Monthly Archives

March 2016

Avoiding founder-investor conflict

By | Startup general interest | No Comments

Earlier this week I had a call with a friend who wanted help because his company is close to running out of cash and his investor is playing hardball. The company has been performing OK, but would have been better if my friend and his investor hadn’t been at loggerheads over distribution strategy and who should run the company. That conflict resulted in the company implementing a strategy it didn’t fully believe in which then didn’t work. Now both sides blame each other.

The lesson for others wanting to avoid a similar situation is to make sure there is full alignment on strategy and the investor has complete faith in the CEO. Strategy alignment can be tested before investment by discussing the company’s plans and how they might change under different scenarios. If investors and management think similarly on product evolution, target customers, routes to market and the balance between growth and profitability then conflict is less likely going forward. If there are important differences I would think carefully about whether an investment makes sense.

It’s also critical that investors have complete faith in the CEO. It’s a common conceit amongst investors to believe that they can compensate for a sub-standard CEO through their own efforts or by adding someone to the team in some kind of quasi-CEO role. However, the CEO generally doesn’t want to be compensated for and quasi-CEOs generally want to be real CEOs, and in my experience this path is folly. As soon as performance falters, which it inevitably will at some point, the investor will blame the CEO, the relationship will deteriorate and the situation will become harder to rescue than it should be.

VC funds need to deploy cash and startups need money to survive, so investors and founders are heavily incentivised to get deals done. This pressure sometimes clouds thinking and makes it easy for both sides to mentally dismiss the chances of conflict. Sometimes there’s no choice of course, particularly on the startup side (investors can always choose not to invest), and accepting the risk of conflict can be the best way forward, however, conflict hurts companies and is very tough emotionally, so if you find yourself in this situation please make your choice with your eyes wide open. My friend and his investor are learning just how damaging and painful conflict can be and I wouldn’t wish that on anyone.


Why some big firms struggle to compete with startups

By | Startup general interest, Uncategorized | 2 Comments

Founders and investors in their startups have to choose which markets to attack and by extension which companies to compete with. Most often that’s done by looking for industries where there has been little innovation and/or the founder has a plan that leads to a sustainable competitive advantage. As an example from our portfolio, has built a personalisation algorithm which allows men to “dress better without trying”. They are competing with offline and online fashion brands that haven’t changed the buying experience much beyond putting their inventory online.

It’s interesting to ask why it takes a startup like to exploit this ‘personalisation’ opportunity. Selfridges, Mr Porter or any other established fashion brand could have gone after it at the same time or earlier and with more resources.

A big part of it is that change happens very fast these days and big companies inevitably gravitate to a manageably small number of opportunities that are most likely to move the needle in the short term, taking them towards the obvious and away from ideas that are higher risk/higher return.

However, another part of it is that many big companies aren’t organised to innovate well. Drucker foundation strategist Steve Denning says that focusing on short term share price movements is a big part of the problem:

Why are firms failing to be entrepreneurial and invest in long-term growth? The answer isn’t hard to find. Once a firm embraces maximizing shareholder value and the current stock price as its goal, and lavishly compensates top management to that end, management naturally focuses on exploiting the existing business and bolstering the stock price by increasing dividends and share buybacks, at the expense of innovation and investing in the future.

And focusing on shareholder value requires a culture that’s incompatible with innovation:

Even worse, shareholder value theory has joined forces with hierarchical bureaucracy. Once a firm embraces shareholder value theory, the C-suite has little choice but to deploy command-and-control management. That’s because making money for shareholders and the C-suite is inherently uninspiring to employees. The C-suite must compel employees to obey. With only one in five employees fully engaged in his or her work, and even fewer passionate, innovation and entrepreneurship are even less likely.

Not all big companies are like this of course, but most are. Interestingly, many of the world’s biggest companies today have eschewed shareholder value theory and remain entrepreneurial to the core – Apple, Amazon, Google and Facebook are four good examples.

When assessing whether industries are ripe for disruption looking at the DNA of leading players is informative even before the disruptive idea is formed. Companies focused on shareholder value (including many PE backed businesses) and, more obviously, those which are hierarchical and bureaucratic, make good targets. Those that are entrepreneurial to the core, not so much. Returning to Thread, the large entrepreneurial companies in fashion are mono-brand plays innovating through supply chain management, and the multi-brand retail focused companies that might be competitors are more stuck in the bind that Denning describes.

Want leaders – look for competence and warmth

By | Startup general interest | One Comment


Few people in the UK remember Tony Blair with fondness, but my view is that in his first two terms was a great leader. When I think back on his Prime Ministerial career the first the thing that comes to mind is an interview he did after John Prescott, his Deputy Prime Minister punched a protestor (picture above). In that interview Blair looked a bit pained and contrite, but simply said “John will be John”. I could see he was upset, but he didn’t over react. Instead he showed a warmth and understanding for Prescott and stood firmly behind him.

These reactions can and have been explained away as clever politicking, and I’m sure there’s truth in that, but for me it shows why Blair, Britain’s youngest Prime Minister since 1812, was so successful. He was a great leader, exuding both warmth and competence. It’s unfortunate for him that the Iraq debacle chipped away heavily at both and his legacy isn’t what it might have been.

We need leaders in every walk of life, from politics to sport to business and beyond. Recognising and recruiting those leaders is a big part of our job as investors and founders. People who exude competence and warmth are strong candidates.

This CityAM article makes a similar point and goes on to discuss use and control of emotion. It’s a good read.

There’s nothing new about exponential rates of change

By | Startup general interest | No Comments

I think that everyone can see the world is changing fast these days, and many agree that it’s changing faster and faster all the time. In many ways that’s the defining characteristic of the 21st century. Great credit goes to Ray Kurzweil who was one of the first to notice and who’s work has helped the world to understand.

Moore’s law is the best known example of exponential improvement, but many other technologies follow the same path. These charts are from Kurzweil’s seminal book – The Singularity is Near.

Screen Shot 2016-03-23 at 13.44.44

Perhaps more interesting is that the rate of change on this planet has been exponential for aeons. That’s a counter-intuitive notion because by modern standards the world changed very slowly until the industrial revolution, but it’s the nature of exponential curves that they change slowly and then suddenly. This picture below makes this point by showing that the time between major events has been decreasing exponentially since the dawn of life on earth.

Screen Shot 2016-03-23 at 13.48.26

Some reasons why founders’ second startups are harder

By | Startup general interest | 3 Comments

Investors love serial entrepreneurs and routinely pay big bucks to invest in their companies. I’ve heard investors say they have backed serial entrepreneurs when they don’t believe in the idea or because it would look bad if they invested in the first company and missed out on the second. Sometimes it works well – Jack Dorsey did a $10m seed round for Square in 2009 at a rumoured valuation of $40m and I’m sure his investors are very happy. But often it doesn’t work so well – Dave Morin/Path and Bill Nguyen/Color Labs had similar seed rounds but couldn’t leverage the profile and cash into sustainable businesses.

I’ve seen research showing that serial founders have slightly higher success rates than first time founders, but the effect was not pronounced and I wondered about the quality of the research. It has always felt to me like the learnings from doing one startup must help with the second, although not enough to justify investors’ enthusiasm in backing them.

I’m writing about this subject today because I’ve just read a post on Mattermark about the second time founder syndrome. It’s a balanced account of the strengths and weaknesses that prior experience of founding a company brings to the next one, written by two serial entrepreneurs.

Benefits of prior founding experience:

  • Wider network makes it easier to raise money and hire people
  • More experience as an entrepreneur leads to better decisions
  • More comfort with the logistics of company building saves time finding lawyers, writing board packs and so on

Disadvantages of prior founding experience

  • Previous success means there is now more at stake – reputation, capital from those who invested based on trust, careers of those who joined based on trust – can lead to risk aversion
  • High confidence can quickly turn to self doubt – was the first success just lucky?
  • Prior success means people pushback less on ideas
  • More distractions – serial founders speak at conferences more often, are mentors more often, and are more likely to have a family
  • It’s hard to know whether what worked previously will work again, circumstances change and it’s hard to understand the impact of luck

That’s a long list of issues, but they can be avoided by maintaining self awareness and retaining some humility.

Startups should develop a fundraising capability

By | Startup general interest | No Comments

I was in a board meeting last summer where we faced a curious situation. The company was performing well, revenues were rising, engagement was on the up, and every month the path to becoming a very big business was getting clearer, but fundraising discussions were slower than planned. One of the Directors asked why we insiders were sure that the prospects were strong but new investors weren’t biting.

When it came down to it, a big part of the problem was that we hadn’t put enough time into making our proposition into a story that was easy to understand and share within partnerships. To make a positive decision new investors have to understand lots of complicated data and buy into a detailed market vision. In our case there was buy-in to the broad market vision, but lots of other startups were making alternative claims about how the details would pan out.

The opportunity was to make our proposition easier to understand by using stories to illustrate how our data provided early evidence that our vision was the one to get behind. Telling stories means starting with real names and real (potential) results and then going back to the abstract and theoretical later. With our help customer X can do Y and achieve amazing result Z.

The interesting question was why we were executing well on sales to customers, but not well on selling shares in our business to investors. We were telling stories and selling effectively to one community but not the other.

The reason was that we thought of fundraising as a necessary evil rather than as a capability that we needed to develop. Hence we’d spent insufficient time into becoming excellent at it.

Perhaps unsurprisingly many startups suffer from this problem. There are multiple reasons:

  • Fundraising only comes round every 12-24 months so it fades from mind
  • Fundraising is a CEO level activity and there are lots of pulls on a CEOs time
  • Founders believe strongly in the strength of their companies and think it should be easy for investors to buy-in (particularly when there’s been a lot of progress)
  • Investors always project high levels of enthusiasm making it hard to gauge whether extra fundraising effort is necessary
  • The market is awash with stories of founders who seemingly raised huge rounds with little effort, again making it hard to estimate how much effort is necessary

However, it’s true that most successful companies raise multiple rounds of finance and it makes sense to invest time into becoming good at fundraising. Thinking of fundraising as a capability that the best companies have in spades rather than an unpleasant task to be ticked off is a mindshift that helps with preparation and gives processes the best chance of going smoothly.

Companies with a strong fundraising capability:

  • Pitch well
  • Have good hustle
  • Are disciplined about follow-up
  • Have good investor networks

Richard Branson on luck – you can make your own

By | Startup general interest | One Comment

I’ve just read Richard Branson’s Top ten quotes on risk. He opens by saying:

The luckiest people and businesses are those that are prepared to take the greatest risks. We can all create our own luck by taking the necessary risks to open the door to change, progression and success.

And then goes on to list ten quotes from others. My favourite of the bunch is from Mark Zuckerberg:

The biggest risk is not taking any risk… In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.

The other quotes are in the same vein, advising people to ‘go for it’ – e.g. “Why not go out on a limb? Isn’t that where the fruit is?” from Frank Scully.

I think this is great advice, but a little caution is appropriate. If we turn to Branson’s Letter to his 25-year old self he advises taking “calculated” risks, and that, for me, is the key. The first thing to think about carefully is the chance of success. The odds don’t have to be high, but if they’re very low you might be better aiming for a higher probability intermediate step first. Failing to think through the chances of success is to be cavalier, and gives you too much chance of being unlucky, and nobody wants to be unlucky. Secondly, as Reid Hoffman noted in his book The startup of you, having an acceptable Plan B is good practice. Simply knowing how you will survive if your gamble doesn’t come off helps retain objectivity and is good for sanity and motivation.

In the second half of the quote I opened with Branson says ‘we can all create our own luck’. He’s mostly talking about having the courage to take risks, but working hard to get exposed to lots of chances to take risks is equally important. This networking activity gives you lots of opportunities to evaluate and increases the chances of finding the one that’s a perfect fit. I wrote more about this in a 2008 post: Ronald Cohen on luck.

The trivialisation of tech and the agglomeration of small things

By | Startup general interest | One Comment

We got an Amazon Echo in our house yesterday. It’s not for sale in the UK and geo-restricted to the US, so it was a bit of a struggle to get it working and there are still lots of things that don’t work as well as they could. It won’t play our UK Spotify account, for example. Despite this, the kids have taken to it. They have an appropriate dose of scepticism when I bring home new gadgets, most of which don’t work, but the Echo is easy and natural to use and they were quickly using it to play radio stations and tell jokes. When the geo-restrictions get lifted and the functionality expands out I think there’s a good chance our Amazon Echo will get a lot of use and maybe even feel part of the family…

I love that, but I’m reminded of the meme Peter Thiel started last year when he said:

We wanted flying cars and we got 140 characters

He was complaining that technology and the startup ecosystem in particular was focused on trivial problems and that we should be trying to solve the deeper problems in society.

The Amazon Echo is definitely at the trivial end. There’s nothing the Echo does which I can’t do myself with a small amount of extra effort. I can walk across the room and press buttons to turn our kitchen radio on and I can find the same jokes on Bing on my smartphone.

But those few saved seconds feel great. There was a real ‘eyes light up’ moment when we were rushing out of the door and turned the radio off at a distance of 5m by saying “Alexa stop”.

SmartWatches are the same. They don’t really do anything that you can’t do directly on your smartphone, but they save you from getting it in and out of your pocket.

Indeed, I could make the same point about many recent startup successes. Just Eat allows you to order takeaway online saving you from making a phone call. FarFetch makes it easier to buy a wider range of fashion. Spotify allows you to listen to music without downloading it first.

I agree with Peter Thiel that deeper problems like wealth inequality and malaria need addressing, but I think Amazon’s Echo, smart watches, and all the Just Eat’s, FarFetch’s and Spotfy’s  in the world are also doing a good thing. They bring a little joy into the world with their ‘eyes light up’ moments, but more importantly all these little time savings add up and allow us to spend meaningfully larger amounts of time doing the things we love.

It’s a common refrain that startup success comes from doing thousands of little things right. It’s the same with life in general, and it’s new technologies that are helping get us there.

The SpoonRocket lesson – US success shouldn’t be copied without critical thought

By | Startup general interest | 4 Comments

The wires have recently been awash with news that US food delivery service SpoonRocket is shutting down. That’s a real shame, largely for their employees and investors (who put in $13.5m), but also because the product promise was amazing – sub $10 meals delivered in under ten minutes.

That product promise is so amazing that the tech press wrote a lot about SpoonRocket even before they graduated from YC. That got people thinking over here, and by the time they raised their $11m round the UK was awash with copycats, including Rocket Internet backed EatFirst. We looked at investing in three that I can remember, and I’m sure there were more. I won’t name them because we passed and I don’t want to hurt the companies – but EatFirst has pivoted and I haven’t heard subsequently that any of the others are doing well.

The consensus post mortem on SpoonRocket says they couldn’t provide a quality service at their promised price point. In other words, the fundamentals didn’t add up – after the cost of ingredients, preparation and delivery there wasn’t enough left to cover customer acquisition costs. There’s a strong suggestion that they cut the ingredients budget to try and make the numbers work, but quality suffered and customers turned away.

These are similar reasons to why we didn’t invest in any of the copycats and they could have been predicted much earlier, possibly at the outset.

In the office this morning we were discussing why businesses like SpoonRocket get cloned. Entrepreneurs should and do look everywhere for inspiration about their next startup, and headline friendly ideas from the US naturally catch attention, particularly when they’re backed by YC or get big Series A investments. However, the interesting question is why ideas like SpoonRocket seem to get uncritically copied. We think it’s because the founders are thinking more about whether they will be able to raise money than whether the idea is going to work over the medium to long term. There’s an assumption, possibly valid, that the hype and momentum around the US equivalent will be enough to carry a financing without anyone poking too much at the model.

The takeaway here is obvious: potential for long term success is far more important than ease of short term fundraising. This approach might mean harder work at the beginning, but as SpoonRocket has shown, it pays dividends in the end.

Note that SpoonRocket’s demise doesn’t mean that on-demand food doesn’t work as a category. Sprig, for example, looks like it is succeeding with a higher price point and slower delivery.

Assessing resilience

By | Startup general interest | No Comments

At the dinner before the Forward Partners board meeting in February we were talking about the characteristics we look for in entrepreneurs. I was going through my usual list – drive, discipline, charisma, intelligence, resilience etc. etc when one of our investors interrupted to ask how we assess resilience.

He caught me out. We form our view on whether to back entrepreneurs by spending time with them, discussing their business idea, what they’ve done in the past and with a workshop to see how we work together. In that process we consciously test and probe and have a pretty good track record of backing people who have gone on to be successful, but we don’t do anything to directly test resilience. We like backing entrepreneurs who have a failure in their past and have a point to prove, and the fact that they’ve picked themselves up to go again shows resilience, but that’s all.

I’ve been thinking about it since though, and happened on an article today about learning resilience which looks at research in this area and points to simple tools for assessing and improving resilience in people. This is important to people making investment decisions, but it’s also important for anyone hiring people to work at startups. Startup life is like a rollercoaster and it takes resilience to get to the end with a smile on your face.

The biggest determinant of resilience turns out to be how we react to traumatic events. People who construe them positively, perhaps seeing them as a challenge to be learned from, are much more resilient, whilst those of us who make negative construals, perhaps blaming fate or feeling out of control, tend not to bounce back so easily.

The test for resilience, therefore, is to ask about traumatic events people have suffered and look for positive construal. More resilient people will talk about what they learned and how they overcame the setback. Less resilient people will talk more about bad luck and be more inclined to re-live the pain.

Finally, the good news is that positive construal can be taught. Techniques include encouraging people to change their explanatory style (“bad events aren’t my fault”), to place the event in perspective (it’s just one small part of life), and to believe they can fix the situation.

With hindsight it’s not surprising that resilience correlates with positivity. But then hindsight is a wonderful thing 🙂