Evolving our investment strategy

By | Announcement, Entrepreneurs, London, Startup general interest, Strategy, Venture Capital | No Comments

This is a long post (1,900 words). For those of you who are time poor here’s the tltr:

  • Forward Partners operates a focused investment strategy because it helps us make better investment decisions and provide better support to our companies
  • A good focus area for us is one that can generate 50+ deals and where we can build some generalised expertise that helps with our decision making and value add
  • Until now we have focused on marketplaces and next generation ecommerce
  • Recently we evaluated lots of options and did a deep dive on Applied AI before selecting it as our next area of focus

For the three and a half years that we’ve been going, Forward Partners has operated a focused investment strategy. We observed that small transactions of all types are increasingly moving online and backed the companies that were helping to accelerate that trend. That meant lots of consumer and small business focused marketplaces and next generation ecommerce companies. Lost My Name, Appear Here and Thread are three of the better known examples, but overall there are 37 companies in that portfolio.

We chose to be focused for three reasons. First, and perhaps most important, being focused enabled us to build up expertise that resulted in better investment decisions. Specifically, we feel we have strong capabilities in working out whether customers will value products highly and whether it will be possible to market them cost-effectively online. Secondly, we have seen so many similar companies now that we have a good sense of what they should be achieving by when. We are better able to see problems coming and advise on strategies to work around them. Being expert in an area makes us better board members and hence better able to win deals with the best entrepreneurs. Finally, focusing allows us to add more value operationally so our companies can execute faster and with higher quality. The companies we back often share the same challenges as each other and because we focus our team has solved those problems many times over.

However, venture capital is a dynamic business and good focus areas don’t last forever. We are still seeing lots of marketplace and next generation ecommerce opportunities, but as we move into our second fund we decided to add another focus area to make sure we will continue to have enough high quality opportunities to invest in over the next four years.

Our first step was to define the what we mean by a “good focus area”. For us the following characteristics are important:

  • Will generate 50+ deals
  • We can build knowledge that’s broadly applicable across the focus area and gives us an advantage versus other investors
  • We can articulate a few underlying investment theses
  • We can articulate use cases
  • Suitable for early stage investment
  • The UK has some kind of advantage

Then we had a high level discussion about what areas we might focus on next. A couple of interesting things came out of that. Firstly we like to invest in sectors that are rising from the low point of the Gartner Hype Cycle. Investing at this point leverages our key capabilities of assessing whether customers will love products and whether companies will be able to market them cost-effectively. If we get the timing right then mass adoption should be achievable. Investing with this strategy means we don’t chase the very rapid value appreciation that sometimes occurs at the beginning of the Hype Cycle, but we think the benefits of focus outweigh the cost of the lost opportunity.

The other interesting point to come out is that investing in deep tech at the very earliest stages is difficult. One of the key drivers of success for us as a fund is backing companies that make rapid progress and are able to raise up rounds a year or so after we invest. To do that they must pass valuation milestones. With ecommerce and marketplace companies those milestones relate to sales and unit economics and are easily demonstrable. Progress at deep tech companies, on the other hand, is based on internal development milestones and it’s difficult to predict how next round investors will respond. Until a product is released and is in the hands of customers, which can take years, the only evidence of success is internally reported improvements in algorithms and the production of code. I’m sure there’s a way to solve this for deep tech investments, but we haven’t figured it out yet.

The next stage for us was to brainstorm potential areas of focus. Each member of the investment team went away and over a couple of weeks contributed ideas to a shared Google Doc. Then we reconvened with the objective of choosing a single area on which to focus. Via a process of discussion, voting and then amalgamation of ideas we decided to look seriously at making “Applied AI” our next focus area. That would mean investing in companies that were using well understood artificial intelligence techniques to build new and superior products.

We felt that Applied AI is attractive because:

  • It’s a broad enough area to generate 50+ deals
  • Is one where we already have knowledge and could could go on to develop a deep expertise in the different techniques and their application
  • Is at the right point in the Hype Cycle and plays to our strengths in evaluating demand

The major concern we had is that AI more generally has been a popular investment theme with other investors for some time and we wanted to make sure that Applied AI is sufficiently differentiated to be a viable investment focus for Forward Partners.

We decided to go away and do some work to improve our understanding of the area with the aim of answering the differentiation question and convincing ourselves more generally that Applied AI has the potential to yield a flow of high quality investment opportunities over the next 3-5 years.

To that end we sought to answer the following questions:

  • What are the AI techniques that can be applied cheaply and predictably by startups?
  • What capabilities do those techniques enable? (e.g. natural language processing enables conversational interfaces)
  • What use cases can these techniques be put to? (e.g. conversational interfaces to FAQ databases can improve customer service)
  • Are there enough use cases where the addition of ‘intelligence’ makes the product meaningfully better?
  • How can Applied AI startups meaningfully show progress in their first year of operations?
  • How much AI talent is required at pre-seed and seed stage Applied AI startups and can we find enough companies with that talent?
  • How can we add value to Applied AI companies?
  • What are some hypothetical strategies for Applied AI startups to obtain the data they need to train their algorithms? (Addressing the “cold start” problem.)

The first three of these questions relate to the size of the opportunity set. To choose Applied AI as a focus area we had to believe there is the potential for 50+ deals that would make sense for us. To get an answer we mapped an extensive list of Applied AI techniques against the Gartner Hype Cycle, and put them into a spreadsheet linking them to the capabilities they enable, then linked those use cases to capabilities, and finally the use cases to ideas for companies. After that we scored the company concepts based on their attractiveness as Forward Partners investments and looked to see how many high scoring opportunities there were. Fortunately there were many.

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Once we had comfort on the size of the opportunity we turned to the final three questions which relate to whether the opportunities will work as early stage investments. Our approach this time was to hold workshops and meetings with people who had experience of building applied AI businesses. Thank you in particular to Matt Scheybeler, Steve Crossan, and Martin Goodson for helping us with this part of the journey.

One important learning at this point was that in the early stages of Applied AI startups the artificial intelligence component isn’t that complicated. We heard multiple times that you can get 80% of the way there with statistics, that almost any AI technique will get you the next 10% and that it’s only when you get to the last 10% that you need to get clever. That was great to hear for two reasons:

Most startups with true potential don’t get to the last 10% in their first couple of years so hard to find AI talent isn’t a prerequisite to get started.

Our existing strengths in building products that resonate with customers and driving growth aren’t eclipsed by a requirement for deep tech knowledge – i.e. we can help.

The other important point we learned is that Applied AI startups can get product to market quickly and drive predictable value appreciation in the timeframe of a pre-seed or seed investment. We talked through numerous real and hypothetical examples and got confident that when we make Applied AI investments they will be able to raise their next rounds at a good step up in valuation. That’s one of the most important questions any VC has to answer and we were pleased to find that because they can get started with simple algorithms, Applied AI startups aren’t different from other software startups in this regard.

The final piece of our investigation was to think about the “Cold start” problem. We talked about three different data strategies for Applied AI startups and what that would mean for us:

  • Founders have access to some proprietary data
  • Founders have an innovative idea for using publicly available data
  • Founders will generate data from their business and develop algorithms later

In the first two of these cases Forward Partners needs to evaluate whether there is value in the data pre-investment and to help the founder extract value from the data post investment. In the third case we need to be able to evaluate whether the business will be able to generate data, and then if they can the evaluation is the same as in the first two cases. All of this points to us enhancing our data science capability at Forward Partners.

Our conclusion therefore, is that Applied AI is an attractive focus area for Forward Partners. It looks promising that there will be the required volume of dealflow, we can see how an early stage investment strategy will work, and we can leverage our existing strengths to help businesses in this new area. The only new requirement is that we enhance our data science capability.

Hence for the last couple of months we have been targeting Applied AI deals alongside our traditional focus area of marketplaces and next gen ecommerce. Wherever possible we like to take an experimental approach so we have decided that we will run with it until the end of the year and then evaluate. In parallel we are investigating what sort of data science capability we need. That will in large part be determined by the sort of opportunities we see and end up investing in, so for now we are relying on relationships with people who help us on an ad hoc basis with a plan to bring the capability in house when the picture gets clearer.

And I’m pleased to report that we have already made our first two Applied AI investments. Neither is announced yet, but watch this space 🙂

Hyphen-tech – a trend that bodes well for London and New York

By | London, Startup general interest | No Comments

I just came across the concept of ‘hyphen-tcch‘:

the numerous sub-sections of startups that align themselves with various industries: fintech, fashiontech, mediatech, and so forth

I think this is the big opportunity right now that much of the pure play internet opportunities are behind and explains why many of Forward Partners’ investments are pushing the internet out into the four corners of the commerce. Recent examples include Appear Here (property), Thread (fashion), Zopa (finance), Live Better With (health) and Patch (homewares). In all these cases the founders have to work closely with existing players in their industries making ‘hyphen-tech’ a good name.

London and New York are good places to build these businesses because we combine strong startup ecosystems with world leading financial services, fashion, media and so on.

Europe’s growing share of $1bn startups

By | Exits, London, Uncategorized | One Comment

Aileen Lee of early stage fund Cowboy ventures wrote a post for Techcrunch yesterday looking at the characteristics of 39 startups founded since 2003 that are worth over $1bn. She calls them ‘Unicorns’. There has been a lot of discussion since. Most notably Dave McLure who Tweeted that “The future of venture capital is not about picking unicorns more accurately — it’s about educating and empowering 2-5% of talented humanity w/ $50k/$5m capital” (which I largely agree with) and Fred Wilson who created a Hackpad to crowdsource a fuller list of $1bn companies.

Fred’s Hackpad lists $1bn+ value companies founded after 2003 and founded before 2003. In the pre-2003 cohort there is just one European company (Vente-Privee) whilst in the post 2003 cohort there are eleven (Klarna, Spotify, Skype, Zalando, Supercell, Rovio,, Criteo, Wonga, Zoopla, Soundcloud). Now the list is not complete (e.g. it excludes ARM and Autonomy) and elements are debateable (I’m not sure Soundcloud has achieved a $1bn valuation yet) but even with those caveats its clear that Europe has made a big step forward in creating ‘Unicorns’.

Finally, if you’ve ever wondered why VCs care so much about $1bn exits, Aileen explains why:

Why do investors seem to care about “billion dollar exits”? Historically, top venture funds have driven returns from their ownership in just a few companies in a given fund of many companies. Plus, traditional venture funds have grown in size, requiring larger “exits” to deliver acceptable returns. For example – to return just the initial capital of a $400 million venture fund, that might mean needing to own 20 percent of two different $1 billion companies, or 20 percent of a $2 billion company when the company is acquired or goes public.

We have a small fund here at Forward which means we aren’t subject to this logic. We’d love our companies to be worth $1bn of course, and hope and expect that some of them will be, but we can make great returns for our investors even if that doesn’t happen and we support our companies in finding the right level of exit for them.

In Britain, online companies are growing 50x faster than the average company

By | London, Venture Capital | 2 Comments

CityAM reported today on research from Barclays:

Research from Barclays shows that firms that sell their products or services mostly online have seen revenues grow by on average 11.4 per cent in the last three years, over 50 times faster than GDP growth of 0.2 per cent over the period.

The research shows that the expansion is being driven mainly by small and medium-sized firms. Most high-growth businesses have fewer than 100 employees, while average revenues are £8.9m. Almost a quarter of firms – 23 per cent – are based in London, despite the capital accounting for just one-eighth of the UK’s population.

The dominant macro-economic story at the moment is one of ‘stagnation’ and ‘low growth’ which accurately reflects the headline statistics and situation at many of the world’s largest companies, but it fails to convey that there is a lot of volatility in the markets that add up to the flat headline figure. This data from Barclays illustrates the point well – average growth is flat, but UK online companies are growing at an average of 11.4%.

When we look around us this isn’t surprising. Some markets are collapsing – e.g. newspapers, much of high street retail, broadcast TV – and therefore for the headline figure to be flat some others must be growing fast – e.g. online retail.

This, of course, means that even in these difficult times there is opportunity for investors who are able to get money to work in those growth markets.

The other interesting thing about the Barclays research is that it shows much of the growth is located in small companies based in London – the sweet spot for venture capitalists.

30 quad-copters create Star Trek logo over London

By | London | No Comments

This is one for any Trekkies out there. As hype is building for the upcoming Star Trek movie Star Trek into Darkness Paramount Pictures decided to hang a huge, glowing Star Trek logo over London last night (picture above).

The logo comprised of 30 LED-carrying quadcopter drones was approx 308 feet tall with the highest point some 426 feet above ground. The two min video below combines a trailer for the film with the story of how the logo was made.

Star Trek, a great PR stunt and quadcopter drone geekiness all rolled into one. I’m smiling from ear to ear.

Some evidence of the UKs growing stature as a centre for technology and entrepreneurialism

By | London | 2 Comments

It’s Friday and I’m going to indulge myself in one of my favourite passtimes – talking up the success of London and the UK as centres for technology and entrepreneurs. You may have seen the following data in the Standard earlier this week:

  • The internet contributes 8% to the UK’s GDP, higher than that of any other G20 nation
  • We spend more online than other nations too – projected to be 25% of retail sales by 2016, 2x the level of Germany, our nearest competitor
  • London is a magnet for talent – over a third of the population here was born outside of the UK. The thriving art, fashion and media scenes make London an attractive place to live for many entrepreneurs and developers.
  • Major US internet companies are growing the size fo their London dev teams – Facebook, Google and Amazon have all taken new spaces so they can grow their teams here
  • There is strong government support for startups in the UK – ranging from world leading tax schemes like EIS to the entrepreneur’s via to strong support for the east London tech cluster
  • Number of east London tech startups has grown from 200 to 1,300 in the last three years [note: this stat looks dubious to me, but I’m sure it is directionally correct]
  • 61,300 new businesses launched in London in 2011, up from 51,000 in 2009

In short, London and the UK are great venues for technology startups and an increasing number of entrepreneurs are taking advantage of what we have to offer. Happy days.

Tech City on the march

By | London | No Comments

Last Friday Techcrunch published a great post on the recent success of Tech City, the heart of London’s startup scene.  According to data compiled by TechHub, and DueDil there are now 93 are true product companies in the region, up from 16 in 2008.  The number of product startups across London is 211, so getting on for half of the activity is in Tech City.

The two other stats I like from this infographic are:

  • The big increase in the number of startups founded since 2006/2007 across London and in Tech City
  • That only three in ten of the directors are ‘running their first company’ – I’m a little unclear as to whether that means ‘founder directors’ or all directors, but either way it implies that we now have a wealth of serial entrepreneurs at work

The government has said that there as many as 600 startups in the area when the definition is expanded beyond product companies to include agencies and the like. This figure is based on self-reported data and is probably on the high side (see GigaOM for more detail) but all agree that Tech City is growing fast and is now buzzing in a way it wasn’t 2-3 years ago.



London underground to get a mobile network – finally

By | London | 7 Comments

image It has emerged this morning that Huawei are bidding to provide mobile network on the London underground in time for the 2102 Olympics.  In my opinion this development is long overdue.  Just about every other major city I visit has mobile access on their metro system and if London is to remain a major financial, media and technology centre we should have the same.  Internet access is a key piece of infrastructure for modern economies and given the number of people that use the underground every day and the amount of time they spend there the benefits of web access underground can only outweigh the costs.

Over the years I have heard that problems of bureaucracy were the responsible for stymieing development, and I understand that the ageing infrastructure in the underground makes development expensive (many of the copper cables are apparently so old that if you move them they crack and stop working) but I suspect part of the problem is that the way mobile bills are structured operators wouldn’t benefit much the extra usage they would get.  Too many people are on unlimited data plans and don’t use up their monthly bundle of minutes and texts, and if these people use their phones on the underground there will be a marginal extra cost for operators, but no extra revenues.

I carry two mobile phones, a Blackberry which I use for voice and email, and an iPhone for browsing and apps.  Until recently the iPhone cost me virtually nothing, as provided I had call credit data access was unlimited, and because I use the Blackberry as my primary phone I rarely used up my call credit.  A month or so back that changed and now I have to regularly top up just because of data usage.  Obviously that costs me money, and is a pain on that level, but overall I welcome it as a step towards a more sustainable charging model.  Spectrum is a scarce resource and operators should be charging more to those of us who use it more, for data as well as voice.  If they did that then the business cases for further development of their networks would be easier to make, which would be a good thing for all of us.

There is a case that the government, or local government, should be subsidising the rollout of mobile to the underground as a public good.  I think there is merit in that argument, but right now and for the next couple of years there simply isn’t enough money to go round.  It is good to see that the London Mayor Boris Johnson and his team are doing everything they else they can to make this development a reality.

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East London gets a boost from Cisco

By | London | 2 Comments

Cisco and the UK government announced yesterday that Cisco will invest $500m in East London, in a boost to Cameron’s previously announced plans to build a tech cluster from Shoreditch to the Olympic Park.  The money will go to build two networked innovation centres and five annual competitions for SMEs.

Clusters are important for the startup ecosystem and I’m pleased to see Cisco’s involvement here, as it will add to the emerging critical mass in the Shoreditch area. 

If you’re interested in more detail Tim Bradshaw of the FT published a good article and fun video on what is going on there at the end of last week.

As I’ve said, I think this is a good thing.  A greater density of engineers and entrepreneurs will make it easier to start and build companies, hiring will get easier, more knowledge will get shared, fewer mistakes will get made and we will have more successful companies – for me it is as simple as that.  I understand the cynicism from some quarters about government announcements and the extent to which they might be talking up this initiative for PR purposes, but for me that doesn’t matter too much.  The important thing is that government support is increasing and that it looks like there is real commitment to building a tech hub.

One thing I will say is that if we are building a tech hub in East London we should focus all our national resources there.  As mentioned above, the greater the density of engineers and entrepreneurs the better, and that means we should focus on a single national hub, not multiple regional ones – in a country the size of the US they only have one major hub (Silicon Valley) and a couple of smaller ones (principally New York).  This is unfortunate for areas outside London, particularly given that many of them are less well off, but I think we have to maximise our chances of success with this project and that makes London the only real choice, given the existing startup activity, proximity to capital, proximity to the City and media customers and good travel links.

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Can do attitude – US v UK

By | Entrepreneurs, London, Venture Capital | 8 Comments

At the NMK conference yesterday there was a bit of a debate about the relative merits of American optimism v. good old fashioned English cynicism. It got me thinking – and mostly that we could help ourselves a bit in this area.

This is one corner of the “is Silicon Valley a much better place to do business?” debate, and my view in this area is much the same as elsewhere – that we will help ourselves by having more confidence. It is for this reason that I post frequently about all the good stuff that is going on here – check out this link for a full list.

To set the scene – Jason Calacanis was making the point that at the Geek dinner the night before last he had encountered a lot more cynicism and negative comments about Twitter than he would have at a similar dinner at home in the Valley. To his mind that is a bad thing – cynicism brings people down and sucks their energy. Allowing people to dream on the other hand sets you free.

He got a bit of a negative reaction from the folk on the panel – the key argument there was a bit of British realism, pragmatism, even cynicism can be a good thing. This way people’s ideas get thoroughly tested and we avoid big, expensive mistakes.

Then there was some response from the floor which highlighted the higher cost of failure over here. A failed start-up looks much worse on your CV if you are touting it around in this country than in the US.

To me a bit of realism is essential – I need to be making good investments and not dreaming – but nonetheless I come down towards Jason’s side of the argument. I’ve worked as a VC both here and in the Valley and you can see the pros and cons of both approaches. We make less stupid and expensive mistakes here, but at the same time we have a habit of destroying half decent ideas before they get a chance to flourish – the net result is certainly that they have more big wins than we do (admittedly there are lots of other contributing factors).

I think at the end of the day we would all happily put up with a couple of extra expensive failures if it meant we had produced another Betfair/CSR/Skype – that is what tells me we should try to look more at how things might work than why they shouldn’t.

I can be as bad at this as the next guy by the way. I remember a point a year or two ago when in a moment of introspection I realised I was beginning to hope much more and not look so much for reasons why things might not work. It was at that point I realised how much the dotcom crash had affected me.

Enough preaching (it doesn’t sit easy with the Englishman in me after all) – to finish on a positive note, I think our collective scepticism is partly to do with the maturity of the VC/entrepreneurial community. As I have written before as an industry we are only 10-12 years old at any scale and we are only know starting to see the success stories coming through the nuclear winter of the dotcom crash. Scepticism is perhaps a natural consequence of there being few good case studies to follow. The current wave of success will hopefully change that. Similarly people will hopefully start to look less negatively on the CVs of failed entrepreneurs when there are more examples of successful ones around.

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