Monthly Archives

May 2015

Chinese marketplaces – lower commission drives faster growth

By | Startup general interest | 8 Comments

Screen Shot 2015-05-29 at 11.02.20

We invest in a lot of marketplaces and one of the questions we wrestle with a lot is determining the optimum commission level. Most of the time 10-20% feels like the right answer. I say ‘feels’ because it’s impossible to know for sure when you start out. At the 10-20% level you can make enough money to build a big business (particularly when non-transactional revenues are layered on top), but commission is low enough that it will be tough for competitors to undercut you. Bill Gurley makes this argument well in his seminal post A rake too far.

The chart above from Mary Meeker’s Internet Trends presentation published this week shows that 3-5% commissions have worked extremely well for a couple of Chinese marketplaces. As you can see they’ve enjoyed much faster growth than their US equivalents which charge much higher commissions.

We should be wary of assuming correlation implies causation, but there’s definitely something interesting to think about here. In the case where the market is huge and/or the underlying transaction costs are very low then taking sub 10% commissions merits thorough investigation. A radical way to look at this that might work in some markets would be using transactions as a loss leader to sell buyer or seller services.

Thoughts on my Apple Watch

By | Apple | No Comments


I’ve had my Apple watch for two weeks now and I am starting to like it. For a good week I was saying to people that it’s just ok, but over the last couple of days I’ve been getting more value from it. That said, I’m not at the point where I would recommend it to others.

As a watch it works well. Nine times out of ten the screen comes on when I tilt my wrist, and that’s enough not to be annoying. The battery comfortably lasts a day and might last two given that it usually has 50%+ charge when I go to bed. I have my screen set up as in the picture above and like being regularly reminded about my next meeting.

The bits I like the most though are alerts and the speech recognition.

I have nearly all alerts turned off on my phone and even fewer on my watch, but I’m responding more to the few I do have more now that I can do it quickly from my watch. In practice that’s mostly text messages and on a private social network my friends and family use called Togethera (I’m an investor).

And the speech recognition works amazingly well. When I dictate text messages I take care to speak clearly, but the result is accurate nearly all the time. This is the feature I show people when they ask about the watch and they are always amazed. It is similarly good for maps, but I don’t use it because there’s no Google Maps app yet and Apple Maps doesn’t do it for me.

That said, I stop short of recommending the watch because I’m not sure these benefits are worth the price tag and because it can be very slow, is hard to learn and suffers from lots of bugs. Another negative is that I don’t use many of the apps, in fact I think Togethera might be the only one. I’m sure all of these negatives will be addressed in software upgrades and future hardware releases and I suspect that more and more of us will wear smart watches over time.

However, at this point I’m thinking we will need better hardware before smart watches spawn many startup opportunities.


Cost ratios as a measure of fund efficiency

By | Forward Partners, Venture Capital | No Comments

Fund managers are assessed, in part, on their ratio of expenses to assets under management. This applies to all classes of fund managers, including pension fund managers, IFAs, private equity fund managers, and venture capital fund managers. In most cases the logic for looking at expense ratios is very strong:

  • the more money that is spent on fund expenses the less gets invested in underlying assets and hence the performance of those investments has to be better to achieve a given level of return
  • fund expenses are largely composed of investors’ salaries and office costs, above a certain level higher salaries and nicer offices don’t translate into better performance

Therefore, the lower the expense levels the better. Moreover, history is littered with examples of fund managers getting rich on the back of high expense ratios and then not delivering good returns to investors (that’s a bad practice that we want no part of).

Forwards Partners, and an increasing number of higher value add VC firms (see here for a partial list) have different models which require a new way of looking at things. The difference is that fund expenses are increasingly spent on people who work with the portfolio companies to make them more valuable, invalidating the second reason for looking at expense ratios in the above list of bullets – fund expenses are not ‘largely composed of investors’ salaries and office costs’. In our case eight out of our team of thirteen spend all or most of their time working with our portfolio companies.

In fact, our strategy is to have higher expenses in order to attract the best entrepreneurs and help their companies achieve better results. We invest more in support to drive higher returns. That’s on the first page of our pitch deck.

Rather than look at our expenses as a percentage of assets under management, which is high compared with our peers, the right question to ask is whether our investment in supporting our portfolio is working. Does it enable us to do better deals?, and are the investments we make more successful as a result of the help we offer?

The definitive answer to these questions will come over time as our portfolio matures, our companies exit, and we can demonstrate a high cash to cash IRR. Until then investors wishing to assess our model can look at the companies we have invested in to date, the success they are having, and hear about the help we are providing on a day to day basis.


Biological brains will be a sideshow: Prediction from the Royal Astonomer

By | Startup general interest | 7 Comments

Richard Rees, the UK’s Royal Astronomer finished a recent article in the Telegraph with the following paragraph:

Abstract thinking by biological brains has underpinned the emergence of all culture and science. But this activity – spanning tens of millennia at most – will be a brief precursor to the more powerful intellects of the inorganic post-human era. So, in the far future, it won’t be the minds of humans, but those of machines, that will most fully understand the cosmos – and it will be the actions of autonomous machines that will most drastically change our world, and perhaps what lies beyond.

To summarise: Biological brains … will be a brief precursor to the more powerful intellects … of machines, that will most fully understand the cosmos.

That’s a big statement and consistent with the thinking of other prominent futurologists like Ray Kurzweil. What’s interesting is to see it so close to the heart of the establishment here in the UK.

Rees puts this vision of the world in the “far future”, but that far future isn’t too far away. He cites expert estimates for the arrival of general human level are 25 years at the optimistic end and 50 years on average (AI expert Nick Bostrom’s recent poll of experts found a 60 year average prediction). Then, immediately after human level AI we will get an intelligence explosion as the AIs work at light-speed to improve themselves.

Try to imagine a world with other intelligences infinitely smarter than us.

I’m 42, so if these experts are right and I’m lucky with my health (or science takes care of me) then I have at least a 50-50 chance of seeing super-intelligence in my lifetime. It’s coming.

As a society I think we have a long way to go in wrapping our heads around what that means. It’s hard to over-estimate how much change will come.

VC value add: trends and challenges

By | Venture Capital | No Comments

In recent years VCs have been rushing to add value by hiring non-investors to help their portfolio companies. I touched on this subject last week when I wrote that Capitalism is being replaced by talentism. This week I want to talk a little more about what VCs are actually doing.

This is a list of the funds that are working hardest to add value beyond capital, strategic advice, and the partners’ contacts. These are just the ones I know. Please shout if you know other examples and I will update. (Note: I haven’t included accelerator programmes or incubators. They do add value, but they are different to venture funds.)

  • Andreessen Horowitz: organise executive briefings where portfolio CEOs meet senior execs at potential customers, have a large talent function to hire for their companies (and have built software to support it), have staff dedicated to helping portfolio companies network effectively
  • Google Ventures: has teams that help portfolio companies with design, engineering, recruiting, marketing and partnerships
  • First Round Capital: built a software platform to help entrepreneurs collaborate, have a talent team, run a large number of events for their portfolio
  • OpenView Partners: has teams to help their portfolio companies with recruiting and sales and marketing
  • Index Ventures: has a ‘platform team’ of nine people, key activities are organising functional support communities for their portfolio execs and running events
  • Greylock: have a data scientist who helps their portfolio
  • NextView Ventures: have a director of platform
  • True Ventures: run an undergrad programme
  • Spark Ventures: have a director of platform, primary activity seems to be events
  • Founder Collective: hired a journalist to help their portfolio with PR
  • Playfair Capital: recently hired a Facebook recruiter to hire for their portfolio
  • Balderton Capital: have a head of PR and content, a data scientist, and a talent and development analyst
  • Frontline Ventures: have a head of platform

And there’s us. Forward Partners has a team of eight to help our partners with product, design, development, customer acquisition and recruitment.

That’s the activity. The major trend is that there’s more and more of it over time.

The challenge is that it’s hard to find ways to make a difference, particularly across a large multi-sector portfolio. Jay Acunzo, director of platform at NextView Ventures recently wrote on Techcrunch:

In the last three months, every frustrated director [of platform, at a VC] I’ve met with (and there have been multiple) had the same complaint about a lack of focus confusing their work and yielding generic-sounding, ineffective projects.

As I wrote last month, focus is one way to address the challenge. We only invest in early stage ecommerce companies so there is a lot of commonality in the problems they face and we have built a team focused on those areas. OpenView partners has done something similar for expansion stage software companies. As Joe wrote in his Techcrunch post, one option for VCs with less focused investment strategies is to build sector and stage focused value add capabilities.

Give feedback with compassion

By | Startup general interest | No Comments

This passage is from a 1958 letter Samuel Beckett wrote as feedback to Aiden Higgins, an aspiring Irish author living in South African (emphasis mine):

My reluctance to comment has become overpowering. I hate the thought of the damage I may do from such unwillingness and such incapacity. If I were less concerned with you I should simply say it is very good, I like it very much, but don’t see where to send it, and leave it at that. But I don’t want to do that with you. And at the same time I know I can’t go into it in a way profitable for you. This is not how writers help one another.

I love the burning compassion that comes through. Beckett clearly cares deeply for Higgins and is delivering the feedback because he wants to help. People on the receiving end of feedback coming from a place of caring are much more likely to listen and remember.

The other thing that stands out for me is the effort that Beckett puts in. That’s important because it reinforces the point that he cares, but the bigger takeaway is that giving good feedback takes a lot of work. Facts need to be remembered and it takes time to prepare properly. The McKinsey Feedback Model is a good guide.

Hat tip to Brainpickings.

The correlation between intellectual honesty and great companies

By | Startup general interest | One Comment

Intellectual honesty is tough, but a powerful enhancer of company performance and driver of personal growth. That’s the message of this post from Joanna Lord, and I couldn’t agree more.

Here’s how she puts it:

I think great companies appreciate intellectual honesty. I’ve seen this at Porch. The past few weeks I’ve pushed on some big things and asked some hard questions. I’ve actually blown up a few email threads…not because I want to. Or even because I had to. But because I believed an argument needed to be made for the greater good. Greater good can be the customer, the team or even the bottom line. There are lots of “greater goods” that demand that sort of risk.

Lesser companies punish people for those risks. They shut you down. They ignore your concern. They silence it with sentences like “we’ll get to that later” or “good point, but we’re just too far along to rethink that.” Great companies stop. They pause. Acknowledge the point made and give it at least a few minutes to breathe.

It doesn’t mean that the argument made wins out. In fact, I’d bet most times it doesn’t. But there is something really special about allowing it to breathe. This sort of respect for intellectual honesty breeds empowerment. It reminds everyone in the room that we all have voices and bring perspectives and experiences that are valuable. It kills bureaucracy and rewards gumption.

Startups have to make decisions based on imperfect information all the time. That means mistakes. Intellectual honesty is key to quick course correction when those mistakes happen. Heaven help the startup that says “we’re just too far along to rethink that”.

Similarly empowerment, rewarding gumption and avoiding bureaucracy are also things founders and CEOs should aspire to.

But intellectual honesty is tough too. It’s tough on individuals and teams who spend more time in uncertain and uncomfortable places (although that way lies personal growth) and it’s tough on startups who want to progress rapidly whilst hearing all voices.

As with so much in life the key is striking the right balance. Individuals should develop good judgement about when something is worth mentioning, worth fighting for, or should be kept on watch for a while. Companies should develop a culture that encourages speaking out, coaches individuals to help them develop judgement, requires that people get behind decisions that have been made, but have regular review points, and not allow intellectual honesty to be a cover for unconstructive criticism or snarking.

The future of mobile ecommerce

By | Amazon, Ecommerce, Facebook | 3 Comments

We’ve been doing a good deal of thinking about the future of ecommerce as the world goes mobile. As we all know people are increasingly accessing the internet and shopping from their smartphones (one of our more recent investments has 81% of it’s traffic from mobile), and within mobile people are spending a larger and larger share of their time in apps at the expense of browsers. That presents a challenge for retailers of occasional purchases whose customers don’t use them often enough to download an app. On the web these retailers found their customers via search, but that doesn’t work as well on mobile.

So how will discovery work on mobile?

In a couple of different ways, I think.

Firstly some apps will aggregate goods from lots of retailers and discovery will happen in app. Amazon is the best example here, but different types of discovery are appropriate for different types of purchase and whilst Amazon works well for commodity goods it doesn’t work so well for higher value goods where the purchase is emotionally driven. That creates space for startups to build discovery experiences focused on specific verticals. Good examples include Houzz in interior design, and Stylect in fashion, and Top10 in travel. We have invested a lot on this theme and the last three examples are partner companies (note Thread is working on their mobile app).

Key to success for these companies is building a loyal customer base with high life time values. The aggregation needs to be broad enough that transactions occur frequently but narrow enough that product discovery is truly engaging. Strong brands will be built on the back of great product ranges and strong discovery experiences.

Secondly, some companies will focus on a small range of their own products. They will be primarily web based (including mobile web) and may not need an app. Strong brands will be built on the back of amazing products and first class marketing. Facebook is the best channel for many of these companies, for now at least. Bonobos in the US is a good example, and amongst our partners I would point to Lost My Name, Big Health, and Spoke.

An interesting question for the first group is whether the aggregation moves from apps into the OS layer, or something similar. There are lots of hints we are headed in this direction:

  • Baidu surfaces recommendations from maps
  • Facebook’s Instant Articles pulls news discovery into Facebook
  • Amazon’s Echo device enables re-ordering via voice command

If aggregation does move to the OS layer then in the short term partnerships will become critical drivers of traffic and custom, and in the long run I hope we will see a meritocratic discovery process emerge.

Update: Benedict Evans argues here that the trend within mobile towards apps is concentrated in a small number of apps (mostly Facebook and YouTube) and hence less significant for ecommerce companies than one would think

Capitalism is being replaced by ‘talentism’

By | Uncategorized | 3 Comments

Screen Shot 2015-05-15 at 14.26.55

This is a super interesting perspective. I’m not a big fan of inventing new words and I’m not proposing that we all start talking about ‘talentism’, but I do think we should all understand the key message here: As capital is increasingly commoditised the pace of change increases it is human talents that drive value creation.

This move towards human capital is manifesting itself in the startup and venture community in two ways. Firstly power is shifting from investor to entrepreneur, as evidenced by the rising celebration of founders, and secondly investors are increasingly bundling human talent with their investment of capital.

Forward Partners aims to be in the vanguard of both these changes.

Founder CEOs vs professional CEOs – exit data

By | Startup general interest | 5 Comments


At Forward Partners we want to back founders who will go all the way with their companies. That’s partly because we work closely with them and they become our friends, and partly because when a founder leaves a business it’s a horrible wrench from which it’s tough to recover, not least because the company has usually gone through an extended difficult period before the departure.

The above chart looks at what happens when the founder doesn’t go all the way. It’s the output of research done by US VCs which compared exits of companies with founder CEOs to exits of companies with professional CEOs. It’s a log chart, which makes it slightly difficult to read, but companies want their exit blob to be high and to the left – big valuation with little capital raised.

As you can see the red dots (founder CEO at exit) and blue dots (professional CEO at exit) are pretty evenly spread and surprisingly the main conclusion is that it doesn’t make much difference whether the founder remains as CEO at exit.

When you split IPOs and M&A then there is a difference. Founder CEOs do much better for IPOs and professional CEOs do slightly better for M&A. Because the biggest winners drive VC returns the authors conclude that founder CEOs are best. I prefer that conclusion from an emotional perspective, but looking at the data I think it’s a bit marginal.