Monthly Archives

April 2012

Some insight into how Instagram secured a $1bn valuation

By | Exits, Facebook | One Comment

It is now two and a half weeks since Facebook announced its $1bn acquisition of Instagram yet people are still talking about how and why such a young startup with no revenues achieved such a high valuation. I have written previously about the why (Facebook wanted to protect their valuation at IPO and $1bn isn’t a big figure in the context of a $100bn+ market cap) and this morning there is an interesting post on Venturebeat which gives good insight into the how.

If the gossip and rumours are to be believed Instagram employed two pretty standard tactics to maximise their valuation on exit.

Firstly they used a venture capital round to induce Twitter to make an offer, and then they took that offer to Facebook and doubled their valuation.

There are elements of this that every startup can learn from.

  1. If you have M&A discussions that are not moving forward as fast as you would like then raising a round of venture will force the potential acquirer into making a decision. They will know that once a round is closed the valuation required to get a deal done will likely have to go up in order to satisfy the new investors, and so if they want the company they will get off the pot and make an offer. According to Venturebeat Instagram had been talking to Twitter for some time but didn’t get an offer until their venture deal was about to close.
  2. Fear and competition are important driers in M&A and it is often the case that market leaders only become interested in buying startups when they learn that one of their competitors is close to making an acquisition and start to fear for their market dominance. Photo sharing is at the heart of Facebook and they are vulnerable on mobile. It is easy to see how the combination of Twitters strength and Instagram’s coolness might trouble them.

The final thing to note is the obvious point that these strategies only work if the startup is highly desirable. Instagram was hot enough to be wanted by Twitter, courted by venture capitalists, and scary to Facebook. Most startups don’t get that lucky, and it is important to be realistic about potential exit valuations and whether the company is special enough that acquirers will enter into a bidding war.

Neul powers new wireless network for the internet of things

By | Portfolio | One Comment

Neul - the Internet of EverythingWouldn’t it be cool if you could stick a $5 module into anything and have it talk wirelessly to the internet?

That’s what our portfolio company Neul (pronounced like ‘fuel’) is building, and they just announced the the launch of a city-wide wireless network in Cambridge, England, that connects devices powered by their modules to the web – i.e. an internet of things. The network operates in the spectrum that is freed up by the switch from analogue to digital TV, and their technology includes the modules that connect the devices and the software for operating the network.

We think this could be huge. Cisco and others are predicting that 20 billion devices will be connected to the internet by 2020, and Neul’s technology is a key enabler. Using existing cellular networks is expensive and unwieldy as the modules are too power hungry to rely on batteries, the spectrum is licensed, and the network stack is optimised for voice traffic rather than intermittent bursts of small data. Neul’s modules can run for years from a single battery, operate in free spectrum and use the new ‘Weightless’ standard which is optimised for machine to machine communications. The network will be cheap to roll out too – the Cambridge network runs from only five base stations.

The first and most obvious application is smart meters but more exciting to me is the new applications that people will dream that are only possible with such cheap and low friction connectivity. My favourite idea is toys. I like the idea of being able to communicate with (or through) my children’s teddy bears from my laptop as they get ready for bed.

Estimating the market and opportunity size is critical at the early stages of a company

By | Exits, Startup general interest | 5 Comments

Yesterday I spent an enjoyable mentoring startups at Springboard, the London chapter of the Techstars accelerator programme. Reflecting on the day I was struck by two things. Firstly the quality of the companies is improving. I mentor at Springboard and Seedcamp and at just about every session I’ve attended the companies have been stronger than the previous session, and the same was true again yesterday. On average, the businesses are a little further developed and the entrepreneurs have a clearer and more credible idea of what they want to do and how they are going to go about it.

The second thing I was struck by was the number of businesses who were working out how big their opportunity size is. Some were working through bottoms up analyses, others were iterating their plans to open up a larger opportunity, and both these are sensible and appropriate approaches. A third group were taking a different approach of beginning with the belief that their market size is huge and building up a case to support their belief.

This third group have things the wrong way round.

Getting an accurate assessment of the opportunity size is very important for startups as it informs the exit potential and financing strategy. Companies with small opportunities can be very successful for their founders and investors if they keep their financing requirements correspondingly small. Conversely, companies that over-estimate their opportunity size can struggle in a number of ways:

  • fundraising proves difficult as investors don’t believe their projections
  • if a large round is raised and expenses are ramped the chances of going bust increase significantly as revenues fall short of budget
  • if a large round is raised and an exit comes it will be below expectations, the founders will make less money than if they had raised a smaller amount, and the investors will only achieve a mediocre return

The best way to accurately assess the opportunity size is to jettison all pre-held convictions and work it out from scratch. That is a useful exercise for more established companies to do periodically as well, in light of changes in market conditions. Maybe the folk at Dropbox are having a re-think now in light of recent announcements from Google and Microsoft….

Exposing the misunderstanding behind the belief that social media makes us less social

By | Privacy, Social networks | One Comment

Regular readers will know I’m a big believer in the power of social media as a force for good in our society. Now that everyone can publish their opinion and no-one can control the media integrity is becoming more and more important for brands and individuals, and I think that’s great.

There are many people who think differently however, the most recent example of which is MIT professor Sherry Turkle who wrote a piece in the New York Times arguing that all the connecting people are doing on Facebook comes at the expense of real conversations. In other words social media is bad because it weakens our relationships. This commentary from Turkle adds to a daily stream of stories from publications like the Daily Mail about the problems that social media is bringing to our society, from people embarrassing themselves by sharing inappropriately to people using Facebook to approach young girls for sex.

These stories irk me because they don’t reflect the truth of the matter, so I was pleased to see GigaOM produce a comprehensive analysis of how Turkle has misunderstood the role that social media plays in people’s lives.

As you can read in more detail on GigaOM, the flaw in Turkle’s reasoning is that status updates on Facebook and texting are not substituting for conversation or deep relationships, rather, they are compliments to other deeper, richer, forms of communication, including one-on-one conversations. In fact, the research shows that people who are more social online are also more social offline.

I think a lot of the negative sentiment surrounding social media is best understood as fear of the new and fear of change, and echoes the moral panics that have histroically accompanied new forms of media. I strongly believe that over time social media will become an accepted and valued part of the fabric of society in the same way as telephones, television and many other new technologies have before.

That said, there are many important concerns around social media that need to be addressed and probably regulated for, most obviously child safety and privacy. However, those concerns are best addressed in an atmosphere of calm and well informed debate. My fear, and reason for writing this post, is that we will get regulation driven more by fear than logic.


Android and iPhone traffic roughly equal, but iPad is where the action is at

By | Apple, Google, Mobile | 2 Comments

I love the fact that every week someone releases some new and powerful data into the public domain, often for free. This week Chitika has released data from a panel of 200,000 US websites which shows market share for iOS, Android and other mobile OS’s. Observers of the mobile industry will remember that Android overtook the iPhone to become the market leader by device sales last year, but for me that was always a slightly misleading statistic. Many Android phones are pretty low end and market share by internet usage is a much more interesting measures, and that is what the folks at Chitika are counting.

As you can see from the chart below iOS dominates overall, but if you strip out the iPad (and iPod, for what it’s worth) then we see that the iPhone and Android are more or less equal at around 25% each. Unfortunately the data released doesn’t go back very far and we can’t see a trend, but given the way device sales are going I would expect Android is gaining at the expense of the iPhone. Mobile app developers should look keenly at this data as it will inform their choice of which platform to develop for first. My observations in the market are that most people still develop for the iPhone first. That may start to change.

Stripping out the iPad data makes sense to me because tablets don’t compete with smartphones. If there is any Android tablet traffic in the Android figure it should be reversed out to give a true comparison with the iPhone. However given that the iPad dominates the tablet market I wouldn’t expect any changes to be more than 10-20% of the Android total (note also that Amazon’s Kindle Fire, probably the best selling Android tablet, is more geared for reading books than using the internet).

The final thing to note is that the iPad is much larger than the iPhone and Android, despite it’s lower unit sales (iPad’s are 50-60% of iPhones). This is testament to the suitability of the tablet format for browsing and app usage, and underlines the fact that we use our tablets very differently to our smartphones.

Startups flourish when new technologies take the first 3-5% of a market – case study mobile advertising

By | Advertising, Mobile, StrikeAd | No Comments

Startups appreciate in value most quickly when consensus starts to build that the market is tipping in their direction, and this is when the high multiple exits occur. Looking at the mobile advertising industry over the last few years suggests that tipping point is around 3-5%. It’s an old cliche that for the first ten years of this century every years was supposed to be the year of the mobile, then the iPhone and Apple app store arrived and the mobile internet finally took off.

After the arrival of the iPhone mobile inventory sky-rocketed and revenues at the leading mobile ad network, Admob (a DFJ investment), went in the same direction. Their success led to a $750m acquisition by Google towards the end of 2009 and Apple responded by acquiring Quattro, the second player in the market for $250m at the beginning of 2010.

The latest news in the mobile advertising industry is of course the Milennial IPO on March 28th (2012) – their market cap peaked at $1.9bn, but has since fallen back to $1.4bn.

As you can see from the charts below (courtesy of AllthingsD) mobile advertising was 3% of the total online ad market in 2010 and rose to 5% last year.

The first wave of successful exits in a new market are about growth in that market. After that the attention turns to dynamics within the market as competing models start to emerge. That is the thesis behind our recent investment in StrikeAd which seeks to exploit and accelerate the trend towards mobile advertising being bought in real time over exchanges, instead of over ad networks.


Don’t get an MBA, start a company

By | Startup general interest | 8 Comments

Tony Shin emailed me about the Infographic below asking if I would share it with all of you. I said that depended on whether it was interesting. He emailed it through yesterday and I like it. I like it for the way it contrasts  the declining value of an MBA with the increasing ease of becoming an entrepreneur, and it dovetails nicely with my belief that as the world changes faster and faster the course content at most business schools is getting less useful in building startups. I still think that MBAs are useful for many people, particularly those looking to build their networks, just not necessarily for entrepreneurs.

Worth of an MBA
Created by:

Developments in 3D printing

By | 3D | One Comment

I’m in Leuven, Belgium for most of this week visiting 3D printing leader Materialise and attending their 3D printing conference. For most of you Materialise is a lead contender for the ‘most successful and innovative European company you’ve never heard of’. The business is 20 years old, has 1,000 employees in 15-20 countries, and most importantly works on a lot of amazing projects. Some of them are inspirational from a design perspective, others from a business growth perspective (particularly in the medical field), some for their sheer amazingness, and still others for their beneficial impact on the environment and other world issues.

I’m here because it seems to me we are on the cusp of a massive increase in consumer use of these technologies, but the surprising thing for me at this conference so far has been the extent to which 3D printing has been adopted in other industries. Just about every company I talk to here is doubling sales each year.

The hearing aid industry is perhaps the most advanced user of 3D printing, where due to the benefits of personalised better fitting devices and improved performance from audio channel structures not possible with conventional manufacturing over 10m 3D printed hearing aids are now in use, including virtually all new ones. 3D printed Knee replacements, hip replacements, dental implants, teeth braces, precisely fixtures and fittings, and engineering components are also all seeing massive growth

This market growth is backed up by a lot of great stories and numbers that I’ve been asked not to share, but I will say that some of it is truly incredible, particularly the inside story of the recent Belgian face transplant.

It is also interesting to think about where this is going next. As the Materialise guys see it, at the moment 3D printing in volume is rarely cost effective for anything with a volume greater than a large marble or maybe a tennis ball. Improvements in technology and materials costs are driving costs down fast though and applications with slightly larger volumes are therefore good candidates for adoption of 3D printing in the near future.

At the moment these technologies are being put to incredible uses, but they are too expensive for most large scale applications. That is changing fast though as advances are driving down prices and increasing quality.

Getting the most out of an accelerator programme

By | Startup general interest | 5 Comments

Garren Givens, founder of social commerce site Dibsie, wrote a great post on Venturebeat explaining how founders should think about accelerator programmes. As the number of programmes mushrooms there is inevitably going to be some bad ones to go with the good ones, and so this is a topic that founders need to think more about.

His main point is that at their heart accelerators are venture capital funds. They exist to make money for their investors. Whilst the principals might love working with startups when push comes to shove they will have to prioritise making the numbers work.

His second point is a great one. I’m going to quote it in full:

One of the common pain points I’ve heard from friends in all the top accelerators is that they get tons of feedback, much of which is confusing and even conflicting. If you ask for a critique, you get criticized—and knowing what to filter is on you. Have conviction in your decision-making, or risk paralysis by analysis. Never have I taken so many meetings in such a condensed timeframe or chatted so much about Dibsie and social commerce. And some folks just don’t get it (which has sometimes made me wonder if I do). But what I’ve learned is to seek out the folks that really understand our space and our goals, and to elevate their feedback above the noise.

In the early stages of a company soliciting feedback from a wide range of people, including those with contrary opinions, helps to speed the iteration of the plan and increase the chances of success. However, the feedback will inevitably be conflicting and as Garren says the difficult part is deciding which advice to take and which to ignore. It is challenging to be open to criticism and new ideas whilst at the same time being able to quickly discard comments which are unhelpful, particularly when great ideas can come from the most unlikely of places and even experienced people sometimes come up with bad ideas (myself included). Good innovators are particularly adept at rising to this challenge.

Jeff Bezos explains why gatekeepers are a brake on innovation

By | Amazon, Apple, Facebook, Google | One Comment

Regular readers will no that I’m a long-time fan of Jeff Bezos and Amazon and also that I have a keen interest in the evolving roll of gatekeepers in the internet age (see here and here for two recent posts). For these reasons I was very interested to read the following quote from Jeff Bezos recent letter to his shareholders (reported on Techcrunch):

even well-meaning gatekeepers slow innovation. When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say “that will never work!” And guess what – many of those improbable ideas do work, and society is the beneficiary of that diversity

Whist Bezos is talking his own book here and I suspect the timing of this statement has a lot to do with the ongoing legal battle between Amazon’s self service book publishing platform and the traditional publishing industry, I think he is on the money here. The ‘gate’ that traditional gatekeepers are ‘keeping’ has always been distribution, in the case of book publishing that has been the ability to get books onto shop shelves, and in that environment there is little incentive to innovate. Staying with the book industry as an example – publishers and retailers want reliable sales, and as a result they lack the tolerance for failure that is a pre-requisite for innovation.

As Bezos says, in a self service world there is nobody stopping innovators from trying their experiments. In fact self service platform providers typically encourage experimentation as they benefit from the successful ones and don’t suffer with the failures.

It isn’t all happiness and light though. In this self service world there are new gatekeepers and they are the companies with large audiences – Apple, Amazon, Facebook and Google. For the reasons explained above I think these gatekeepers will be more pro-innovation than the businesses they seek to usurp, but they are still self interested companies who will seek to maximise the rent they extract. Worse, some of them may end up in quasi-monopoly positions.