Monthly Archives

June 2016

Debating with intuition as well as logic

By | Startup general interest | One Comment

If you’ve ever been frustrated that your neat logical arguments aren’t persuading people, this article is for you…

Daniel Kahneman’s Thinking, Fast and Slow had a strong influence on my thinking last year. He helped me get greater clarity on the difference between instinctual and reasoned thinking and I blogged about how VCs need to switch between thinking fast and thinking slow.

Now I’m reading The Righteous Mind by Jonathan Haidt which offers another take on the subject.

Haidt is interested in how we come to moral judgements and his work shows that most people start by making a snap decision and then afterwards they find a logical argument that supports their position. The point here is that the logic comes second, and it is rare for people to change their initial judgement in the light of rational argument. He then goes on to argue that this is the way most people think about all topics. He explains how western philosophy puts reason on a pedestal and venerates those who are able to think clearly and dispassionately with the result that we have ended up seeing emotion as an impediment to good decision making.

The reason Kahneman is so interesting because he challenges the notion that purely rational thought should be our goal. He shows that for a lot of decisions we rely on intuition and don’t employ reason at all.

I’m interested in Haidt because he goes a step further. He shares Kahneman’s view that most of our decisions are made intuitively, but argues for a more nuanced model of how that happens. He makes an analogy with how we process visual information. First there is a sub-conscious pattern matching and then if the image is ambiguous and resolving that ambiguity is important we add more and more reasoning until we’ve cracked it. Where Kahneman has a dichotomy between intuitive and reasoned thinking Haidt sees a continuum. Moreover, for Haidt, all thinking processes start as intuitive and then reason is added later if needed and to the extent the thinker is inclined to think that way.

Anyone who works in startups has to continually make decisions from relatively small amounts of information. Doing that well not only requires making the right calls, but also having good judgement as to when to make a decision and when to go looking for more data. Good investors and operators have ‘golden guts’ and come quickly to firm judgements. One of the challenges we all face from time to time is that our judgements don’t tally with our partners.

One of the things I like about Haidt’s model is that it helps understand how we come to those judgements and therefore offers an increased chance of resolving differences. Step one is to recognise that opinions on both sides are most likely rooted in an intuitive pattern match of some kind. Step two is to uncover those patterns and look there for the sources of differing views. People’s first answer to ‘why do you believe x?’ will most likely be post hoc rational analyses, and getting to the underlying patterns will require a commitment to the process on both sides and patient use of something like the five whys technique.

If this process is going to work it requires both sides to recognise that their opinions are most likely rooted in intuition as well as logic and to be ready to accept that they might be the one who needs to change.

Seed and pre-seed – trends and definitions

By | Venture Capital | 2 Comments

The increasing capital efficiency of startups has been changing the face of venture for the last decade or so.

  1. The first thing to happen was that the bar for a Series A went up – unsurprising given that startups could now get much further with pre-Series A amounts of capital (2005-2010)
  2. That created a gap in market which sub $100m dedicated seed funds (aka micro-VCs) stepped into – there are now over 300 of them (2005-2016)
  3. Then competition in the seed market led to increased round sizes driving the Series A bar still higher and causing seed investors to in turn look for more progress before investing (2013-ongoing)
  4. Creating a gap for Pre-Seed which is beginning to emerge as a category (2015-ongoing)

NextView Ventures recently published this graphic which captures the trends nicely.


Note that they have added a ‘Second-Seed’ stage which I haven’t described above. Their point is that as the bar for Series A rises an increasing number of companies are raising second seed rounds to get them there. That’s definitely happening, but I’m not sure I would have broken it out as a separate category on this chart as the goals and investing disciplines of Seed and Second-Seed are pretty much the same – get from early traction to the scaleable economics that yield a Series A.

However, Pre-Seed is very different. The criteria and evaluation are very different and the goals are to be ready for Seed rather than Series A. As you can see from the table below, the most significant difference is that Pre-Seed investors base their decision on team, vision and desk research whereas Seed and later investors also look at companies’ products and customers’ reaction to them.

Screen Shot 2016-06-20 at 14.30.57

Note that venture is an industry of exceptions and whilst this table is accurate for the middle of the bell curve there are plenty of companies that have raised outside of these criteria. The exceptions come for a myriad of reasons, common ones include experienced founders are able to raise seed or even Series A size rounds at the pre-seed stage, companies in hot markets or sectors (e.g. current account startups in the UK last year), and situations where tech development or regulatory costs demand more capital.

Forward Partners invests at the Pre-Seed and Seed stages, with slightly over half of our deals coming at Pre-Seed. Our founding vision was to deliver amazing operational support to our portfolio companies through our startup and growth team covering product, design, development, marketing, recruitment and now PR and comms, and what we’ve learned over the last three years is that operational support makes most difference at the Pre-Seed stage (we say Idea Stage). When we invest at Idea Stage our team becomes the company’s team for a few months, and teams execute faster. The leverage comes because founders are able to spend less time on hiring and recruitment and because our experience helps them plot a better path.


Europe is underweight in Micro-VC

By | Venture Capital | One Comment

ValueWalk have reported on new data out from Prequin that shows continued growth Micro-VC fundraising. Micro-VC growth has been going on long enough now that I’m hearing LPs question whether we’ve reached saturation point and this segment of the market would benefit from some contraction. Certainly that’s the argument Samir Kaji is making.

However, Samir’s comments are largely based on US data and don’t separate out Europe and Asia. Besides the continued growth the interesting thing for me in the Prequin data was the geographic splits.

This chart shows that compared to the rest of the world Europe has a lower ratio of Micro VC funds to Non-Micro VC funds than the rest of the world, suggesting that unless the US is 2x+ overweight in Micro-VC we can expect substantial growth in the category over here. Anecdotally that feels right to me.


For completeness I’ve also included charts showing the number of funds and the amount of capital raised. The surprising thing for me here is that in most years Asia has seen more Micro VC fundraises than Europe.



Mattermark data shows US venture is slowing down – Europe may be insulated

By | Venture Capital | One Comment

Stage-by-Stage Change in US Venture Capital Deployed (Deal Value) – Mattermark










Stage-by-Stage Change in US Venture Capital Deal Volume – Mattermark










Mattermark just released data for deal volume and value in the US in May. As you can see the trend is down, particularly in Seed and Series A. Moreover, as they point out these are lag measures because they report announced deals and deals are often announced 6-12 weeks after completion.

The implication is that Seed and Series A have been in slowdown for 3-5 months now.

The Q1 data for Europe showed investment was flat on Q4, but it will be interesting to see if we see the same declines as the US in April and May. Anecdotally it feels to me that activity is slowing here, but the slowdown isn’t as marked as in the US. That wouldn’t be surprising given that the ramp up in investment activity here in 2013-2015 was less pronounced.

Whatever your view on which way the market is likely to move it makes sense to plan for a difficult fundraising climate over the next 12-24 months. That means having an option of getting to profitability (where possible), allowing extra time to raise money, making existing funds last long enough to achieve significant progress (18 months) and focusing on unit profitability. Plan for the worst, hope for the best.

Physical retail in trouble as shoppers continue to move online

By | Ecommerce | One Comment

New data out from BRC-KPMG shows online sales of non food products grew 13.7% in the year to May 31st, taking online penetration of non-food to 21.2%. Physical retail of course went the other way decreasing 1.6% in the three months to the end of May. During that period we also saw the collapse of BHS and Austin Reed – both bastions of the UK high street.

Retail analyst Diane Wehrle from Springboard is now predicting that retail footfall is in permanent decline and CityAM are running headlines saying 2016 set to be year of retail failures.

At Forward Partners we’re all about creating innovative, new businesses and it’s never nice when industries suffer, but the continued demise of non-food physical retail has an air of inevitability about it. The number of shoppers is declining and prices are under constant pressure and that will leave an increasing number of shops unable to generate sufficient sales to cover their fixed costs. This is likely to be an accelerating trend as each new failure further reduces footfall.

It’s a different story online though, where new retailers are coming to market with innovative products and services. The erstwhile physical retail shopper has moved online because the services are more compelling. That’s sometimes about price, but more often it’s about product selection, personalisation and convenience.

79% of non-food sales are still offline and at current rates of decline that will be 69% in three years. UK retail spend was £339bn in 2015, so that equates to £34bn of business moving online. That’s an opportunity!

Whilst the short term is all about retail market share moving from offline to online many of the more forward looking companies have blended clicks-and-mortar models and I expect that is what will dominate over time.

Voice – the next big paradigm shift

By | Amazon, Google | One Comment

I just worked my way through 213 slides of Mary Meeker’s annual Internet Trends publication. If you’re at all into understanding how the tech world is evolving I recommend you find the time to read it yourself (embedded below). This time round the most thought provoking slides for me were slides 115-133 where she talks about voice as a computing input.

The way I see it, in the next five years voice will replace typing to become the dominant input method for quick commands and short passages of text. Here’s why:

  • Speaking is much quicker than typing – according to Mary Meeker it’s 3.75x, and the difference will be greater on mobile
  • Speech recognition is starting to work now – as evidenced by the success of Amazon’s Echo and the fact that 20% of Google Android app searches in the US are now voice
  • The keys to success are accuracy and latency, with both improving fast. Google, Baidu and Hound are reporting 90%+ accuracy rates and speculating that adoption will sky rocket when accuracy reaches 99%. Moore’s law is taking care of latency.

However, audio out sucks in comparison with text on screens, so I think we will see ‘voice in – text out’, most obviously on mobile phones where we have a great screen already. Amazon’s Echo and Google’s Home are interesting in this regard. At the moment they feel a bit uncomfortable to use because they don’t offer much feedback that shows whether they are understanding what you are saying and audio out isn’t great to confirm purchases or other actions. However, they are are designed to be operated at distances that preclude reading screens so the solutions are simple. A bar of LEDs on the side of the device  that light green when comprehension is high and red when it’s low would help solve the first problem.

‘Voice in – text out’ throws up some interesting design challenges, and big rewards will accrue to the companies that crack them first.

Additionally, for some time voice dictation will remain inferior to typing for longer form documents where the precise choice of words is important. I might be able to speak at 150 words per minute, but I can’t read and correct what I’m saying at that pace.

Amazon, Google and Apple are the ones pushing voice the hardest, and that’s perhaps not surprising as it will favour large companies and platform owners. Convenience is one of the big benefits of voice and following voice searches we will collectively choose default options much more often than we do today. I can imagine asking my Echo to buy flowers for my mum and simply saying ‘yes’ when I’m offered something similar in price and style to my last purchase. That gives Amazon amazing power to decide who gets my business, and that’s power they will leverage to take a bigger cut. That’s best for Amazon and second best for large existing brands. It’s bad news for startups who will struggle to get promoted due to a preference for recognisable brands and concerns over their ability to handle volume. (This effect will be less pronounced if Amazon do put a screen on the side of future versions of the Echo – then I’m more likely to browse through multiple options.)


Non traditional venture investors are still getting to grips with startup investing

By | Venture Capital | One Comment


Perhaps the biggest story in venture capital from 2012-2015 was the rise in late stage valuations. That was fuelled in large part by new investors coming into the private company market. Because of Sarbanes-Oxley and other factors, companies have been staying private longer and mutual fund and hedge fund investors who didn’t want to miss out on the late stage growth at companies like Uber, AirBnB, and Snapchat started investing in late stage private company rounds. Hence the growth in the number of hedge funds investing in tech startups that you can see in the chart above.

Because there aren’t that many unicorns (still) and the amount of money in hedge funds and mutual funds is 500-1000x the amount that VC funds raise every year the new entrants to venture market acted were ‘hot-money’ that distorted the market driving valuations up way past comparable public companies – as you can see in the chart below.


That’s clearly not sustainable and the catalyst for change came when auditors at Fidelity and other new entrants to the VC market started writing down the valuations of their private company holdings in late summer last year. At that point investing in unicorns suddenly became a lot less attractive. That’s what the down slope on the far right of the chart at the top of this post shows.

Mutual funds and hedge funds exiting the late stage venture market has had trickle down effects to earlier rounds driving down valuations and increasing the time it takes to get deals closed. So far that has felt like heat coming out of the market rather than a collapse, but the really interesting question is what happens next. Investment data for Q1 suggested the decline might have flattened out, but then data for April was less positive, with CBInsights suggesting that the public market woes in February might have precipitated a further contraction in the venture market.

Against this backdrop the folks at Industry Ventures, a Limited Partner that invests in VC firms, spoke with 40 mutual fund and hedge fund managers to find out what they are thinking. You can read about their findings and conclusions in detail here, but reading between the lines and factoring in what I’ve heard elsewhere my view on the situation is:

  • As long as companies are staying private longer, mutual funds and hedge funds will want to invest in private companies. Otherwise they will shrink their universe of opportunities and miss out on many of the best growth opportunities.
  • However, they are still learning how to invest in our sector. The dynamics are very different to IPOs or public market investing. Each deal is in effect an auction where mutual funds and hedge funds have less information and less time than they are used to, the risk-return profile is different, and there’s less liquidity. Meanwhile, auditors are increasingly forcing them to adjust valuations quarterly when private companies don’t manage themselves to deliver quarterly improvements the way public companies do. So lots to figure out.

However, this is a positive view. If I’m right then mutual and hedge funds will be back investing in private companies before too long and what we are experiencing now is a correction not a crash. The catalyst will be when public and private price/sales ratios come back into line.

Quality over quantity on The Equity Kicker

By | Announcement | One Comment

Robert Scoble is perhaps the greatest blogger of them all, so when I started blogging in 2006 I read Naked Conversations, his guide to blogging. One of his tips was to post every day. At the time we were all reading blogs in feedreaders which we checked every day for updates from our favourite bloggers. I tried them all, but Netvibes was my favourite. At that point in time blogging was in it’s infancy and readers were using feedreaders to keep up to speed with rapidly expanding content, therefore to serve up content in a way which worked for readers it was key to post daily. I also figured that an everyday habit would be easier to maintain than posting on some days but not others.

So I’ve posted pretty much every working day for nearly ten years now.

But the world has changed. When I look in my traffic sources now it’s all Twitter, Facebook, Google and aggregators like Mattermark, channels where posting daily makes much less of a difference. In fact most people are surprised to learn I write that frequently. Twitter is different from feedreaders in that inactivity on my part doesn’t waste screen real estate for my followers. They are equally likely to see my post-tweets if I post daily, twice per week, or even once a fortnight.

In summary, posting frequency no longer effects distribution.

The other thing that’s changed is me. In 2006 I was a newly minted Partner at DFJ Esprit (now DraperEsprit) without the family, fundraising, and fund management responsibilities I have now. Blogging is still a priority for me, but on some days I struggle to find the time to do it justice.

So going forward I’m going to switch to posting twice per week, allowing me to spend more time making sure each post is good. I will also start writing posts in advance so I have time to get feedback before I hit publish. You will be the judge, but I’m hoping these two changes result in a higher quality blog.

This is the first of those posts. Next up will be some thoughts on mutual funds investing in startups and their impact on valuations and the VC industry.

Alignment before freedom

By | Startup general interest | One Comment

There’s a big multi-decade trend towards giving employees more freedom over how they spend their time. There are two drivers. Firstly, as the world changes faster and faster, quick response to new situations has become more of a competitive advantage and companies that empower front line employees to make decisions are winning over companies that have to wait for management to decide. The second, related, and more recent driver is that the best employees increasingly want to work in organisations that give them a large amount of control over their day to day activities. As Dan Pink correctly identified in his seminal book “Drive”, autonomy makes us happy.

The first step many companies took was to start managing by outcome, telling employees what they they should achieve rather than what to do, and then giving them autonomy over how they do it. The OKR system that many of you know is designed for this environment. Management set company goals which are then cascaded down through the organisation to individuals who figure out for themselves how best to achieve their objectives.

In the last five it so years radical CEOs have taken the trend to empowerment to the next level and given staff the power to decide what they do as well as how they do it. These CEOs want their employees to love their companies (and maybe love them) and to maximise productivity by allowing people to work on what they think is most important. Some of these experiments have worked well, most famously at Valve, where they have extraordinary employee loyalty and great creativity.

Other experiments have worked less well, often because the staff they give freedom to haven’t all pulled in the same direction. In other words they have found themselves with an alignment problem. I have seen examples in recent weeks where alignment issues resulted in productivity sapping disagreements over investing in new products and the desirable rate of growth. These are legitimate differences of opinion with no right answer and once someone has been given control over what they do there is little intellectual basis for imposing a product decision or rate of growth on them.

These companies have created a leadership challenge that could have been avoided. They gave their employees freedom before they had alignment and then when they tried to force alignment it was perceived as a removal of freedom that went against the ethos of the company. That contrasts with companies that have forced alignment first and then gave employees freedom afterwards. The experience of workers in these businesses is only one of gain.

The answer then is to only give freedom when employees are aligned.

This post is long enough already so I won’t write about how to gain alignment save to say that one way is to distil what the company does into a couple of simple phrases (at Forward Partners our job is to make great investments and deliver amazing help to our partner companies) and then align company and personal objectives with those phrases.

Pitch investors at the right level of abstraction

By | Startup general interest, Venice Project | No Comments

I’ve just read the a truly excellent guide to fundraising from First Round Capital. It’s a long read, but packed full of goodness and I highly recommend reading the whole article.

I’m going to pick out and expand on one point – it’s critical that founders pitch investors at the right level of abstraction. The two common mistakes are:

  • Pitching too much in the weeds, leaving investors unexcited about the big picture
  • Pitching at too high a level, preventing investors from really feeling the opportunity – you’re looking to create a visceral connection

As First Round put it:

The fundraising founder has to operate at the right oxygen level between the soil and the stratosphere. Not in the trenches, but not in rarified air.

Founders who are pitching too much in the weeds focus too much on operations, short term progress, and the mechanics of the business. If investors are worried about market size or exit potential, or if they are simply looking bored, you may be making this mistake.

Conversely, founders who are pitching at too high a level talk too much about market trends (often using poorly defined buzzwords) and don’t properly connect their story with their business. If investors are asking lots of questions about what you actually do or struggle to understand your story, then think about whether you are making this mistake.

The best pitches paint a picture of the future which is easy to understand and grounded in reality. Then they describe the path that will get them there, starting from where they are today.