Monthly Archives

November 2015

Repetition is important to leadership because of cognitive bias

By | Startup general interest | 2 Comments

Cognitive biases are a great tool for understanding human behaviour, particularly our more irrational behaviours, and although the meme is in danger of getting overdone I continue to find new value in the concept.

Today it is in the bias ‘cognitive ease’ and how it explains why repetition is important for leadership. Jack Welch, the legendary CEO of GE in the 1980s and 1990s is famously a big advocate of repeating key messages. In an interview with Alastair Campbell he said “You have to talk about vision constantly, basically to the point of gagging. There were times I talked about the company’s direction so many times in one day that I was completely sick of hearing it myself.”.

Aside from the observation that effective constant repetition is a rare talent (although learnable) the interesting question here is ‘why is it so important?’.

I had assumed that repetition works because it cements memories. The more times someone hears something the more likely they are to remember it and the more likely it is to subconsciously help with decision making.

I’m sure that’s true, but there’s something else too, and that is the concept of ‘cognitive ease’. We are drawn towards and believe more in things that are more familiar because they are less taxing on the mind. Conversely we shy away from that which is hard to understand.

Strategies which are constantly repeated become more familiar and hence more believed and accepted.

From survival to excellence

By | Startup general interest | One Comment

Much of this week I’ve been thinking about how the life of successful startups falls into two phases: survival and excellence.

In the early life of a company success is all about getting to the next milestone. The team is small, everybody has to turn their hands to multiple tasks, cash is short,  and time is short. In this environment survival is the name of the game. There’s no time to build systems or perfect process, rather everything should be done so that it’s good enough. For sure there should be half an eye on the future and ‘good enough’ means ‘good enough for now’ and ‘won’t cause us problems down the line’, but the emphasis is very much on getting things done.

When Reid Hoffman advises that if the first version of your product isn’t embarrassing you’ve shipped too late, he’s making this point.

When Paul Graham and YC say ‘do things that don’t scale’ they’re making this point.

When Eric Reis talks about minimum viable products he’s making this point.

However, when companies go from being early stage to growth stage then the emphasis changes. The team is bigger, there are specialists for every task, there’s more cash, and whilst speed is still critical the constant need to get stuff done fast to avoid failing has passed. The challenges now are to keep growing really fast and maybe (hopefully) to start making progress towards profitability. In this environment excellence is the name of the game. Success becomes about getting all the little things right and at scale that requires great systems and processes.

The transition from survival to excellence doesn’t happen overnight, but happens piece by piece across the company. For most companies it starts somewhere between the seed round and the Series A and then never really finishes, at least not for the very best businesses.

The second problem with bubbles: overfunding

By | Venture Capital | 2 Comments

The first problem with bubbles is well known. Valuations crash, lots of companies aren’t able to raise money and go bust, and most of the good ones are only able to raise smaller amounts of money and have to layoff staff. Bubbles are brilliant for companies that exit before the burst, but for the rest they bring a lot of pain.

There’s a second problem though, and that is overfunding of whole industries. As Bill Gurley said in a recent interview, “Once your competitor raises $400 million, you don’t get to choose whether you’re in that game or not.” and the result is that whole industries get overfunded. They then spend all their money competing to grow and margins for everyone disappear. Strong companies are still built but exit valuations aren’t what they could have been because cashflows aren’t healthy and acquirers have choice.

There’s a good chance that’s happening in the home delivery market where large numbers of startups are well funded – Doordash, Postmates, Deliveroo and Instacart are the first ones that spring to mind, and then there are others which bundle product with delivery, usually food, e.g. HelloFresh, Munchery, and Blue Apron. Back in July CBInights reported that food delivery startups raised $1bn in 2014 and $750m in H1 2015.

My former partner at DFJ Andreas Stavropoulos describes this as ‘venture fratricide’.

Update on Clayton Christensen’s theory of disruption

By | Startup general interest | One Comment

Clayton Christensen’s book The Innovators Dilemma, originally published in 1997, changed my understanding of innovation, the evolution of value chains and gave me a theory of disruption that has served me very well over the years. His theory of disruption states that large companies are most often disrupted by small competitors who release products which are cheaper and initially inferior but good enough to take the low end of the market, after which quality improves to the point where they take the whole market. Incumbents initially ignore the threat because they are happy to cede the low end of the market and because they make the mistake of thinking that inferior products can ever be a threat.

For startups the beauty of this theory is the simple instruction: targeting the low end of the market with a much cheaper product is a winning strategy. Successes with this strategy over the year have been numerous – Skype, MySQL (and nearly every open source company), and Salesforce spring to mind.

So when I saw that Vivek Wadwha had written a post titled Tech successes are disrupting disruption theory I clicked straight through.

His argument is that disruption no longer starts at the low end of the market. He cites Tesla and Uber as examples of a disruptive business that started at the high end and worked down and he makes the bigger point that for many incumbents the threat is not so much from startups attacking the low end as from other industries. Apple is disrupting the entertainment business, Uber’s UberEats and UberFresh are disrupting the takeaway food and grocery markets, and Tesla’s PowerWall battery technology will disrupt the home energy market. Meanwhile Google and Apple are both moving into healthcare and payments.

Wadwha is right. I’m still holding onto the idea that disrupting from the low end is a great strategy, but the key point for startups is that exponential improvements in technology are creating opportunities for 10x better products at the high end as well. Our portfolio companies Spoke (great fitting mens clothes) and Lost My Name (amazing personalised children’s books) are good examples.

Disney’s new streaming service is the way of the future

By | TV, Uncategorized | One Comment

I’ve long thought that producers of TV and movie content should build direct relationships with their customers over the web. It’s been slow to happen though, largely because the content producers were wary of retribution from their cable, satellite and IPTV partners if they launched properties that competed with them. So instead of content owners moving to the web we got new web companies stepping into the void – largely Netflix, Amazon and Hulu. To start with they were aggregators in the same way as cable companies were aggregators and they competed with traditional TV companies for content – a happy world for content producers like Disney.

But then Netflix and Amazon started commissioning their own content and it started to look like the traditional TV content companies had missed a trick and left the door open for new players.

But now Disney is pushing back. They’ve just launched a direct to consumer streaming service, DisneyLife, for their content here in the UK. HBOGo is similarly a direct to consumer streaming service from a major content creator, albeit in the US.

You might be wondering, where does this all go?

I think we will see more TV content companies build direct to consumer propositions. That seems pretty certain.

The more interesting question is what happens to the consumer proposition. At the moment most people buy a subscription service from a cable or satellite provider which includes connectivity and a menu of options, maybe have a Netflix or Hulu subscription on top, and probably buy the odd movie from iTunes or Google Play.

Going forward the number of places where consumers can go to buy TV content is going to increase. There’s really value to subscription services which allow for a low effort, lean back TV experience where nobody has to think about whether it’s worth paying for the next show, but there’s a limit to the number of services anyone is going to subscribe to. That points to a significant part of the market going on a pay-per-view model. Maybe that will continue to be aggregated on iTunes and Google Play, but maybe new aggregators will arise which take the show from the content owners site and charge a lower margin. Maybe they will also offer superior browse and discovery.

Finally – this is a cord-cutters vision of the future where access is unbundled from content.

The modern management mindset

By | Startup general interest | No Comments

I’m a keen follower of Steve Denning and his writing on strategy, leadership and the future of work. He writes in what might be described as ‘strategy speak’ and is rarely a quick read, but there’s a lot of insight in his words for those that take the time to look for it.

In a post earlier this month he wrote a list of ‘common characteristics of the modern management mindset’ which emerged from a study by the Learning Consortium for the Creative Economy:

  • Goals, attitudes and values that focus on added value and innovation for customers and users, rather than a preoccupation with short-term profits.
  • Managers seeing themselves, and acting, as enablers, rather than controllers, so as to draw on the full talents and capacities of knowledge workers.
  • The use of autonomous teams and networks of teams, in some cases operating at large scale with complex and mission-critical tasks.
  • The coordination of work through structured, iterative, customer-focused practices, rather than bureaucracy.
  • Embodying on a daily basis the values of transparency and continuous improvement of products, services and work methods.
  • Communications that are open and conversational, rather than top-down and hierarchical.

For many of you there won’t be anything new in this list, but it’s power comes in having all these characteristics in one place. I like that it eschews buzz words in favour of easily understandable plain English.  Would be modern firms who look at  their practices and compare it with this list will have little doubt how they are getting on.

I also like that this list explains why mission driven businesses often enjoy a lot of success – they score highly on the first bullet about goals and values. Companies like Google, Facebook and more recently (and at a smaller scale) Transferwise here in the UK, or a number o companies in our portfolio, including Unbound and Big Health have missions which are focused on doing something for important customers. Big Health, for example, wants to make billions of people healthier without pills or potions.

On the Square and Match IPOs and hopes for a correction

By | Exits, Venture Capital | No Comments and Square both enjoyed strong first days after their IPOs yesterday. Match closed up 23% at a valuation of $3.5bn and Square was up 45% at a valuation of $4.2bn.

That’s good news for both companies, because first day declines can sour a stock for months to come. However in the run up to its IPO Square had indicated it would go out at between $11 and $13 per share, and then ended up at $9, and in October last year Square raised $150m at a $6bn valuation. So the share price has been trending down for some time before popping after the IPO.

The interesting question for me is what this means for startup valuations more generally. The obvious narrative is that investors thinking of investing in other late stage private companies are either going to walk away or insist on much lower valuations, which will then have a knock on effect on all company valuations, particularly as Box IPO’d at less than its previous valuation back in January, Fidelity recently wrote down the value of its holding in Snapchat, and there are lots of private companies sitting on valuations higher than similar companies with public listings.

A lot depends on what happens next in the public markets, particularly with the Fed preparing to raise interest rates, but I think there’s grounds for hoping that investors in late stage private companies will have a reaction, but won’t hit the panic button. I say that because investors in the $6bn round in Square have still made money on the deal. They had a ‘ratchet’ which repriced their investment in the event of a down round to give them a 20% return. If you compound the 20% with the 45% pop then when the markets closed yesterday they were showing a 74% profit on the Square deal. That’s a good return, but it came in a way that investors won’t want to repeat.

Hence I think investors will have a measured reaction and if we’re lucky some heat will come out of the market but we won’t have a crash.

A reminder that the “web isn’t dead”

By | Google | No Comments

Google announced yesterday that Chrome now has 800m active users on mobile. That’s up from 400m a year ago. They didn’t say how much of that is on Android and how much on iOS, but there must be a good amount of growth on the latter. That’s impressive given the power of defaults and a welcome news for fans of open systems like myself who have not had much to cheer about lately. As Google said “Not only is the web not dead, adoption of the web is growing dramatically, particularly on mobile and this is opening up huge opportunities”.

On a similar note Google search is now indexing the content of Android apps which don’t have matching content on the web and will stream the content to the device is the app isn’t installed. This has the potential to bring app discovery to the browser and end the app store mess. That would be a massive boon for startups who are largely crowded out of the app stores by larger companies – take a look at the chart.

Similarities between raising a venture fund and raising for a startup

By | Uncategorized, Venture Capital | No Comments

It’s becoming a cliché that read raising for a VC fund is like raising for a startup. I know this because fur much of this year I’ve been on the road for Forward Partners and when I tell entrepreneurs what it’s like they smile, give me a knowing nod like we’re insiders together, and say “it’s just like raising for a startup”.

The basic similarities are lots of meetings, unpredictable processes, lots of wasted time, and a feeling that there really ought to be a better way.

I’m at the Super Investor conference in Amsterdam, which is the main event each year when private equity and venture capital fund managers and their investors (Limited Partners out LPs) get together. At the Fundraising Summit yesterday LPs repeatedly made the following points which really cemented the point:

  • LPs receive around 400 fund pitches per year and invest in 8-10. Comparable numbers at VC funds are 1,000 pitches for a around 10 investments (Forward Partners will have received a little over 2,000 pitches this year and will have made 6-7 new investments).
  • A major complaint from fund managers is that LPs don’t reply to their emails and let them know how their investment case is progressing. Forward thinking LPs are saying they understand this and work hard to get a quick ‘no’ to funds they aren’t going to back. Entrepreneurs say the same.
  • Like top startups, the top funds have it easy. LPs all want to invest in them, their fundraising processes are short, and they can command good terms.
  • Other funds find it much more difficult, with fundraising taking 15-18 months, which is 5-10x as long as it takes the top funds.
  • LPs are working hard to differentiate themselves so they can get into the best funds.
  • Relationships are important, and they want to invest in managers they trust.
  • LPs are starting to advise find managers on what to put on their investment decks and how to present themselves generally.

Those are the similarities. One of the big differences if that LPs benefit less than VCs when they are innovative and take risks with new funds. That makes it harder to be a startup fund and harder to get traction with new VC models.

Comparing Google’s and Facebook’s grand strategies

By | Facebook, Google | No Comments

Facebook and Google are the second and twelfth most valuable companies in the US (accurate at 22/6/15 see here), they both rose to prominence extremely quickly setting records for rapid valuation growth on the way, and as a result they are both very aware that their shelf life could be limited. They’ve seen great companies like Yahoo and Microsoft lose relevance and they don’t want it to happen to them.

The lesson from those businesses is that developments in technology can quickly undermine a company’s core strength. The internet and mobile marginalised Microsoft’s dominance of the desktop and improvements in search took away the need for Yahoo’s portal of curated links.

As a result Page and Zuckerberg have both made bold moves to future proof their businesses.

Google has launched a range of bold and innovative projects including Android, self driving cars, a project to deliver internet connectivity to the developing world via orbiting balloons, and Google Glass. They even went as far as changing the name of the company to Alphabet, emphasising the point that the Google search business is just one part of what they do.

Facebook has mostly moved via bold acquisitions, starting with $1bn for Instagram six weeks before their IPO, moving the through $24bn for WhatsApp, before paying $2bn for Oculus. That said, they also have a track record of making radical changes to their product, often in the face of user protest. Introducing the Newsfeed and splitting Messenger out from the main Facebook platform are stand out as the two best examples where they did that successfully.

The obvious difference between Google’s bold moves and Facebook’s bold moves is that Google is venturing much further from its core business. At first look Facebook’s acquisition of Oculus might look like it’s a big step away from social media, but if you think of their business as mediating social interaction then it doesn’t seem that way.

I suspect Google is innovating further from its core because it’s a more mature business than Facebook. Android was one of Google’s early bold moves, and it’s easy to see how that was closer to the core because it helps maintain their strength in search. It was only as their search business began to face existential risks that they started making moves designed to open up whole new areas. It’s impressive is that they have started making these moves so early.

Facebook’s acquisitions of Instagram and Whatsapp and the separation of Messenger from the main Facebook app are clear moves to protect and extend their core social media business. These strategies have helped them continue to grow their audience and advertising revenues and whilst individual properties might whither, potentially including Facebook, there’s still no sign of an existential threat to social networking as a category. To put numbers on it, back in March they had 1.4bn MAUs on Facebook, 700m on Whatsapp, 600m on Messenger and 300m in Instagram. That’s four of the six largest social media properties on the planet, and they’re all still growing.

All of which has me thinking that Facebook might become more radical as its business matures.