Monthly Archives

November 2011

50 Questions: What are the five killer things I could do to improve my chances of funding?

By | 50 Questions, Venture Capital | 5 Comments

Thirty-ninth 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.


  1. Have a great company!  I almost put this point as a footnote rather than a member of the list because it is so obvious, but when I thought it through I figured that a lot of people go out to raise money when they are still working out for themselves whether they have a great company or not.  That is ok, up to a point, but only up to a point.  Most VCs understand that the product will iterate and the plan will change over time, and like to back entrepreneurs who will absorb and act on market feedback.  But, they also want a Plan A which is exciting, and raising money before Plan A has been worked on enough to be compelling is always going to be tough.  It is still possible (and I would say advisable if you can) to have discussions with VCs before Plan A is baked, but they should be couched as ‘getting to know you’, or ‘advice’ meetings as opposed to fundraising meetings.
  2. Make sure a large pool of investors are familiar with your company before you start the process.  VCs find it much easier to invest in companies and people they have known for a while, Mark Suster explained why in his post Invest in lines, not dots “The first time I meet you, you are a single data point.  A dot.  I have no reference point from which to judge whether you were higher on the y-axis 3 months ago or lower.  Because I have no observation points from the past, I have no sense for where you will be in the future.  Thus, it is very hard to make a commitment to fund you.”
  3. Have a clear plan.  It is almost impossible to spend too much time honing and clarifying key messages.  Make them simple, easy to remember, and easy to pass on.  Use stories and soundbites.  Try them out on friends and colleagues, including non-techies.  The VC partner proposing a deal has to explain it to their partners, so make it easy for them!  This advice holds for all aspects of the business plan, including the financial model.
  4. Create a sense of competition.  Making a decision to invest in a startup is a big deal for the VC partner proposing the deal.  We typically make 1-2 investments each year and we bet a piece of our career on each one.  On top of that we are busy people.  Without competition in a deal it can be difficult to create the urgency needed to overcome the natural desire to do more due diligence, and to get to the top of the priority list so a decision is made.  Plus the fact that other VCs are looking at the deal provides some validation.
  5. Be prepared, organised, and courteous to investors.  Fundraising should be treated in many ways as a sales process, where the product is equity in the company and the investor is the customer.  Companies who prepare well with the information that investors will need, are organised with meeting times and follow-ups, and are generally courteous to investors have a much higher chance of success.

I have picked out five individual factors here, but in reality they are all highly interdependent – getting to know investors before fundraising helps improve the quality of the business and clarity of the plan and will also help create a sense of competition, and having a clear plan and being organised is the best way to pique the interest of a number of investors simultaneously.  Similarly, whilst these are the top five there are many other elements that are critical for a successful fundraising.  Unfortunately for most people there are no tricks that will short circuit the fundraising process.  I say ‘most people’ because the one exception to all of this is entrepreneurs who have previously had a lot of success.  They are often able to raise money based solely on their reputation and a good idea – i.e. without (yet having) a great company, clear plan, sense of competition or a lot of preparation.

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Instrumenting our bodies – cool video from Scanadu

By | Uncategorized | 2 Comments

I think the next few years will see a massive increase in the consumer use of technology to monitor ourselves and maintain health and wellness.  We are seeing the first products come to market now, and despite their clunkiness they are getting good use from early adopters.

I’ve been using a service called Dailyburn to keep track of my calorie intake for two years now and I find it a more reliable guide to whether I need food than whether I’m hungry.  I like it, but calorie counting is too much effort for most people and as with most new product areas the break through will only come when the effort level required to get value and the price level get low enough – both compared with the value you get out.

Calorie counting services are free, but they haven’t taken off because manual entry of foods is too much hassle for most people given that they roughly know what they are eating anyway, but the proposed service from Belgian/US startup Scanadu has a proposition which offers much more value – quick diagnosis of your children’s health (and ultimately your own) using smartphone connected sensors.

Check out the video below for a glimpse of the future.  It is also a great example of an inspirational product introduction.

Other products in the market which offer body monitoring include:

  • The Jawbone Up – track your physical activity
  • The Fitbit – track your physical activity
  • Zeo – track your sleep
  • Various blood glucose monitors (not just for diabetics)
  • Body Media Fit – multiple sensors to track calorie burn
  • Runkeeper and other smart phone apps which use GPS to track runs, bike rides and other exercise

We will see a lot more services like this over the coming years.

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Ecommerce still growing fast despite the gloom – particularly on mobile

By | Ecommerce, Exits, Startup general interest | 3 Comments

Last Friday was Black Friday – the day after Thanksgiving – which is traditionally a big shopping day in the US as most people take the day off and many go shopping in preparation for Xmas.  The following Monday, which is today, has recently become known as Cyber-Monday as it has become the biggest day of the year for online sales, driven by a combination of discounts and offers, and (once again) the imminent arrival of Xmas.

The good news is that In a period of widespread macro-economic gloom (the Euro crisis persists, warning signs in the US are mounting, and on Wednesday this week up to 2m public sector workers will be on strike) there are sub-sectors that are continuing to grow fast.  Data from IBM Coremetrics shows that:

  • US online sales last Friday were up 24.3% on Black Friday 2010
  • mobile market share rose rapidly – largely driven by the iPad sales rose from 3.8% of the total in 2010 to 9.2% this year, and browsing share grew from 5.6% to 14.3%
  • social media discussion volume increased 110% over 2010 – topics included out-of-stock concerns, waiting times, and parking

There is some significant growth in these statistics and it follows that there is good money to be made in the companies that are driving the sales directly – i.e. etailers, and also in the companies that provide them with technology and marketing/advertising services.

The existence of large pockets of growth like this are what has kept interest and valuations in the tech sector on a different trajectory to the rest of the economy.  Moreover, with the pace of innovation continuing to increase I think we will see more exciting new pockets of growth over time.  Given that the overall economy is not growing the quid pro quo is, of course, that other markets are being destroyed just as quickly.

The existence of pockets of growth like this is enough to build great businesses with strong profits.  It doesn’t necessarily follow that these businesses will command high valuations in the way that they have for most of this year.  On the subject of valuations I stand by my comments of the last couple of weeks – i.e. that the key driver will be public market sentiment towards technology, and that will be guided by the performance of recent tech IPOs, including Groupon (see While the exits keep coming the party will keep rolling and Groupon’s bull run is over).

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The challenges of bringing an operating mindset to venture capital

By | Startup general interest, Venture Capital | 2 Comments

I’ve had two conversations this week with people from entrepreneurial and operational backgrounds who are looking to become venture capitalists.  They were smart people who I respect for their achievements and intellect, but I’m not sure their ideas about adding value to a portfolio of venture capital investments will work well in practice.

Before I start I want to make it clear that this isn’t a post about whether it is best for venture capitalists to have an operating or financial background – I think both can work.

I also want to get it clear that I believe adding value to investments is a key part of being a VC.  If you don’t add value you shouldn’t be in the game – you won’t get into the best companies and you won’t make the most out of the ones you do get into.  I like to say that half the profits you make as a VC come from choosing the right investments and the other half come from the value you add after the deal is closed.

But adding value to a startup isn’t an easy thing to do.  Over the twelve years I’ve been in this game I’ve come to think the best way to think of an investors job is helping the company (primarily the CEO) to be as successful as it can be.  Notice the careful formulation of words – the company has the success, it is in control and the help is ‘given’, which means it can be refused. 

The tendency of people with an operating mindset is to think about a portfolio of companies in a similar way to a company with a number of divisions, which results in a different approach.

The first manifestation of this approach is often is to look to synergies within the portfolio as a major driver of value add.  This means investing in a set of related companies which can add value to each other, thereby making the overall fund more successful.  There is a direct analogy here with the way that the divisions within a company help each other.  The difficulty with transferring this idea to a venture portfolio is that the way to make money is to invest in the best companies you can find, not companies that will work well together.  Additionally, portfolio companies cannot be forced to work with one another and instead choose to work with the best available partner, a company which is most likely outside the portfolio.  An further challenge is that startups are typically much more resource constrained than divisions within a company and are less able to undertake side projects to help out friends.  This is not to say that portfolio companies never help each other out, they do, and I remember a good collaboration between our portfolio companies and WAYN which helped us when we sold to AOL, but it doesn’t happen that often and works much less well in practice than in theory.

The second tendency of people with an operating background is to over-estimate how much the partners and staff in a fund can help at high impact moments, often compensating for weaknesses in their portfolio companies.  Examples are covering for partnership weaknesses by stepping in to negotiate key deals and unlocking value by turning the company’s focus onto a different market.  Good investors can and should add value in exactly this manner, but the first objective is always to back companies that don’t need this kind of help.  Moreover, helping like this is time consuming for partners and doesn’t scale very well. 

There has been a trend in recent years for venture funds to take staff on their own payroll and have them offer services for free to their portfolio companies.  Andreessen-Horowitz stand out as one of the leading proponents of this model.  For the funds whose fee structure allows it I think this is a great development.  However, the services offered are recruitment, corporate finance and the like – all services that the startup would be able to get elsewhere if they were prepared to pay.  This type of help is great in that it saves the portfolio company money and also saves them from having to spend time finding their own suppliers, but it is different to the sort of high impact strategic help that operating people often aspire to give.

As I said earlier a good VC adds value by offering help, but neither expecting, or insisting that it necessarily be taken.  Doing this well requires a deep empathy with the CEO and this is sometimes the hardest thing to achieve.  But with deep empathy the VC can get a sense of the help that is wanted, build consensus and channel his energies more effectively.  Sometimes this means the VC not focusing on what may seem to him (or his partners) like the most burning problem, but that’s ok.  Offering help that isn’t wanted isn’t the same as adding value.  Empathy, however, isn’t much use unless it is accompanies by good business sense, good judgement and practical advice, and good VCs add value by exercising the first two items on this list and offering the third.  Finally, value is added commonly added by well thought through introductions.  Note the caveat ‘well thought through’.  Making lots of introductions that suck up time but don’t go anywhere doesn’t help anyone.

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Groupon’s bull run is over

By | Exits | 3 Comments

For some time now Groupon has been the company that everyone loves to hate, but despite that its valuation has kept on climbing. 

Until this week.

Groupon’s share price has fallen 35% over the last three days, closing at $16.96 last night – some 15% lower than its IPO price of $20, and nearly 40% off its $28 peak.  This has not been a one off affair either, but rather three consecutive days of 10%+ falls.  (I actually thought about writing this post yesterday, after the second day of falls.)

A quick recap on the common arguments against Groupon:

  • the business model is inherently unprofitable – largely due to an ongoing requirement for high marketing costs
  • the service isn’t good for merchants, and many experience problems – this week’s bad news story was about a UK cup cake maker who got her sums wrong and ended up losing money on her Groupon promotion
  • their business practices are questionable – e.g. aggressive selling tactics and creative use of accounting standards (they had to restate revenues in the run up to their IPO)
  • only 5.5% of the shares were listed at the IPO resulting in allegations that the float was kept small to manipulate the share price (micro-economics tells us that reducing supply results in higher prices, assuming constant demand)

Earlier this month I wrote a post with the title While the exits keep coming the party will keep rolling and flyingkiwiguy left a comment this morning that was simply a link to a Forbes article about Groupon’s share price decline.  His unwritten point was that after this fall it is less likely that the other tech companies in the IPO pipeline will get out, the exits will stop and the tech bubble will come to an end.

I think it is too early to make that call definitively, but I think he may well be right.  Gawker wrote yesterday that The tech bubble just popped, pointing out that the 41 tech companies which went public this year are down 13% collectively with LinkedIn the only big tech IPO that is in positive territory.  (LinkedIn is up 53%, whilst Yandex, Pandora, Demand Media, RenRen and of course Groupon are all below their offering prices.)

Unless these recent IPOs see come improvement I think we will see a knock on decline in M&A and venture valuations.

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50% of ecommerce site visitors are logged into Facebook – personalisation will follow

By | Facebook | 7 Comments

Facebook Ecommerce Shoppers Stay Logged In

I seem to be posting a lot of stats this week, and today it is that 50% of ecommerce visitors are logged into Facebook.  This is data from a Sociable Labs study of 456 million visits to ecommerce sites.

As Sociable Labs CEO Nisan Gabbay says:

People look at Facebook’s active user count but don’t quite get how pervasive the service is in people’s lives. It’s there all the time in any activity they do online

(As a sidebar, I got to know Nisan in 2007 when he wrote an excellent series of posts on why selected consumer internet companies had succeeded.  He’s a smart guy – see his Betfair case study here.)

Ecommerce site owners can get rich data on the 50% who are logged in to Facebook and use that to target offers or otherwise personalise their sites.  Gender and age are the obvious places to start, but there is a huge volume of data to work with and the smartest etailers will use it all, employing sophisticated regression analysis to determine which parameters are the most effective to target against.

In order to get at the data the ecommerce site has to get its customers to link their accounts using Facebook Connect.  This can be a stumbling block as forcing people to connect to Facebook will hit conversion rates and have an immediate negative impact on the bottom line, particularly given that Facebook Connect often seems to be poorly implemented, especially on mobile.

I think we can expect to see etailers start offering incentives to connect via Facebook, or making it mandatory to access non-purchase path functionality like tracking orders.  After that we will start to benefit from a more personalised ecommerce experiences.

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Analysis of Yelp S-1: An illustration of how investors look for weaknesses in investment pitches

By | Uncategorized | One Comment

Yelp filed it’s S-1 last week in preparation for an IPO next year, and yesterday Rocky Agrawal, wrote on Venturebeat about the company’s strengths and weaknesses as an investment prospect.  Rocky describes himself as a fan of Yelp as a consumer (he was one of the early adopters in 2006 and used to email the CEO with product suggestions) but his analysis is nicely balanced.

Rocky cites a number of strengths in the business (deep review content, the most up to date business listings, highly engaged local communities, clever community management, high percentage of revenues from independent businesses), and I also think that Yelp is a strong company – growing revenues from $12.1m in 2008 to $47.7m in 2010 and $58.4m in the first nine months of this year is no mean feat.

That said, for the rest of this post I’m going to focus on the weaknesses in Yelp’s investment pitch that Rocky highlights.  Investors have to look for the weaknesses in a company’s pitch, we start with the strengths, but the weaknesses come next – one significant flaw is enough to sink an otherwise excellent company. 

I think Rocky’s points are a good illustration of the way that investors look for the ways that companies might go wrong and that anyone who is about to embark on the fundraising trail would do well to make a similar analysis of their own business, both to improve their pitch and prepare for investors questions.  This is not intended to be an exhaustive analysis of Yelp, and there are many things that aren’t considered – not least valuation.

(Investors look first for the strengths in a company, but after that we have to look for the weaknesses.  One significant flaw is enough to sink an otherwise excellent company.)

First off, Rocky lists two areas in which Yelp’s presentation of data is either incomplete or misleading:

  • The S-1 contains a pie chart (inset right) which shows the breakdown of reviewed businesses by category, of which 23% are restaurants.  That’s interesting, but the split of reviews by category would give a much more accurate picture of the business.  That would show a much higher percentage in the restaurant category where the number of reviews per business is much greater.  This question is important because the extent to which Yelp is ‘just a restaurant site’ is critical to estimates of its market size and medium term revenue prospects.
  • No data on the cost of acquiring merchants to the platform or what the churn rate is.  From the perspective of a venture investment (which is different from an IPO) a clear understanding of the unit economics is key to understanding whether the business is ready to scale and are worth getting in the first investor deck.  I would even argue that if the unit economics aren’t clear or in good enough shape then the best thing might be to put off raising money until they are, or at least keep the size of the fundraise to a minimum.

Second, he draws a perhaps unexpected unfavourable conclusion from some of the data that is presented (note that if you want a positive and trusting relationship with your investor the right thing to do here is to answer the question raised, not take the data out and hope that nobody asks for it):

Low-hanging fruit
One of my biggest concerns about Yelp’s model is that the company seems to have already picked the low-hanging fruit. As you would expect, Yelp started with larger metro areas and has filled in smaller markets over the years. It’s S-1 is honest on this point:

Although our revenues have grown rapidly, increasing from $12.1 million in 2008, to $47.7 million in 2010, we expect that our revenue growth rate will decline in the future.

Cohort data showing how various groups of markets have performed starkly illustrate this. The earliest cities, including San Francisco, New York and Chicago, generated $4 million per market year to date. For the 2007-2008 cohort, which includes Portland, Dallas and Miami, revenue drops to $761,000 per market.

And finally he raises a question about the business model:

Yelp’s S-1 shows what we’ve known all along about the small business market: it’s a really, really tough business. Getting and keeping small business advertisers is difficult and expensive.

Groupon touts a “no risk” model. In reality, it’s a “no money down” model. There is plenty of risk, it’s just hidden. Yelp sells its product as a media buy. It turns out that when you’re upfront about what you’re selling and how much it costs, it’s harder to get people to buy.

I like what Rocky has done here because it is balanced and thoughtful.  Like most VCs who get serious about investing in a company he starts from a positive position and then looks for the holes in the investment case, the only difference is the motivation, which in Rocky’s case the motivation is to write a piece of analysis, but for VCs is to make sure their investment thesis is sound.

People watch more video on tablets than desktop

By | Advertising, Mobile, Video | 2 Comments

I was going through my unread saves on Instapaper today and  came to this interesting chart in a Techcrunch post from earlier this month.  It shows people stay watching videos much longer on tablets and mobile than they do on desktops. Maybe not surprising in theory – but look at the extent of the difference – people are twice as likely to watch to one quarter or three quarters of the way through.

The first implication is that as tablets and mobiles continue to improve and take time and attention away from desktops and laptops video views will continue to soar.  This is good news for over-the-top TV plays and the mobile advertising ecosystem.

The second implication is that other apps and services will likely see the similar boosts in mobile usage.  Services that are ‘built for mobile from the ground up’ have been in vogue now (see Jim Breyer’s comments in this series of interviews on Techcrunch), and this tells us why.

Other interesting data in the Techcrunch post is that video plays on connected TVs tripled in Q3 and that the Android-iOS split of mobile video plays is approximately equal.

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Your body is an incredible information system

By | Uncategorized | No Comments

You are awash with information.  You have billions of cells, and each one is constantly signalling highly nuanced chemical messages to its neighbours.  Every scrap of tissue has a rich network of nerve connectors and hormonal receptors, and millions of their signals fly around your body all the time.  All the traffic on the internet and all the phone calls in the world are dwarfed by the information traffic in your body.

Younger Next Year, Dr Henry Lodge and Chris Cowley, 2004

That’s pretty amazing, even if I suspect it won’t be true for much longer (if indeed it still is).

Thanks to everyone who voted for me for the Best VC Partner of the Year Award at the Techcruch Europas

By | Announcement, Conversocial | No Comments

A big thank you to everyone who voted for me in Best VC Partner of the Year category at the Europas – it means a lot.  I was honoured and surprised in equal measure to walk away with this award.  There are a lot of great VC partners out there and I don’t think I’ve really gotten started yet with what I want to do in venture capital.  We need more $billion tech companies in Europe and my goal is to help create some of those.

Thanks also to my partners at DFJ Esprit.  We’ve had a great year or so, with the final close on our new fund, a great run of exits and I think now nine new investments.  Without them I wouldn’t be here.  Simple as that.

Regrettably, I didn’t actually ‘walk away’ with the award as I am in Paris (I committed to speak at a conference here before the date for the Europas was set) so I heard the news on Twitter:


From what I’ve read it was a pretty special event.  I wish I had been there.

Congratulations also to Josh and Dan at our portfolio company Conversocial who won the Best Advertising or Marketing Tech Startup award.

UPDATE: Full list of winners here