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Startup general interest

When did tech become a dirty word?

By | Startup general interest | 2 Comments

The world is turning against tech. Silicon Valley is in danger of becoming the new Wall Street – public enemy number one. And it’s easy to see why. Facebook is being used to influence elections and promote hate speech. Google is pressuring think tanks to fire people they don’t like. And meanwhile Uber has grown into one of the most obnoxious companies on the planet. That’s just the news in 2017. To that, you can add enduring concerns over privacy, the dangers of AI, losing our children to their devices, and perhaps most dangerous of all, a growing sense that tech is a leading cause of the growing inequality of wealth. Meanwhile, we are easy to ridicule.

All this has come as a bit of a shock to much of the tech ecosystem. Collectively we’ve been happily beavering away, content that our work is driving innovation, economic growth and job creation. We haven’t been wrong. Young companies are responsible for nearly 100% of net job creation.

We have, however, been in denial about the negative side of the massive growth in tech. It’s easy to be dismissive of privacy concerns as misguided (been there, got the t-shirt) but they matter deeply to a lot of people. Similarly, with kids spending all their time on their phones; there are pros and cons and it’s easy to focus on the pros – it’s truly fantastic that my children have all the world’s information at their fingertips.

But, as with most everything in life, tech has its good sides and its bad sides. What’s important is that we recognise that as a fact. Otherwise we aren’t listening to our critics, and so, in turn, they won’t listen to us. This was probably always true, but it’s pressing now that tech is such a large part of society. On 30 June this year, the four largest companies in the world by market cap were Apple, Alphabet (Google), Microsoft and Amazon. Facebook was number eight. Products of the tech industry are now everywhere, all of the time and it’s not surprising people are paying attention.

Our opportunity is to move to a more nuanced and honest dialogue. It’s important to continually re-emphasise the good that comes out of the startup ecosystem, mostly jobs and productivity growth. But in the same breath, we should acknowledge that some of the fruits of our labour are hurting us and need regulating. Perhaps more challenging is to recognise that change is scary to some people and that their opinion is as valid as ours. We should start to look beyond simply creating enduring companies, to how we can build technology and businesses which can have a long-lasting positive impact.

None of this is too difficult. Lots of the raw ingredients are there already. We have data on the positive impact that startups have on jobs and the economy and we have lots of great products and much-loved companies. AirBnB stands out to me as a good example that has hit a lot of scale, and there are literally thousands of smaller companies I could cite. We should continue to tell this side of our story much as we have been, but start thinking like members of society rather than tech advocates when it comes to issues like those listed above. That will be easier if we stop identifying with Apple, Google, Microsoft, Amazon and Facebook. They aren’t startups anymore. They are large self-interested institutions with a big influence on society which, inevitably, has its good sides and its bad sides.

If we don’t move to a more honest dialogue, we will end up in a shouting match with the rest of society, where neither side is hearing the other. There are important policy issues that we need to address and if we don’t go about it in the right way news like last Friday’s announcement from TFL that they won’t be renewing Uber’s license to operate in London will start to become the norm rather than the exception. I am hopeful that calm heads will prevail in that situation and more generally but that will only happen if we in the tech industry open our hearts and minds to the concerns of other parts of society.

US and UK entrepreneurs suffer equally from ‘fear of failure’

By | Startup general interest | No Comments

This chart is from the UK government’s recently published Patient Capital Review.

I’m publishing it here because I often hear it said that the US startup ecosystem has a significant advantage over the UK and Europe because on this side of the Atlantic we are hobbled by a greater fear of failure. This has always annoyed me because a) I didn’t see it in practice, b) a certain amount of fear of failure is rational, and c) people used our supposed fear of failure to talk down the local startup ecosystem.

As you can see from the graph on the far right it turns out that fear of failure is roughly the same in the UK, the US, France and Germany.

It’s so good to finally have data on this topic!

Board meetings: Avoiding triviality

By | Startup general interest | 3 Comments

Getting value out of board meetings is tough. Lots of VCs have written posts with great tips – this recent one by Mark Suster is a very high quality example.

There are lots of reasons why value can be hard to extract – mostly to do with the fact that often board members don’t pay enough attention and CEOs don’t prepare as well as they could. However, today I’m going to write about a lesser known reason: the law of triviality.

From Nir Eyal’s What to do when someone steals your idea:

The British author C. Northcote Parkinson is famed for his “law of triviality,” first elucidated in a satirical article published in 1957. Parkinson writes of a committee assembled to approve plans for a nuclear power plant that instead spends most of its time arguing about a bike shed. The fictional committee wastes so much time on the bike shed because people are more likely to have an opinion on things they understand. While few feel qualified to speak about nuclear power, everyone can put in their two cents about a bike shed.

In board meetings this plays out with non-executive directors focusing questions on things they understand, often the accounts, but it can be any area of expertise – rather than what’s most important to the business at any given moment. On a lucky day the accounts might be the right thing to focus on, but usually the right thing will be something else, often something that is specific to the business and harder to understand and hence many shy away from. This scenario plays out most frequently with less secure or less experienced board members who have a need to be heard.

So what should we do?

As directors of companies we should try and catch ourselves when we dwell on topics that are in our comfort zone but aren’t the most important topics, and we should move the conversation on when other directors make the same mistake.

As CEOs we should identify the most important topics to discuss in advance and bring the conversation back when it wanders.

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.

Screen Shot 2017-07-26 at 20.10.30.png

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 🙂

Google’s 5 Traits of Great Teams

By | Startup general interest | One Comment

As you may know Google has done an almost obsessive amount of research into what makes a high performing team. This post from Michael Schneider summarises what they found, into five traits that are easy to understand and easy to identify. Very powerful.

1. Dependability.
Team members get things done on time and meet expectations.

2. Structure and clarity.
High-performing teams have clear goals, and have well-defined roles within the group.

3. Meaning.
The work has personal significance to each member.

4. Impact.
The group believes their work is purposeful and positively impacts the greater good.

5. Psychological Safety.
When everyone is safe to take risks, voice their opinions, and ask judgment-free questions.

I love this for it’s simplicity and completeness. Unfortunately implementation sometimes remains challenging.

 

Ten minutes mindfulness a day makes you a better leader

By | Startup general interest | One Comment

Want to see the confirmation bias at work?

Then read on.

I just read Spending 10 Minutes a Day on Mindfulness Subtly Changes the Way You React to Everything and loved it. I meditate for 15 minutes first thing every morning and feel that it makes a big difference to me. As I meditate I can feel stress dissipate and my mind feels somehow less taut. In the same way a flexible muscle is able to absorb more shock than a taut one I feel I’m more able to control my response to things that go wrong or might otherwise instigate a knee jerk reaction. The article tells me that my experience is common and this excerpt goes a little way to explaining why.

Leaders across the globe feel that the unprecedented busyness of modern-day leadership makes them more reactive and less proactive. There is a solution to this hardwired, reactionary leadership approach: mindfulness.

Having trained thousands of leaders in the techniques of this ancient practice, we’ve seen over and over again that a diligent approach to mindfulness can help people create a one-second mental space between an event or stimulus and their response to it. One second may not sound like a lot, but it can be the difference between making a rushed decision that leads to failure and reaching a thoughtful conclusion that leads to increased performance. It’s the difference between acting out of anger and applying due patience. It’s a one-second lead over your mind, your emotions, your world.

Mindfulness is a powerful practice.

 

How to beat the behemoths

By | Startup general interest | One Comment

I just read Andrew Chen’s Growth is getting hard from intensive competition, consolidation, and saturation. His argument is that we are at a point in the cycle where distribution is controlled by a small number of companies who limit the opportunities for differentiation via marketing. He mentions Google, Apple, and Facebook, and I agree wholeheartedly. Facebook’s growth in revenue per use shows just how successful they’ve been in extracting value from the system and I’m sure we could find similar charts for the other two.

Amazon is the other company that is dominating distribution, and for me most impressive and therefore ultimately the most scary of the lot.

All four of these businesses have monopolistic tendencies that make it hard for startups to compete and get noticed. Chen identifies six trends which continue to make life more difficult:

  • Mobile platform consolidation – The App Store and Google Play dominate, and they are in turn dominated by Facebook and Google apps
  • Competition on paid channels
  • Banner blindness = shitty clickthroughs (now extending to blindness for referral programmes)
  • Superior tooling – makes it easier for companies everywhere to be data driven
  • Smarter, faster competitors – copying successful new product ideas more and more quickly
  • Competing with boredom is easier than competing with Google/Facebook – the bar for new products to gain traction gets ever higher

Against this background, a great product is a startup’s only weapon. Great product gets companies heard above the noise and gives them good conversion rates which in turn allow them to out spend competitors on Facebook and Google. Being data driven and first class at exploiting paid marketing channels is now table stakes.

And the only way to reliably build great product?

To understand your customers better than anybody else.

In our experience the three best ways to get that experience are:

  • Work with customers in your target market for years before starting your company (the founders of all three of our last investments have done this)
  • Do “Mom test” style interviews with target customers before building your product (not customer surveys or focus groups)
  • After you’ve launched build processes that keep you in constant communication with customers and pump them for insights

 

 

 

Authenticity cannot be achieved solo

By | Startup general interest | No Comments

I’ve been thinking a lot about authenticity recently.

The first thing to say is that it’s a woolly concept. As an individual I am clearly me, and therefore of undisputed origin and not a copy. In common parlance then to be authentic is to be genuine, to be truly what we say we are. The problem with this is that most of us are, in fact, many different people. The person we are with our kids might be different from the person we are with our partner, which might again be different to who we are at work, and we might even be a different person depending on which group of friends we are with.

There’s a tempting notion that the true person sits somehow at the middle of these different external facing people, but if you subscribe to the view, as I do, that we are no more than the sum of our actions, then it follows that we are really just a collection of different people. That’s born out for me by the tension we sometimes feel between our different personas. I often suffer from inner conflict because I genuinely want to do more at home and at Forward Partners, but there’s no time for both. If there was one inner person governing everything then it should be possible to resolve the issue, but I find that when I’m in family mode my desires are different from when I’m in work mode.

All that said I am a firm believer that, generally speaking, if we can be more authentic we will be happier and more effective in our lives. Firstly, from a selfish perspective, maintaining multiple personas is tiring. We constantly have to remember where we are in order to remember how to behave and there’s cross over between the different areas of our lives that threatens to expose the differences. For most people this is a low level stress that’s eminently manageable, but it’s there and it impacts performance. I was discussing authenticity with a friend recently who partly thought of it as being able to say what he genuinely thinks. Many of us censor what we say a lot of the time, and that becomes exhausting after a while.

Secondly, the more authentic we are the easier it is for other people to trust us, making us more effective as friends, partners and leaders. The more knowable we are, the easier it is for people to rely on us, which means they can spend less energy worrying about whether we will do what we say and whether we will look after them.

Bringing this all together, it follows for me that the first key to being authentic is achieving an alignment between our different personas. The more aligned we are the more we have one true self, which makes us more genuine by definition.

However, there is a caveat. If we are successful in achieving an inner alignment, but there’s is a lack of alignment between what I want and what my friends, family or colleagues want, then being true to what I think all the time might make me feel better, but can put a burden on others. In most of our relationships we find a shared space that works for both parties. That space defines what we talk about, the topics we avoid, what we expect of each other, and a whole host of other things. The process of getting to know somebody is in large part a process of defining that shared space. If we unthinkingly change our behaviour to be more authentic then we unthinkingly change that shared space with each of our friends, colleagues and partners. That can be a jarring experience for them and could well be a selfish thing to do. You might be able to think of someone you know who has achieved a good degree of internal alignment but comes across as selfish. I know I can.

Which brings us back to alignment. The journey to authenticity is ultimately a shared journey towards alignment with everyone we share our lives with. Writing that sentence really made the penny drop for me, so I’m going to repeat it. The journey to authenticity is a shared journey towards alignment with everyone who shares our lives. Full alignment with everybody will be out of reach for most people, but the more aligned we can get the more authentic we can be and the better everything will work.

That’s one of the reasons why great leaders place huge stress on aligning their people around a unifying company mission and why many successful couples are aligned that their relationship is the most important thing in their lives. As I think this through we have many tools for building alignment in the work place (vision, mission, company values and OKRs spring to mind) but we don’t have anything comparable for our personal lives. That feels like a gap to me.

Entrepreneur to scale-up CEO: two very different skill sets

By | Startup general interest | 3 Comments

Growing from a founder to a scale-up CEO is challenging. Thinking up game changing ideas couldn’t be more different to running a large business. Many transitions are required along that journey but the one that I’ve been thinking about recently comes when the first product starts to take off. To simplify, before then success comes from trying lots of things, but after that success comes from making one thing work.

Creativity is the main skill required in the first phase. It’s all about coming up with lots of ideas and seeing which ones have merit. It’s a time when the options seem limitless and new ones are opening up all the time. Conversations with customers and other industry players frequently go off on tangents revealing new opportunities and adding to the sense of upside. It’s all about getting a few irons in the fire and founders often have a growing belief that at least one of the ideas will work out, even if they aren’t sure which one.

Then one of the ideas starts to work. Customers are buying and levels of excitement and optimism grow still further.

We are now into the second phase. The onus has moved from trying lots of things to making one thing work, and that requires a very different mindset.

The first thing that’s required is focus. It’s difficult moving from adding irons to the fire (and feeling good about the security that brings) to taking irons out of the fire to focus on something that is promising but still unproven. For many founders giving up on the optionality of having lots of horses in the race is hard, and that’s despite the fact that ideas put on the backburner at this point can be re-ignited later. The difficulty isn’t rational. Everyone understands the benefits of focus from an intellectual perspective, but in practice many find it very challenging emotionally. Buckets of self belief play a part here too – most great founders believe they are snowflake special, which is great, but that confidence can give them the excuse to think that whilst everyone else should focus, they are good enough to keep all the options alive without compromising on delivery. I’m here to say that’s rarely the right strategy.

The second thing that’s required is discipline. The fun creative process of dreaming up new user flows and product features gives way to disciplined experimentation. For an ecommerce company or marketplace that means analysing the whole funnel from marketing spend through to checkout, looking where people fall out, and experimenting with fixes. Many good companies run regimented experiment programmes with a weekly cadence. Every seven days they identify a metric they want to move, develop a hypothesis on how to move it, implement an experiment to test the hypothesis, and then kill or roll out depending on the result.

Moving from adding irons to the fire to taking them out and from creativity to discipline is quite a shift. Writing this post has got the transition clearer in my mind. I hope it’s helped you too.