Monthly Archives

July 2012

When improving execution isn’t the answer

By | Startup general interest | No Comments

When a business team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Warren Buffet

I love this quote. The FT printed it in their Lex article on Marissa Mayer taking the CEO job at Yahoo (paywalled, so no link) but it applies equally at startups. When a company is underperforming it is tempting for boards and shareholders to believe that the problem is with execution rather than with an underlying underlying feature of the business. That way they can reach for the easier fix of changing management and avoid dealing with the fact that their investment thesis was flawed. However, as anyone who has been around lots of companies knows, sometimes the problems are fundamental in nature and radical restructuring is required to save or maximise value, not just better execution. This is the point I think that Buffet is trying to get to with this quote – when a business has flawed economics (fundamentals) then good execution alone doesn’t help.

Mayer is a very impressive character and Yahoo have done well to land her. It is also easy to see the attraction from her side of trading a senior exec team roll at Google for a CEO position at a $19bn market company. The tech press this morning is full of speculation about whether there are enough good bits in Yahoo (large audience, good media partnerships, strong cashflow) for Mayer to work with. I think she will have to be brilliant to succeed – Yahoo’s technology, products, and culture are a mess, they are rapidly losing market share, and the good bits aren’t the sorts of things you can build a company on – unlike, say, a dominant position in search. Perhaps most concerning is that it doesn’t sound like she has a mandate for truly radical change. Mayer is talking about spending her first period in office touring the company and getting to know the business better before outlining her strategy. If she was planning a radical overhaul I would expect her to be starting to build momentum now.

I saw something similar play out at one of the startups we were involved with. The company was missing budgets and failing to grow, so we brought in a new CEO who had previously been successful at a similar business, but his better execution didn’t translate into an improvement in business performance. In order to turn things around we had to radically overhaul the business model. The core product proposition remained the same, but we dropped the price by up to 60-90%, cut investment in R&D by a similar amount and innovated to find a much more efficient sales process. The company isn’t out of the woods yet, but has recently secured new investment and is doing much better. With hindsight we made the mistake I described above of taking the easy option of fixing the execution when the business model was the issue.

The perils of aiming too big too early

By | Startup general interest, Venture Capital | One Comment

I’ve been advising startups for a long time now to make sure their fundraising is consistent with the size of their opportunity. Unfortunately, it is in the nature of startups that the opportunity size is usually unclear at the early stages. For the lucky few that have found an obviously large opportunity with a relatively benign competitive environment they should go all out and raise as much money as they can. Wonga springs to mind as an example of such a company at the moment, as does our portfolio company Neul, albeit at an earlier stage. The rest of startups should size their fundraisings to allow their investors to make a decent return at an exit valuation commensurate with the opportunity size which can be credibly defended at the time of investment. (Note, opportunity size shouldn’t be the only driver of round size, Nicholas Lovell wrote more about this as part of our 50 Questions Series: How much money should I raise?, and Why too much money will kill your company )

This advice isn’t always terribly popular. Taking a pragmatic and realistic view of the opportunity size today is sometimes mistaken for a lack of ambition or a lack of belief in the entrepreneur/company vision. This is a particular problem when other VCs are routinely advising companies to shoot for the moon, but it is crystal clear in my mind that for many companies raising a couple of million and preserving the possibility of a profitable $30-50m exit is the right strategy. By all means plan to step up the ambition once the opportunity size is proven, but don’t lose site of the fact that exiting at that level is a great success that only a few entrepreneurs pull off, and will most likely be very lucrative for founders if they haven’t raised too much money.

So I was pleased to see this morning that Dave McClure thinks about things in a similar way. In a post titled Niche 2 Win, Baby Dave wrote the following:

Most startups think they have to be AWESOME to succeed.

Actually, this is quite far from the truth – in fact, you can be incredibly mediocre and still be quite successful. (sounds inspirational, i know, but stick with me for a minute.)

The secret is to find your Niche – that is, the initial customer segmentation / product differentiation combo that enables you to beat your more established, mature competition with a much crappier product.

This strategy is called “Niche to Win”.

Most VCs (especially those with limited operational marketing experience, or in a few cases, those with too much good fortune with big wins) have no understanding of this. They commonly and foolishly advise founders: a) “You’re thinking way too small”, or b) “Your market isn’t big enough for us”, or (sorry Vinod i know you mean well but i don’t agree) c) “We only fund Ambitious Entrepreneurs who want to Change The World”.

While this perspective isn’t completely irrational coming from large-fund VCs (>$250M+) who need big exits & returns to satisfy their LP investors, it’s incredibly unhelpful in the short-term for entrepreneurs just getting started, who may be a year or three from understanding their mature market opportunity.

I think this is a really important point and one that is not widely understood. Whether it is ‘niche to win’ or matching the ambition with the opportunity the key is that success comes in many guises and it isn’t always appropriate to be shooting for a $1bn outcome.

DFJ Esprit leads $5m round in Lyst

By | Announcement | No Comments

We announced yesterday that DFJ Esprit has led a $5m round in Lyst, fashion’s leading social commerce platform, or, for those of you who prefer plain English, Lyst is a social shopping site where consumers discover and buy fashion. We were joined in the round by Accel, Alex Zubillaga and Venrex. Techcrunch and TheNextWeb did two of the best write-ups.

As regular readers will know, at DFJ Esprit we’re believers that Facebook and other communication and time wasting oriented sites are running out of room to grow in terms of new users or additional time on site for existing users. Going forward the exciting area for growth in social will be services which leverage social data to help us do the things we already do better and more efficiently. In the case of Lyst that means:

  • bringing all your favourite fashion designers and retailers into one place
  • giving you a personalised feed of recommendations based on what you like, what your friends like, and what your favourite fashion bloggers are saying
  • having everything on the site available for purchase
  • alerting you when items you have added to your ‘Lyst’ (i.e. favourited) go on sale

Fashion is a huge market and anyone with an interest in the space will know that there are a huge number of startups trying to make a piece of it their own. Even within the narrower social fashion space there are lots of competitors. Lyst stands out from the crowd because of their tight focus on commerce. Uniquely, Lyst has great metadata which allows them to optimise the experience for purchases, with pricing, stock information (including sizing), and an effective search function.

Lyst also stands out from the crowd because of its momentum. The company is pretty tight-lipped with its numbers but they have said that sales have doubled every month for the last three months. I will add that the April figures weren’t too small. I like it when we find companies with good momentum and invest to help them accelerate.

Next is the team. Lyst was founded by Chris Morton and Sebastjan Trepca, who are first time entrepreneurs with enormous potential. Chris was formerly a VC at Benchmark Europe (now Balderton Capital) where he got exposure to a large number of startups, worked with a number of fashion companies, and saw first hand what success looks like. My favourite story about Chris is that in the early days of Lyst he hustled his way into a relationship with Net-a-Porter by becoming a menswear model. Seb was almost part of the DFJ family before we made this deal because he used to work at our portfolio company Conversocial, we weren’t able to keep him there, but we’re thrilled to have nabbed him now. I think these guys will go far.

Finally, some of the other fun bits and pieces that make us excited about Lyst:

  • Everyone wants to work with them. Lyst’s roster of partners reads like a who’s who of the fashion world including big names for design and retail like Gucci, McQueen, Net-a-Porter, Neiman Marcus and Barneys. In all they have admitted hundreds of partners to the site and there is a queue of applicants that will take six months to process.
  • Everyone wants to work for them. They have made four hires in the last month and it’s been great to see the high quality of candidates that have been attracted to the business.
  • They are on the leading edge of social – Lyst was a Facebook open graph launch partner earlier this year and now has a Pinterest integration which is working amazingly well.
  • Lyst is also a big data play – they are pulling data from over 3,000 fashion bloggers giving them real time data on localised trends
  • The best is yet to come – good things are happening at Lyst, and there are a lot of obvious things which should accelerate growth, perhaps the most obvious of which is to release a mobile app.

If you are into fashion, go and sign up.

Shift from PC to mobile faster than expected

By | Mobile | No Comments
[Update: typo in title corrected]

Mobile is growing partly because it is expanding our use of computing and partly at the expense of desktops and laptops. PC sales data out yesterday shows that PC substitution, the second the driver of growth, is happening faster than expected.

As you can see from the tables below global PC shipments in Q2 were flat on the year before, meaning that in aggregate PCs are not participating in any of the growth in computing globally, and in the US PC shipments were down 11% in the same period. The US is one of the worlds most developed markets in computing and where the US goes I would expect the world to follow.

Analysts at IDC had expected PCs to fare better, predicting global shipments to grow 2.1% and the US decline to be 6%.

Adoption of new technologies typically follows an S-curve:

Chart 1. Technology Adoption Stages

I think we around the knee of the curve in mobile now. Exciting times ahead.

Everyone is extolling the virtues of ‘simple’ on mobile – but how simple should simple be?

By | Mobile | No Comments

The meme on mobile at the moment is definitely ‘keep it simple’. My newsfeed today was full of bloggers reporting on Dave Morin’s talk at MobileBeat where his message could be summarised as ‘mobile needs to be simple, but it takes great design to make simple work’. He also said that v1.0 of Path didn’t work because it was too complex. For those that don’t know Morin is something of a celebrity entrepreneur, having worked at Facebook from early on, at Apple and now founded private social network Path which is backed by some top VCs.

Fred Wilson was saying the same thing a couple of weeks back when he wrote that ‘Mobile does not reward feature richness’ and predicted that Facebook will break it’s mobile offering into a bunch of small apps.

When I was thinking about this post I flicked through the home screens on my Android (I have four now, it’s time for a tidy up) and found that bar one, all the apps I use daily are single purpose, with one pretty repetitive user action:

  • Email – reading, replying, composing, and filing email
  • Calendar – managing my diary
  • Chrome browser – browsing
  • Financial Times – reading the daily news as written and curated by the FT
  • Taptu – reading daily technology and chelsea news from a list of blogs I curated
  • Bloomberg – check the stock markets and share prices
  • WeatherPro – check the weather every morning so I know whether to ride my bike and what to wear
  • Google Maps/Waze – finding my way around
  • Hailo – book taxis in London (I’ve been using this a lot recently but now my achilles are better and I’m back on my bike I will be taking cabs less often)
  • Kindle – reading my book

MyFitnessPal is the exception to this rule. I use it daily, but it’s a pretty rich app with tabs that allow recording of food diary, exercise, personal measurements and viewing of charts that show progress. That said, circa 90% of my usage is for the single purpose of recording my food diary, and the other 10% is recording my exercise, the other features are complicated to use and not really necessary on mobile.

Look at this list a little closely though, and it becomes clear there is a level of complexity in all the apps.

Email is a good example. Calendar, It is simpler than on the desktop because calendary, contacts, tasks and plugins have been stripped out, but it is more than single function. Single function would be to read emails, but the app also allows for replying, composing and filing. The email experience on mobile is optimised for reading, but with a bit of patience you can figure out how to complete the other activities pretty efficiently (although filing could be much better – I’d love for the app to guess where messages should go, Blackberry have been doing this for years, so it can’t be hard).

Something similar can be said about many of the other apps I use. On Taptu (one of our portfolio companies) I occasionally save articles to Instapaper and share them on Twitter and email, and I periodically update the blogs included in my feeds. Those advanced features are a large part of the value I get from the app, but the whole thing only works because I get blinding fast access to my news feed every morning.

It seems the key to mobile design then is to optimise the experience around a single simple action but allow access to a small number of other features that are key to the mobile experience. These features will most likely be the one your advanced users love to use.

New study–percentage of population interacting with brands via social media doubles in eight months

By | Social networks, Social software | No Comments

The rise and rise of social media has been the biggest story in the startup world over the last decade, and one of the biggest stories globally full stop. I think that over the next ten years the story will shift from the rise of social media platforms themselves to how we use them to our advantage in just about every area of our personal and business lives. This belief underpins our strategy of investing in companies that help enterprises leverage social media which has led to investments in Conversocial (customers service over social media) and RadiumOne (social advertising).

That investment strategy received a boost this morning from new research from Fishburn Hedges which found that 36% of UK consumers have interacted with companies through social media, up from 19% eight months ago. This tells me that social media is rapidly becoming more pervasive and that there is still significant room for growth.

The research also found that 65% of the people who used social media to interact with brands believe it works better than call centres, and 40% of us believe that social media improves customer service.

They did sound a cautionary note though. Eva Keogan, head of innovation at Fishburn Hedges said:

Many people are currently enjoying the VIP treatment from brands on social media. As millions more catch on to this great route into traditional customer service channels, the challenge for brands will be maintaining the same level of service. Over the coming years, will Twitter become the next call centre? We are urging brands to think about this now, as there are some clear and simple ways to use these new customer service channels to great effect.

2,000 people took part in the research.

The five dysfunctions of a team

By | Startup general interest, Venture Capital | 11 Comments

For the last twelve years my professional life has revolved around two types of team – venture capital partnerships (~4) and boards of directors (~25). Both of these are challenging teams to get working well, I think because the team members often don’t do a lot of day to day work together and a lot of the relationship building has to be done during key meetings – partner meetings for VCs and board meetings for companies. That is a bit like learning to fly by piloting a passenger jet.

Just about all of the boards and partnerships have had periods when the team dynamics weren’t great, and the following passage from JP Ranagaswami is on the money as to the reason why:

I liked the simple message in Patrick Lencioni’s Five Dysfunctions of a Team. An absence of trust leads to a fear of conflict which in turns reduces commitment, which makes for an environment where people avoid accountability and thereby lead to poor execution.

So I clicked the link to find out more and found a list of the five dysfunctions:

  • Absence of trust—unwilling to be vulnerable within the group
  • Fear of conflict—seeking artificial harmony over constructive passionate debate
  • Lack of commitment—feigning buy-in for group decisions creates ambiguity throughout the organization
  • Avoidance of accountability—ducking the responsibility to call peers on counterproductive behaviour which sets low standards
  • Inattention to results—focusing on personal success, status and ego before team success

As you can see from the quote from JP the five dysfunctions are linked which makes it difficult to break out of a cycle of poor team performance and make improvements. The beauty of frameworks like this is that they offer a way to analyse and describe the malaise and hopefully go on to fix it.

On company boards and at VC partnerships the most common dysfunctional behaviour I have observed is seeking artificial harmony by avoiding discussion of difficult issues. The difficult discussions are often avoided because there is uncertainty as to how different members of the team will react – i.e. there is a lack of trust.

I think the trick is to only get involved with people you trust, to be as clear and as rigorous as possible about the teams objectives and everyone’s responsibilities, and to then have the courage to start and persist with constructive debate, even when it’s difficult. Where there is an absence of trust the priority should be to re-establish it, but ultimately if partners don’t trust each other, or company directors don’t trust each other then it is questionable whether they belong on the same team. Sometimes the lack of trust stems from a lack of confidence in professional ability, and sometimes it reflects incompatible personalities, either way it should either be resolved or recognised and dealt with.

I wondered if getting the list of the five dysfunctions would save me from adding another book to my ever growing list, but the reviews on Amazon say that Patrick’s book has tools and exercises to diagnose and fix the dysfunctions so I’ve bought the Kindle copy. If there is more goodness to come from reading the book I will write about it here.

The importance of being in the same room–familiarity breeds trust

By | Startup general interest | 4 Comments

I came across an interesting article this morning from academics at MIT who have been researching the importance of face time in the office for over a decade. Their research suggests that people who work remotely get lower performance evaluations, smaller raises and fewer promotions. This is the key paragraph:

Companies rarely promote people into leadership roles who haven’t been consistently seen and measured. It’s a familiarity thing, and it’s a trust thing. We’re not saying that the people who get promoted are stars during every “crucible” moment at the office, but at least they’re present and accounted for. And their presence says: Work is my top priority. I’m committed to this company. I want to lead. And I can.

This is interesting to me because the concept of ‘face time’ stretches beyond remote working and performance evaluations to building trust generally. The high level of uncertainty at startups makes trust between team members particularly important and this research is a reminder that trust follows face time. Most of our portfolio companies open international offices in the US and many of them have development in eastern Europe and encouraging travel between the different sites is the key to getting the face time necessary to build trust and help keep everyone pulling in the same direction.

Recruiting tips

By | Uncategorized | 4 Comments

I do just about all my reading on the Kindle app on my Samsung Galaxy Nexus these days. The 4.65in screen is big enough to read from comfortably, so much so that I use it at home in my bedroom when my Kindle is just across the room. I prefer it to the Kindle for a number of small reasons (the phone is always with me, no need to synch, backlit screen, better UI) but the killer is the touchscreen. Highlighting interesting passages is now very quick and when I finish reading a book I check back through my highlights to get a reminder of the bits I liked best. Best of all, these are saved forever (or at least for the life of the Kindle format…).

I’ve just finished reading The Rare Find: Spotting Exceptional Talent Before Everyone Else which I highly recommend to anyone who has to do a lot of recruiting. These are the best nuggets from the book from a startup perspective, as culled from my highlights:

  • Compromise on experience; don’t compromise on character – this is especially true for startups when budgets are tight
  • Rely on auditions to see why people achieve the results they do – use presentations and other real work simulations in the recruitment process and if possible find a way to work with people before you commit
  • Most of us dodge the hard work of extracting lasting truths from the zigzags of our own careers. We don’t want to know why we stumbled at certain points. We may not even care to pick apart our successes that much much. We would rather settle for a soothing narrative – revealing little about the real reasons for success or failure – instead of staring at the raw truths of why some people achieve great things and others didn’t …. It takes a special sort of courage to revisit the critical junctures in our lives, and to look at them calmly and with clarity. Why bother? The answer: because that is where insights are born – startups are unpredictable and hard to understand and people with the courage and ability to find the real reasons for success and failure are a huge asset
  • It’s not enough to know that a candidate .. can deliver .. a successful performance. It’s far more important to understand the path that particular candidate travelled to achieve that result. Some paths are built on durable habits that will lead to many more good results. Others involved flawed choices that may work for the moment, but already contain the seeds of future trouble – it isn’t the quality of the decisions made previously that counts, it is the quality of the decisions they will make in the future that need to be assessed
  • Bosses need to be clear thinkers, decisive actors, powerful builders of teams, and morally sound leaders – these are more important than a rock star CV
  • Among the professors’ conclusion: traits such as organisation, aggressiveness, commitment, persistence, proactiveness, setting high standards and holding people accountable were especially closely tied to later success in leading companies owned by private equity firms. Meanwhile traits such as teamwork, flexibility, and being open to criticism were less valuable – venture backed startups are more fluid and typically benefit more from supportive cultures than private equity backed companies, but this is interesting none the less
  • Being able to see people’s potential is especially important in smaller scrappier organisations – when budgets are tight think about what can go right and hire for potential
  • The more you know about your core values the easier it will be to shrug off flaws that don’t really matter – mission statements, values and a clear sense of culture bring clarity to the search for talent
  • Draw out the “hidden truths” of each job. It’s unnerving how many talent hunts go astray because no one ever makes a brave, clear-headed call about what the job really requires – this is particularly challenging at startups where roles are fluid and founders often morph their jobs to fit round new hires, the key is to make sure nothing important is being ignored, including latent conflicts of opinion about the role being hired for
  • When you are an aggressive listener, you interview candidates differently. Once you get past the initial pleasantries, you don’t ramble or try to make friends. You stay focused and intensely interested, but not “palsy”. Zero in on the issues which matter most to you, which usually relate to the candidate’s core character. Ask a lot of follow up questions. Keep digging.
  • Resilience – often the ability to recover from setbacks is what separates people who surpass expectations from those who disappoint – especially in startups where setbacks are frequent and often have the potential to be fatal
  • Curiosity is invisible on many resumes yet it is a remarkable talisman in many careers – again, especially at startups where there is no rulebook to play from and the path forward has to be invented
  • Efficiency is another oft-overlooked virtue – at least I think so, but that might be because I pride myself on my efficiency…
  • Self-reliance rounds out the list – in more ways than one..

The Rare Find is a great book. I feel a bit guilty quoting from it so liberally. Hopefully some of you will go buy it. You can read my review on Goodreads, I gave it four stars.

Get Funded/50 Questions you should ask before raising venture capital – the journey from a series of blog posts to a book

By | 50 Questions | 6 Comments

Regular readers will be well aware that through 2011 and into early 2012 Nicholas Lovell and I were writing a series of 50 blog posts designed to help entrepreneurs with the fundraising process, and that we intended to publish them in book format once we were finished.

This is how we described our aims for the series at the outset

Our hope is that the posts (and eventually the book) will be a good resource for anyone who is thinking about how to finance their company and who wants to understand more about the options, including venture capital.  The posts will assume very little, if any, prior knowledge and should be useful to everyone from newbies to the industry to those who have been around venture capital a fair bit and have a decent understanding, but are a bit hazy around the edges on some of the more detailed points e.g. ‘weighted average anti-dilution’ or ‘1x participating preference share’.

I think the posts deliver pretty well on this objective, but our challenge now is to make them into a book. Nicholas and I want it to be a book we can be proud of and that means doing more than putting the blog posts back to back with an introduction and some nice cover art. A good non-fiction should be interesting and take the reader on a journey, just like a novel.

The first thing we wanted to do was decide on a name, and so far we are liking “Get funded”, with a subtitle TBD.

The second (and much larger) challenge is finding a narrative structure for the book to hang the posts off. We are thinking that following the journey of a founding team from company formation through raising venture capital and then back to getting on with building his or her business could work well. We could split that journey into the following stages:

  1. Three friends sitting round a table in a pub thinking of business ideas, and then agreeing to start a company
  2. Having got started with £50k from their parents they set down to figuring out how to finance growth going forward – considering the pros and cons of VC
  3. Learning a little about raising venture capital it first sounds like the answer to everything, then begins to look like a daunting task
  4. They get to know a few people, maybe a VC or two, decide they understand what it means to raise venture capital and elect to go for it
  5. The process starts well, then stalls
  6. They change tack and then get offered terms following a piece of commercial success
  7. The deal almost dies during due diligence
  8. The round closes, champagne is drunk
  9. 8am the next morning they are back in the office delighted to be done with the fundraising, but daunted by the challenge of delivering the plan they have agreed with their new investors
  10. Fast forward twelve months and the founders are back in the same pub deciding to raise a Series B, but feeling older and wiser this time round

Our hope is that entrepreneurs at any stage in their fundraising process will be able to quickly find the section that corresponds to where they are and helps them figure out the best way forward. Raising venture capital can seem like a hard and complicated process and the journey from start to finish is often marked by quick shifts from elation do despair. VC is a very opaque industry and it is difficult for most entrepreneurs to know why VCs do and don’t take meetings and then decide to invest or not invest, and each little bit of progress or each little setback often assumes more significance than it deserves. Our aim is to make the whole process simple to understand and help reduce the emotional volatility entrepreneurs experience through the journey.

The next step is to match the posts we’ve written to this narrative structure and confirm that it works. So far I think it does, but this is new territory for me, so all thoughts welcome.