Monthly Archives

October 2012

Return profile of VC investments shows why home runs are key

By | Exits | 9 Comments

One of the world’s larger investors in venture capital recently shared data with us about the multiples they have made on over 5,000 companies they had stakes in via their LP investments in US VC funds. I’m not sure the extent to which they are happy with the information being made public so I’ve rounded the numbers and won’t mention their name. None of this alters the story which is that the data shows clearly why VCs want to make sure that every investment has home run potential.

This LP is one of the more successful ones, they have positions in many of the top funds and have achieved a very comendable IRR from their investments in venture funds (well north of 20%, which is great as an average). So think of the following as the profile of a successful fund rather than an average fund. Additionally, this analysis only looked at the companies which have exited, ignoring thousands of positions in companies that have yet to exit or go under. They said that they don’t believe this skews the data.

So, to the data.

The headline is that they received 60%+ of their returns from just 10% of their capital which was invested in companies that achieved home run exits of 5x or more. The average exit multiple in this homerun set was 16x.

This makes it very clear that unless a business can achieve a 5x+ exit, and maybe up to 16x+ then it isn’t likely to contribute meaningfully to the returns of a fund. Hence VCs target these sorts of exits on every deal.

Exceptional returns on the winners are, of course, necessary because of the large percentage of losers. In their sample 50%+ of capital was invested in companies that returned less than the original investment, and the vast majority of that 50% was invested in deals where all or nearly all the money was lost.

The remaining capital (nearly 40%) was invested in companies that achieved OK multiples of 1-5x. These accounted for 30%+ of the returns and are therefore an important part of the mix. Companies that achieve these kinds of returns are often in less sexy sectors (or sectors that didn’t turn out to be as sexy as everyone hoped) and can be harder to exit. Disciplined VCs work hard to make sure that they do find a home so they can get the capital back to their investors.

Remember that if these investors don’t make good returns then they will stop investing in VC funds and a large part of the startup ecosystem will grind to a halt.

Great to see Facebook succeeding on mobile

By | Facebook, Mobile | 4 Comments

As you may have seen Facebook announced their Q3 results yesterday, revealing 14% of their ad revenues came from mobile. This was ahead of analysts expectations and helped drive their shares 13% higher in after hours trading.

Since the advent of the web it has been harder to make money out of publishing. A few have succeeded with novel cost and revenue models (Huff Post and Techcrunch spring to mind) but many have struggled because banner ads don’t pay much and startups took away big revenue streams like recruitment and classifieds that were no longer tied to content by physical distribution. It is often said that analogue dollars have been traded for digital pennies.

The rapid rise of mobile over the last year has exacerbated the problem. Small screens on smartphones don’t leave much space for adverts and everyone has been wondering how much worse it will become for publishers to generate revenues. People interested in this debate have focused their attention on Facebook because it is the world’s biggest publisher and because its customers are rapidly transitioning to mobile. The fact that the shares bounced 13% on the back of good mobile news in an otherwise solid but not inspiring set of results shows how worried investors were about this issue.

Facebook’s success in monetising mobile is good news for publishers everywhere, who will now be more confident they can repeat the trick on their own properties. It’s not all cookies and ice cream though. It is early days, but Facebook is monetising mobile at less than half the rate of computers (mobile is 33% of traffic but generates only 14% of ad revenues).

I expect that the potential for monetising mobile will improve going forward, for Facebook and for other publishers. There is some talk that there are too many ads on Facebook’s mobile apps, and that as many of 50% of clicks on mobile ads are accidents, but experimentation with new ad formats and improvements in targeting to improve yields, and the natural uplift in effectiveness as it becomes easier to transact ecommerce on mobile will more than compensate and keep the sector moving forwards at a rapid pace.

50 Questions: How soon should I start raising my next round?

By | 50 Questions, Startup general interest, Venture Capital | No Comments

As you may recall Nicholas Lovell of Gamesbrief and I have been writing a series of 50 blog posts which we will then publish as a book designed to help entrepreneurs navigate the sometimes tortuous process of raising money. Our hope is that readers of our book will find a straighter and quicker path to getting cash in the bank.

You can find the original 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.


Much as a good blogger should always be posting, a good entrepreneur should always be fundraising. The best deals on both sides come when a good relationship has been built between investor and entrepreneur, and calling a total halt to engaging with investors only to surface again when you want money is no way to build a relationship. Remember that VCs invest in lines not dots.

So the question then, is not when to start and stop fundraising, but when to dial up and dial down the effort, and what to do at each stage.

I like to think of fundraising as having three different phases, a keeping the relationship ticking over phase, a warming up phase, and a full on fundraising phase.

Keeping the relationship ticking over is about maintaining occasional contact with 10-15 of your favourite investors. Good ways to do this include turning up to events where they might be present (particularly if you have organised the event or can get a speaking slot), helping them evaluate deals and people, engaging on social media, getting written about in press that they read (e.g. Techcrunch), and sending occasional emails announcing your good news. None of this should take too much time, and try to include some of the more personal methods (the first three on the list).

In the warming up phase you meet VCs to remind them why you are important, update them on your progress, tell them a round will be coming, and gauge their interest. You are in listening and learning mode. In this phase you will build a shortlist and get feedback on how you tell your story. If you are a hot company enterprising investors may try to beat the competition and seek to invest before you enter the full on fundraising phase. Happy days.

In the full on fundraising phase you prepare a formal fundraising presentation, go see investors and pitch your heart out. In the first meeting you should look to qualify out those that are unlikely to invest and understand and progress the process to get a termsheet from the others (more detail on this here). Each subsequent meeting should have a similar objective.

I wrote before that the average European company should allow 6-9 months to raise capital, and I still think that’s about right. In the US it’s 3-6 months, but processes take longer here, largely because there is less capital in the market. Some deals close more quickly of course, but unless you have lots of investors telling you they are keen to invest it would be a mistake to rely on that. That means moving into the warming up phase 6-9 months before you run out of cash. Hot companies with good investor networks can figure on the lower end of the range.

Thinking big and doing stuff properly

By | Startup general interest | 9 Comments

I’m just back from an inspiring few days at Dublin Web Summit and then F.ounders, both in Dublin. Many of the conversations and talks there revolved around the importance of having big ambition and of doing quality work. Paddy Cosgrave’s F.ounders and Web Summit are great examples of both. Delivery of high quality conferences characterised by an extraordinary attention to detail have enabled them to grow in three years from nothing to 4,000 people in Dublin last week and conferences around the world, and they have ambitions to go much further.

The notion of big ambition is an interesting one. It’s important but sometimes misunderstood, and occasionally gets in the way of success.

A reminder of the pros. Big ambition should equate to a big opportunity to make a difference to the world and to make a lot of money. That’s exciting and motivating for founders, and makes it easier to enlist support for your mission from investors, new employees and customers and will get you talked about on blogs and at cocktail parties. Powerful stuff.

But big ambition on its own isn’t enough. Without a credible plan to get there it’s just talk. The emperor’s new clothes, if you will. Focusing too much on the big vision and too little on the plan is an increasingly common mistake at startups. Big visions are fun to work with, everybody wants to talk about them, they get you invited to talk at conferences and meet with investors. Working on the plan is harder work. It’s the daily grind of working out the detail of what customers want today and how to sell it to them, it is thinking through the knotty issues that might turn out to be roadblocks. This work is at least as important as the big stuff. The plan will iterate and change as the company develops but unless you have a good one you don’t really know if your big goal is achievable or even if the steps you are taking today are taking you towards it.

So far I might just be talking about good execution, but there is more to it than that. The best companies combine big ambition and a great plan with a commitment to quality. This is what I mean by ‘doing stuff properly’ – it is really getting inside the mind of customers and going the extra mile to really delight. Good examples include Zappos’s legendary customer service, Steve Jobs’s almost maniacal obsession with great product design, and, as many of us were saying in Dublin at the weekend, the way Paddy and his team worked hard to make every element of the F.ounders experience top notch.

I will elaborate a little on F.ounders as I think the idea of bringing an Apple like obsession with detail to a service product is interesting. Much like Apple has worked on every element of the customer experience from retail stores to packaging (with the exception of iTunes…..) everything at F.ounders had been thought through and done well. That started with having a team at the airport who greeted everyone and organised transport into town (the Apple ‘open the box’ experience) and included high quality guests and speakers some of which were unannounced (e.g. Bono), dinners in interesting new places, thoughtful seating plans to make sure everyone met everyone else, and small details like printing a book of photos for all the guests in time for distribution at dinner on the final night.

The final thing I want to say about big ambition is a little counter-intuitive. In today’s fast moving markets it’s often hard to know at the outset just how big your true opportunity is, and the smart play is not to let your investment get too far ahead of your current best guess outcome (note best guess, not best case). Betting too early on a billion dollar outcome and building up a big liquidation preference can turn what would otherwise have been a decent success into a failure.

The trick, of course, is to find the right balances between big vision and focus on execution, between quality and cost/efficiency, and between really going after your dream and getting too far ahead of reality. Signs that you might have got the balance wrong include people being impressed with the detail of what you are doing but not getting excited (not enough ambition) and lots of people getting excited about the vision but poor conversion into employees or customers (plan not strong enough).

The winds of change: consumer Internet and software investing

By | Exits, Venture Capital | No Comments

I was on a panel at the excellent Dublin Web Summit yesterday where we discussed the balance of VC interest between consumer internet and software companies. My perspective is that for most of the last five years the balance was shifting in favour of internet, but in the last year or so software companies have been getting an increasing share of attention.

I think the main drivers have been poor share price performance at many leading consumer internet companies and the continuing good performance is SaaS stocks. VCs think about exits when they make investments and over the last year it has become harder to believe in big Internet exits whilst SaaS exits have more than held up, particularly if you include M&A.

This doesn’t mean that consumer internet investing will stop or that there will be no more big Internet exits. It means that at the margin investment dollars are moving out of internet into software. If share prices at SaaS companies suffer, and they are very highly rated, then we will get the next shift.

Smart VCs are, of course, trying to predict the next shift and investing based on where they think the exits will be in 3-5 years rather than where they are today.

1bn smartphones today, 2bn in three years

By | Startup general interest | No Comments

News broke yesterday that there are now more than 1bn smartphones in use. It took sixteen years to get to the first billion and analysts forecast the next billion will come in three years.


There are  a couple of interesting things about this news. Firstly and most obviously the market for mobile services is huge and growing at an accelerating rate, putting a strong tailwind behind businesses in this sector. When I’m talking about our portfolio company StrikeAd, which operates in the realtime mobile advertising ecoystem I like to quote Mary Meeker’s statistic that 10% of media consumption is on mobile, but only 1% of media spend. A doubling of smartphones in the next three years suggests that will move to 20%, and that is without taking into account the effect of improving networks and devices.

Secondly it’s a great example of the accelerating pace of change. Sixteen years to the first billion and less than 20% of that time to get to the second billion. Even if you take the very conservative position of saying that smartphones started with the launch of the iPhone in January 2007, the increase in the pace of change is still dramatic. Also interesting is how much faster we have adopted smartphones than just about any other new technology – nearly 5x faster than the computer, and 10x faster than the telephone. Curiously, the television was adopted at a similar rate to the smartphone, which is remarkable given how long ago it was invented.

This increasing pace of change makes speed and flexibility increasingly important, playing to the core strength of startups as they compete with large corporations. At the same time the cost of innovation is declining making the balance sheet strength of large corporations less important.

Four reasons why Facebook chose London for their first non-US engineering centre

By | Uncategorized | One Comment

Today Facebook opened it’s first non-US engineering centre in London. That’s great news for the startup ecosystem here because it will make it easier for the world’s largest social network to build partnerships and make acquisitions in the UK, and because over time it will increase the flow of ex-Facebook engineers into UK startups. Facebook have had a presence in London for some time now, and Christian Hernandez has done a great job of building connections with the startup and investment community, and I imagine that the same partnership processes will remain in place, but unofficial connections via developers are a great compliment to official channels.

I was also pleased to read their list of reasons for choosing London:

  • London’s strengths in mobile, particularly Android
  • London has the world’s second largest concentration of Facebook-registered third party developers
  • High density of PhD level machine learning experts
  • London is a desirable place to live and work, so people will relocate

As we work towards building a large and thriving ecosystem in London it’s helpful to know why others find our city attractive and the technology areas in which we have advantages. We compete with some much larger startup hubs and it’s important we play to our strengths.

Cascading targets through a business

By | Startup general interest | 9 Comments

I’ve long been a fan of the CEO setting top level goals for a startup and then having those goals cascade down through the business with each function head setting more detailed goals for their department which in aggreagate add up to the CEO’s goals, and then each employee setting still more detailed individual goals which add to the goals set by their function head. I’ve found this to be a great way to make sure the whole company is pulling in the same direction, and to be particularly helpful when a company wants to quickly align around a new objective (typically fixing a pressing problem – e.g. if churn gets out of control).

In the fast moving world in which most startups live it is helpful to set these targets on a quarterly basis. Monthly doesn’t allow enough time to change behaviour and deliver against a target and too much changes within a year for that to be the right time period. There shouldn’t be too many targets, three or four per person is a good number. For the CEO and overall company these will typically include something related to traction (usually revenue), a tech/engineering objective, a marekting objective and an operations or customer focused objective.

Objectives should be SMART. If you don’t know what that means go read the link. It’s important.

Around a year or so ago it became popular to make these targets very aspirational, i.e. to set them so high that getting two thirds of the way there would be a good result. I’m sure that can be made to work, but my experience across a couple of companies now has been that aspirational targets are more confusing than helpful. The value of targets is that they bring clarity and accoutability, and there is more clarity and accountability with a single number that should be beaten than when there is a range of acceptable outcomes. This will end up with lower aspirations in the short term, and occasionally that might result in smaller outcomes, but in my opinion this risk is more than offset by the benefits that come from absolute clarity. I’d be interested to hear from anybody with a different experience.

Running a business with cascading targets renewed every quarter takes discipline. It takes time to come up with targets that are meaningful and it takes a concerted effort to make sure that missing matters, but matters the right amount. Without these disciplines setting targets does more harm than good.

Geolocation changes the social contract

By | Startup general interest | 4 Comments

Techcrunch has a good post up today pointing out that geolocation makes it much harder for people to lie about where they are, which in turn changes our social contract a little. This is the key passage:

Lying’s a lot harder than it used to be. Examples — Boss: “Where are you?” Employee: “On my way to the office.” Boss: “Show me.” ||| Mom: “Where are you?” Son: “At Jimmy’s house” Mom: “Show me.”

With geo-coded messages, you have to be where you say you are. Whether it’s a parent, employer, or spouse, anyone with a little power over you can demand you verify your location.

Sometimes you’re running late. Sometimes you aren’t where you’re supposed to be. You might be still in bed when your boss calls, or a kid could be biking through the night with their little hooligan buddies when they were supposed to be safe asleep at a friend’s house.

But until recently, the only thing someone had to go on was your word. They asked you over a voice call where you were, you told a little white lie, and then rushed to be where you said you were before they found out.

Now, someone could request a screenshot of your blue dot on your mobile map. Or that you send a geo-coded Facebook message that shows your current location. Hell, they could force you into a video call and request you to show the traffic you’re supposedly stuck in, or the house you’re supposed to be at.

Whilst in theory people could simply say ‘no’ and regulators might make it illegal for bosses to force employees to reveal their location in practice many people in trusting relationships will choose to share, often by default, makng it difficult for others to say no. Refusing to share will be grounds for suspicion. 

As Techcrunch says, “like it or loathe it, this is a new social contract we will have to get used to”. What they don’t say is that we have had one iteration of this change already. Mobile phones have only been around for 20-30 years, and before that it was even easier to mislead people about your location. Nowadays background sound is a big clue.

Last week I wrote about how social media is demanding a change in the way we judge people, which is really another example of technology changing our social contract. I chose to make a similar point again today because many people resist the idea that developments in technology should force them to abandon elements of their social contract that they are happy with and have served them well for years. There is a sense that social contracts shouldn’t change, whereas in practice they have been evolving in response to changes in technology for at least the 300 or so years since the industrial revolution. As examples, the newspaper, the radio, the cinema, the television, the PC, computer games, and most recently social media have all had profound effects on how family life is organised. Most often those changes were frightening to large elements of the population at the time, just as many are worried about geolocation and social media now. I think that people will eventually get used to the change in social contract around geolocation just as they did when mobile phones first became popular and all the new media formats listed above were introduced.

Friday fun: Monkeys get wet

By | Startup general interest | 2 Comments

I saw this on Quora last night and thought you all might enjoy it.

Source: * Stephenson, G. R. (1967). Cultural acquisition of a specific learned  response among rhesus monkeys. In: Starek, D., Schneider, R., and Kuhn,  H. J. (eds.), Progress in Primatology, Stuttgart: Fischer, pp. 279-288.

There is a serious point for startup entrepreneurs here though, which is that a lot of accepted best practice stems from times when things were different. Trying to work everything out from first principles takes too long, but selectively innovating in high impact areas where best practice has become outdated is a great way to create value.