Monthly Archives

December 2013

Robots and artificial intelligence are replacing jobs

By | Startup general interest | 7 Comments

Manufacturing output vs jobs

This chart shows that manufacturing has become decoupled from employment and explains why people are predicting that half of US jobs could be done by computers. We are in for a period of considerable social dislocation.

As a society we’ve been through these sorts of changes before, most notably with agriculture which used to employ c100% of the population and now employs 2-3%. Every time so far there has been a difficult period during which politicians got excited and society changed, but ultimately new jobs emerged to fill the gap. The transitions weren’t easy, but they were ultimately completed successfully. Some people are arguing that this time round things are different, largely because the jobs are being destroyed faster than during previous transitions and that there won’t be enough time for new jobs to be created.

My thinking on this subject has a three strands:

  1. Whether you view this development as desirable or undesirable there is no stopping it. Technological progress will continue at pace and attempts to stop it by individual governments only succeed in forcing innovation overseas, and slowing innovation and hurting the economy locally. Witness what happened when Bush banned stem cell research in the US.
  2. The next twenty years will be a disruptive time in our society and there is a risk of continued high unemployment as whole industries become automated. Governments would be well advised to anticipate this by extending retraining and back-to-work programmes (and potentially adopting more redistributive taxation policies), but either way people will eventually find new productive things to do and the economy will re-adjust.
  3. After that adjustment the world will be a better place as more of us will be doing more interesting and rewarding jobs whilst the machines do more of the dull repetitive stuff.

In summary we are headed to a better place, probably much better, but getting there will be difficult and we would be well advised to accept that there is no choice but to embark on the journey and to prepare well.


Some lessons on startup financing from Tren Griffin and Nassim Taleb

By | Exits, Startup general interest, Venice Project | No Comments

Nassim Taleb is one of the most visionary thinkers in modern finance. His books Black Swan and Fooled by Randomness are must reads for anyone in the investment business. Tren Griffin writes a good blog about investing, and this post is inspired by his article A dozen things I’ve learned from Nassim Taleb about optionality/investing. Thanks to Josh March for the pointer.

Griffin and Taleb’s main point is that we should all seek investments which offer high optionality. He explains why in his first bullet:

1. ”Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).”  Venture capital, when practiced properly by a top tier firm, is a classic example of a business that benefits from optionality. All you can lose financially in venture capital is what you invest and your upside can be more than 1000X of what you invested.  Another example of optionality is cash held by a disciplined patient value investor with the temperament to not buy until Mr. Market is fearful.  As just one example, Warren Buffett did exactly this during the recent financial panic and earned $10 Billion by putting his cash to work.  Seth Klarman, Howard Marks and other value investors use dry powder in the form of cash to harvest optionality since Mr. Market is bi-polar.

He later explains why venture capitalists build portfolios of risky options:

Warren Buffett believes:  “If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually- independent commitments.  Thus, you may consciously purchase a risky investment – one that indeed has a significant possibility of causing loss or injury – if you believe that your gain, weighted  for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but  unrelated opportunities.  Most venture capitalists employ this strategy.”

The corollary of this is that when valuations get too high, or the amount of cash raised gets too high then the asymmetry between the upside and the downside disappears. The optionality is therefore lost and the investment becomes less attractive. This is all from the perspective of the venture investor.

Interestingly though, I think things end up looking pretty similar for the entrepreneur. In this case the investment is largely in the form of time committed to the startup, and hence the downside is the time lost to other opportunities. Most entrepreneurs work as hard as they can to grow their businesses quickly and for the good ones the limits to growth are generally exogenous – i.e. they come from outside the startup, usually in the form of market readiness for a solution or the availability of enabling technologies – so there isn’t much that can be done to change the investment or limit the downside. There are however many important decisions to be made that change the probability profile of the upside, and following the Munger/Taleb logic they should be made to maximise optionality.

The most important of these decisions is how much money to raise. Many entrepreneurs seek to raise the maximum amount of money they can at the highest valuation possible at the earliest possible time, but that locks the company on the path of seeking a very high exit and looking through the lens of maximising optionality it’s clear that from the point of view of maximising founder returns it isn’t always the right thing to do. The examples are pretty obvious to think through. If after a $5m Series A a founder holds 30% of her company and then goes on to raise a $20m Series B at $60m pre-money her stake will drop to 22.5% but she will most likely now be sitting behind a $25m liquidation preference and have taken on new investors who want to exit the company for at least $240m (to get 3x on their investment). The probability of getting to a big exit will have increased but the commitments to new investors will have reduced the chances of getting a smaller exit and the amount of cash the founder gets from those smaller exits will have reduced, particularly at sub $50m exits when the lions share of proceeds will go to the preference holders.

The upshot of this is that in the situation where it’s too early to have real confidence in the big upside opportunity AND there is a viable go slower option raising the maximum amount of money at the highest valuation isn’t the smartest strategy.

Griffin puts it this way:

7. “[Avoid] companies that have negative optionality.” Companies (1) focused on a niche market,  (2) have employees with limited technical skills, (3) which raised too much money at an inflated early valuation or(4)  are highly leveraged are examples of companies with negative optionality.

8. “[Avoid[ A rigid business plan gets one locked into a preset invariant policy, like a highway without exits —hence devoid of optionality.”

Locking into arrangements that demand a high exit is a form of rigid business plan.

The dangers of viral growth

By | Uncategorized | One Comment

Pandodaily just published an analysis of The 20 most viral companies of the last decade. Only six of them are deemed ‘winners’ in the sense that they are still valuable properties today. Several more of them had good exits before ultimately flaming out, so in a way they won, but not in a way that is very replicable. So the big takeaway here is that, seductive as it might be, a spurt of amazing viral growth and becoming everybody’s darling often doesn’t get you very far. More important is to deliver real and enduring value to customers.

To get on the list companies had to have a short and distinct period of very rapid growth (this excluded Tumblr and LinkedIn which grew steadily for years), and to have enjoyed substantial PR and raised significant capital as the next big thing. Here’s the full list (I would probably order it differently and have included Facebook):

  1. GroupOn: Loss column
  2. Instagram: Win column
  3. Myspace: Loss column
  4. Pinterest: Win column
  5. Twitter: Win column
  6. Glam Media: Loss column
  7. Snapchat: TBD
  8. Slide and RockYou: Loss column
  9. Digg: Loss column
  10. Youtube: Win column
  11. Viddy: Loss column
  12. Second Life: Loss column
  13. Fab: Loss column
  14. Bebo: Loss column
  15. Buzzfeed: Win column
  16. OMGPOP: Loss column
  17. Ning: Loss column
  18. Groupme: Win column
  19. Loss column
  20. Chatroulette: Loss column

Have some empathy this Christmas

By | Startup general interest | One Comment

Happy Holidays everyone! I hope you had a great year, and thanks for reading The Equity Kicker.

I’m going to leave you with a short video and some thoughts on empathy, which Google defines as:

1. the ability to understand and share the feelings of another.

Empathy is a great thing to possess. In my book one of the greatest. It makes you stronger and kinder as a human being, and in many professions it makes you better work. Venture capital is one of those professions.

If you want to have more empathy then check out this three minute video. It’s funny as well as instructive.

For those who skipped the video, or who weren’t taking notes, empathy breaks down into four parts:
  • The ability to see things from another person’s perspective
  • Not judging
  • Recognising emotion in other people
  • Communicating that emotion

This breakdown is useful because as individuals we can work on improving ourselves at this level of detail, whereas simply saying ‘I want to have more empathy’ is hard to action. Not that any of these things are easy. As it says in the video choosing to  be empathetic is often a vulnerable response because it requires you to connect with something inside yourself that knows the feeling you are empathising with.

The need to build trust in ecommerce

By | Online retail | One Comment

This is the time of year when people love to publish lists. They mostly fall into two groups, the ’10 best XYZ of 2013′, or the ‘Top 10 ABC predictions for 2014’. I prefer the latter type and have just read Business2Community’s Top Ten 2014 eCommerce Trends. It’s a good list, and item no. 7 really got me thinking:

Buying decisions will be primarily guided by community

As more online shoppers buy products they have never seen in person from retailers they have never used before, they will increasingly rely on input from their digital peers to make their decisions. In 2014, expect to see traditional ratings and reviews supplemented with features that connect shoppers to community support networks.

Community is without doubt playing an increasingly important part in ecommerce, but the larger point here is the one that’s interesting to me. More shoppers are buying products they have never seen from retailers they have never used before. These shoppers will need to be given reasons to trust and believe in their online retailers. Good back story, authenticity, social proof, provenance, a friendly returns policy and good design are minimum requirements these days and tomorrows winners will find new and better ways to build trust. Bringing an element of true human interaction and clever use of data from social sites are two areas where we’re seeing retailers do interesting things.

The inexorable rise of free – paid apps example

By | Apple, Startup general interest | One Comment



Business Insider posted these two charts today under the headline Paid Apps are Dead. Looking at the data, it’s hard to refute that claim. App developers are still making money, of course, it’s just that they are doing it through in-app purchases rather than from an up-front charge. This solution is better for consumers because they get to try before they buy, and better for app developers who can increase their overall revenue by enabling their superfans to spend vastly more money than anyone would ever pay in an up-front charge. Supercell is the most recent poster child for this model. Only 10% of their users pay anything at all to the company, yet last year they made $40m in profit on $105m in revenues and earlier this year Softbank valued the company at $3bn (see here for more details).

As Nicholas Lovell explains in The Curve other companies should be copying Supercell’s model. The idea of The Curve is that the revenue potential of every user can be plotted on a curve – most will be at $0, or very close to it, but there will be a few where the number is much higher – often thousands of dollars. To make money in a digital age companies must organise their business models to exploit the curve and get the most value from their products and customers.

As Nicholas also explains, The Curve isn’t limited to apps, it applies to all industries where customers can be engaged for zero marginal cost. Zero marginal cost allows companies to build relationships by giving away small amounts of value in the hope of recouping much greater value down the line.

Pradeep Raman joins us at Forward Partners

By | Forward Partners | No Comments


I’m pleased to let you all know that Pradeep Raman has joined us as Senior Associate from Piton Capital, a VC fund that invests in marketplaces. Prior to Piton Pradeep was an entrepreneur, founding three companies in New Zealand and the UK.

Our strategy here is to get into the best deals and help them towards better outcomes by offering a package of cash investment, strategic guidance and tangible operational help. As cash requirements drop, and as capital gets commoditised, competing on value add is the key to making money as a venture capital fund. Doing that well requires that we combine great investment decisions with the capability to really help our portfolio, and I mean really help.

Pradeep’s blend of operational and investment experience position him well to help us on both sides of this promise. He will be helping us originate and execute on deals and assisting the entrepreneurs we back to build their businesses.

As a reminder, we invest from true startup stage to late-seed/early Series A and we’re focused on ecommerce companies building brands that people love and the associated ecosystem. Our USP is that we run an expert operational team for the benefit of our portfolio.

Non-tech companies are making more acquisitions

By | Exits | 2 Comments

Techcrunch has an article up today about the increasing number of tech acquisitions by non-tech companies. Recent examples include:

  • Monsanto’s acquisition of Climate Corporation for $1.1bn
  • United Health Group’s acquisition of Humedica for ‘hundreds of millions of dollars’
  • Under Armour’s acquisition of MapMyFitness for $150m
  • Staples’ acquisition of Runa
  • First Data’s acquisition of Clover
  • Ford’s acquisition of Livio
  • Target’s acquisition of, Chefs Catalog and some assets

The story is simple. Non tech companies are waking up to the fact that tech is the future. As Kleiner Perkins Partner Allen Lee says:

Companies like TJ Maxx, Urban Outfitters and others can easily make a $100 million to $400 million acquisition in the current market, she adds. In fact, earlier this year, Urban Outfitters reportedly did try to buy NastyGal, a fast-growing e-commerce site for young women.

I think this means two things. Most obviously, the range of acquirers is increasing. This is particularly welcome in our focus area of ecommerce where there historically haven’t been many buyers. Secondly, these new acquirers are not used to valuing businesses based on multiples of revenues or paying big ‘strategic premiums’ but will rather pay up for strong fundamentals. That means growth and profitability.

That’s another reason to build businesses for the long term.

Business models built around the needs of companies don’t work

By | Apple, News | No Comments

It seems trite and obvious to write that the best products are designed around what customers need and want, yet it is still surprisingly common for companies to make decisions based on what’s important for themselves.

Digital magazines are a great example. Physical magazines have been suffering from declining circulations for a while now and their owners have mostly struggled to charge for their content online. When the iPad arrived they and Apple saw an opportunity to reverse the trend by selling magazine subscriptions through the Newsstand app. Unfortunately they were solving for their problems rather than what users wanted. Magazine publishers saw a chance to start charging for digital content and Apple saw an opportunity to take a cut. Neither stopped long enough to realise that the great free content was still out there and would inevitably find a way onto people’s tablets.

I’m writing this post today because I’ve just read an article about the impending death of tablet magazines. It describes how many people are getting free realtime content in magazine format from apps like Flipboard whilst very few people are subscribing to digital versions of traditional magazines. Moreover, Apple has now made it so that the Newsstand app can be buried inside a folder whereas previously it had the prominence of a guaranteed home page spot. A lot of time and money was wasted by Apple and publishers in bringing the Newsstand model to market because they were thinking about their own needs rather than what consumers wanted.

The area where I most often see this mistake of putting the business model ahead of what consumers want is subscription ecommerce. Subscriptions are great because they bring predictable revenues and higher customer life time values (LTVs). High theoretical LTVs in turn make it possible to justify high customer acquisition costs (CPAs). For managers and shareholders in ecommerce companies the combination of high and predictable revenues, and justifications for  high CPAs is intoxicating and often results in a lack of discipline in questioning whether customers really want a subscription product.

You should be able to justify your business model by reference by what’s good for your customers,

A balanced view on news

By | News | No Comments

There’s a Guardian article titled News is bad for you – and giving up reading it will make you happier which has been retweeted a lot this morning. It makes some good points, but for me the conclusion is wrong. News isn’t bad per se, it’s just over-consumption of news is bad. Let me explain.

The opening sentences from the article set the scene nicely:

In the past few decades, the fortunate among us have recognised the hazards of living with an overabundance of food (obesity, diabetes) and have started to change our diets. But most of us do not yet understand that news is to the mind what sugar is to the body.

I love the analogy with sugar. We have a part of the brain known as the amygdala which has barely evolved for tens of thousands of years that keeps a constant watch for danger. When we lived as wild animals a well developed sense of danger was critical to survival – seeing the small signs early and running or fighting was the best way to stay alive, and being over-sensitive was way better than being under-sensitive. The amygdala lives on with us today, and it loves to look for those signs of danger in the form of bad news – aeroplane crashes that could catch us next and terrorist threats are good examples. That’s why bad news sells and why our newspapers average a 90:10 good news:bad news split, and it’s also why scanning headlines is so compelling. We’re hard wired at a deep level to keep looking for danger.

This is bad news because scanning negative headlines increases fear and paranoia. Public perceptions of technology are a good example of how this pans out in a bad way. To me it’s evident that on balance technology has had, and will continue to have, a profoundly positive impact on our lives, from decreased infant mortality to more meaningful work the good outweighs the bad. However, if you ask most people about the impact of technology they recall horror stories about Facebook or chemical warfare and start thinking about Terminator style armageddon scenarios. Worse still, confirmation bias comes into play. Headline writers intuit that people want to read headlines that confirm their fears and then we naturally screen out or dismiss the 10% of stories that paint a positive picture.

The advent of social media and news aggregators, especially Twitter, has heightened this problem in recent years by making it easier to quickly scan headlines. I think that’s why the backlash meme expressed in the Guardian this morning is now gathering steam.

However, contrary to what the Guardian might have you believe, the answer isn’t to stop reading news altogether. Returning to the food analogy – the answer is to figure out the appropriate level of consumption. The obesity epidemic engulfed the planet when food costs plummeted after the Second World War and for the first time a large percentage of the population had the possibility of consuming more calories than they needed. Our natural wiring, again dating back to the days of pre-civilisation, is to eat as much as we can when food is available because there might be none available tomorrow and it has taken us a few decades to collectively get to the point where many of us have learned to eat appropriately. Similarly, it will take us a little while to learn to regulate our news consumption.

I also think our collective use of email and messaging systems is following a similar pattern.

My routine is that first thing every morning I scan the last 12-24 hours of Tweets on a couple of Twitter lists I’ve curated and then save the interesting headlines to Instapaper so I can read them at work. Crucially, I then rarely look at Twitter again before the next morning. I probably average 30-60 mins per day checking the Twitter lists and reading the saved articles and I’m pretty happy that’s the right amount of news for me.