Nic Brisbourne's view from London on technology and startups

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 | 3 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, Thread.com 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 | One Comment

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 | 3 Comments

founderexitdata

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.

 

Make your problems tangible

By | Startup general interest | 4 Comments

I re-read Eric Ries’s The Lean Startup this week largely because our partner companies do things a little differently to what I would describe as ‘classic lean startup’ and I wanted to get clearer on what the differences are and why. I don’t usually enjoy re-reading books, but this time I had lots of a-ha moments and it was a joy. It’s a very good book and deserving of it’s reputation.

One of Eric’s pieces of advice is to ‘make your problems tangible’. At the time he is recommending companies use cohort analysis instead of aggregated customer analytics so they can see whether changes to the product are making any difference. His point is that the only way you can see differences is to compare the behaviour of customers recruited since with earlier cohorts. If the product changes aren’t making any difference then growth in engagement or some other customer metric won’t be what you hoped for and you will have a nagging feeling that something isn’t working as planned. The cohort analysis makes the problem tangible.

That’s great advice in and of itself but it extends to all other areas. If you have a nagging feeling that something isn’t right think hard about how to make the problem tangible. Once a problem is tangible it’s much easier to fix it. In the above example the feedback loop from customers back to development gets much quicker making it easier for the dev team to cycle through ideas until they find something that works.

Other activities that can make problems tangible include:

  • Observing customers
  • Interviewing customers
  • 1-2-1s between team members and management
  • Encouraging feedback and a transparent culture generally
  • Unit tests

The list could go on and on. The point is to find ways to shine light on problem areas.

 

UK second only to US amongst large countries for ‘Digital Evolution’

By | Startup general interest | No Comments

W150210_CHAKRAVORTI_COUNTRIESBUILDINGDIGITAL1

The chart is from a Fletcher School study of how different countries are succeeding in embracing the digital revolution. You can see that the UK is doing very well on the Y-axis, showing that we are very “digitally evolved” and that we are doing OK in terms of progress – neither falling back or accelerating.

It’s easier for smaller countries to substantially re-orient themselves, as Singapore in particular has done, so the real point of comparison here are the other large developed countries: the USA, Germany, France, Italy, Spain and Japan. Our position amongst that group is strong, particularly given we’re part way through a period of lower state investment generally, but the message to the new Cameron government should be that there’s no room for complacency.

The measure of digital evolution is derived from four broad drivers:

  • supply-side factors (including access, fulfillment, and transactions infrastructure);
  • demand-side factors(including consumer behaviors and trends, financial and Internet and social media savviness);
  • innovations (including the entrepreneurial, technological and funding ecosystems, presence and extent of disruptive forces and the presence of a start-up culture and mindset); and
  • institutions (including government effectiveness and its role in business, laws and regulations and promoting the digital ecosystem)

Together these are the necessary pre-conditions for a fertile startup community. If any one is missing life gets much tougher for entrepreneurs. Policy makers wanting to improve our digital economy and attract the best entrepreneurs from around the world to these shores should target the detail behind each of the four drivers.

There’s more detail in the full report here. Much more…

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