself).  I regularly encounter people who make bad budgeting decisions because they are over optimistic about the chances of raising more money, and occasionally meet people who should raise money but aren’t because they over estimate how hard it would be.  Characters like these would make better decisions and have more success if they spent more time reading Techcrunch and venture blogs rather than less.

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Hulu’s sale fails – value in the rights not the audience

By | Content, TV | 2 Comments

Leading US TV streaming site Hulu has been trying to sell itself for much of this year, but is no longer for sale.  The company announced yesterday that the sale process was terminated and now the owners, which crucially include content owners News Corp, Disney and Comcast, will keep the site independent.

According to Techcrunch the company had a number of offers, but none matched the $2bn price tag they were looking for.  Google apparently offered $4bn, but wanted longer deals than the two years on offer with the current shareholders to the rights for NBC (Comcast), Fox (News Corp) and ABC Television (Disney).

The fact that the streaming rights are such a driver of value is of significance to web based media businesses everywhere.  The fact that Google was willing to deal at 2x the asking price with long term rights, but wouldn’t even match it with two year rights shows that they place more value on the rights than on Hulu’s considerable audience and powerful brand.

Hulu’s business model is essentially an arbitrage between what they pay for the rights and the money they can make from advertising as people watch the streams.  The idea behind most sites with this model is that once they get to scale the content owners (be it movie studios or music labels) will have no choice but to deal with them if they want to reach a large audience.  Theory has it that the power in negotiations should then be with site rather than the content owner, and the price of rights will come down and big profits will follow.

The potential acquirers of Hulu clearly didn’t buy into that theory and thought that after two years they would get legged over when they came to renegotiate the rights.  The fact that Hulu’s owners didn’t take the Google deal suggests that they are thinking the same way.

Other companies in this space should take note.

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Foldit – crowdsourcing disease solutions using games

By | Business models, Casual Games, free | No Comments

Crowdsourcing and third party monetisation (aka the trend to ‘free’) are a couple of my favourite themes and Foldit combines them both to help solve biology problems that have applications in cancer, HIV and Alzheimers.  Brilliant.

Foldit have released a puzzle game in which the solutions that the players come up with are real world possible solutions for how proteins might fold.  That is signifcant because there are many, many ways in which proteins might fold and finding the optimal solution is one of the hardest problems in biology, and more importantly one that can’t be solved cost effectively through the use of raw computing power.  It is important because understanding how certain proteins fold is on the critical path for combating the diseases listed above.

You can download the game from Foldit’s site, and if you play you will see it is a game with similarities to some of the iPhone based puzzle games.  It is a little rough round the edges, but both the concept of what they are doing and the practical implications are very cool.

Thinking ahead, this idea of using games to crowdsource solutions to difficult science and engineering problems could be a way to finance free to play games.  The idea could even be extended to non-scientific problems like testing the response to advertising campaigns or product ideas.  Foldit feels like it has been put together by the people looking for the solution, but there is no reason why the problem couldn’t be defined in the abstract and offered up to third party developers who would then design the game in return for payment based on the value of the solution delivered.

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It is getting easier to learn how build a company

By | Startup general interest | One Comment

As I’ve said many times I think the startup ecosystem here in Europe is getting stronger all the time.  One of the reasons for that is that the entrepreneurs are getting better.  That is something I observe on a daily basis at the companies we see.

When I’m asked to explain why entrepreneurs are getting better I typically point to the increasing number and strength of networking and support groups for startup founders (e.g. the ICE group run by Alex Hoye), and to the increasing number of serial entrepreneurs that are helping with both investment and advice (e.g. Brent Hoberman, Michael Birch, Niklas Zennstrom, the White brothers).

As of this morning I’m going to add a third item to the list; that learning the art of company building is easier than it ever has been before (note the careful choice of words – the learning part is getting easier, the building part is still very hard).  It would have been nice if I’d thought of this whilst eating my breakfast this morning, but credit where credit is due, Marc Andreessen came up with it yesterday in an interview with the Wall Street Journal:

“I think entrepreneurs are getting better and better,” he said, “Better educated, better trained, better informed, better networked. When I was starting out, there was really no such thing as networking for entrepreneurs. Now they all know so much more about what’s going on.”

Social media has been a big part of that, Andreessen says.

“They’re all on Facebook, they all tweet – plus, so many VCs are blogging,” he said, referring to investors such as Fred Wilson of Union Square Ventures. “They’re basically comprehensively writing the how-to manual for how to build companies.”

I would add to this the excellent work done by Steve Blank, Eric Ries and others in breaking down the process of building a company into its constituent parts which is slowly making entrepreneurialism more science than art.

This is particularly good news for entrepreneurs in Europe (and other smaller startup ecosystems) because it levels the playing field with Valley entrepreneurs who have historically had access to much better education on building companies.

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