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Startup general interest

Enough with the unicorn bashing

By | Startup general interest, Venture Capital | One Comment

It’s fashionable in certain quarters now to slate some of the billion dollar startups that have been created recently and the investors that helped them get there. Zebras Fix What Unicorns Break is a good example. The piece makes three criticisms of the status quo:

  • Pursuit of extreme growth results in companies with unpleasant characteristics and a negative impact on society – e.g. Facebook (fake news) and Uber (where do I start…)
  • Companies with pure for-profit motives aren’t well equipped to solve many of society’s most pressing problems – e.g. homelessness in San Francisco, education, healthcare
  • Companies that aren’t chasing unicorn status find it hard to raise money

There’s some merit in these arguments, but they need to be put into context.

  • There is clearly dysfunction in chasing growth at all costs – inherently unprofitable companies grow to employ thousands of people before going bust, resulting in much personal anguish and not a little wasted capital. However, that’s a cyclical dysfunction which hit notable peaks in 2000 and 2015 and which needs to be understood as an unfortunate part of a larger system which overall has been an incredibly positive force for good. Five of the six largest companies in the world today were venture backed startups and just about all net new job creation comes from young companies.
  • It’s also true that many of society’s deepest problems aren’t likely to be solved by for-profit companies. That’s because there’s no money in solving them (otherwise the market would have been solved already). What we need here is government intervention.
  • The startup community has taken the ‘go big or go home’ mantra so much to heart that good mid-level outcomes – including exits in the hundreds of millions – aren’t seen as sufficiently ambitious. There are structural reasons why we’ve ended up here. As Fred Destin explained in his recent post Why VC’s are obsessed with large outcomes, investors with large funds have to chase unicorns to make their numbers work. Those large funds are often the ones everyone wants on their cap table and so almost everyone in the food chain, from smaller funds to angel investors and entrepreneurs alike, orientates themselves around giving those larger investors what they want, with the result that companies without unicorn potential find it disproportionately harder to raise money. That’s not a good thing.

So what should we do?

  1. Recognise that the system is imperfect, but not broken. We need massively successful companies like Facebook, and even Uber to generate growth, employment and the profits needed in the venture industry to finance the next generation of companies. Some unicorns are bad, but lots are good. Some investors back unsustainable growth in pursuit of short term profit (often unknowingly) but most are sensible.
  2. Celebrate mid-level outcomes as much as massive outcomes. Or at least almost as much. For me companies that exit for $200m are as noteworthy as many of the companies that raise money with a $1bn valuation, and often the lessons they’ve learned are more widely applicable than lessons from companies in the unicorn club. Talking about their stories more would help shift some of the dialogue and mindset in the startup community away from the needs of larger funds, towards the middle of the bell curve where most founders exist.

 

Assessing product demand – top down and bottom up

By | Startup general interest | No Comments

It’s common for VCs to look at the market size for a potential investment from a top down and bottom up perspective. The top down perspective takes market research, often from an analyst firm or investment bank and the bottom up approach works by multiplying the number of customers by their likely spend – more detail in my old blog post here.

What I hadn’t thought of until recently is that it’s also helpful to take a top down and bottom up approach to assessing likely demand for a product.

The top down approach looks at how a startup fits with prevailing big picture trends. At the time of writing AI is the trend of the moment and it’s a good starting point to think that companies which intelligently apply AI techniques can create useful products. Moreover, it’s also true that raising money is easier for companies that are on trend (investors love a herd… or at least most of them do!).

However, the top down approach isn’t sufficient on it’s own. Even though it sometimes seems like companies doing AI for XYZ seem to be raising money almost as easily as companies doing Uber for ABC were a couple of years back, this strategy is unlikely to yield much success for either founders or investors.

To make good investments it’s important to combine the top down approach with a bottom up approach which looks at use cases. If it’s difficult to convincingly explain how someone will use a company’s product, it’s a fair bet that they will find it difficult to get customers. I’m consistently surprised how often entrepreneurs allow themselves to be satisfied with only a vague understanding of why they will make people excited.

When looking from the bottom up, a good first question to ask is ‘what behaviour potential customers are already exhibiting which shows that they will have demand?’ For young software companies a classic answer to this questions is that potential customers are building homegrown versions of the product they intend to build. If our young software company can build a software product that’s better and cheaper than the homegrown version then it’s a fair bet these companies will stop writing their own code and become paying customers.

A second technique is to employ Clayton Christensen’s ‘jobs to be done’ framework which starts from the insight that customers buy things because they have jobs they want to get done. Jobs can vary from the mundane (e.g. cutting the grass) to the exotic (e.g. become my better self) and companies that can articulate a good fit with a job that lots of us have to do or want to do are in with a good shout of selling lots of product. There’s more detail on the jobs to be done framework here.

For infrastructure companies the use cases are often not end user use cases. Rather the use cases are to help other companies build use case for the ultimate end user. For example a company that makes electric motors might sell to a lawnmower manufacturer who’s job to be done is to sell more lawnmowers. The electric motor opportunity can then be evaluated on the basis of whether it will allow the lawnmower manufacturer to help its customers (the end user) with their job of cutting the grass.

As with market size analysis the bottom up approach is harder to do well, but yields much richer insight.

 

The importance of happy endings

By | Startup general interest | No Comments

I’ve come across Kahneman’s Peak-End concept before but only just grasped it’s significance. As with much of his work Kahneman is highlighting an area where our minds don’t work rationally. In this case it’s how we remember experiences.

If we were rational we would remember experiences as some kind of average of how they felt at the time, adjusted for their duration. However, it turns out we remember them as a function of two moments – the peak moment (best or worst) and the last moment. Duration and average are less important.

Kahneman makes his point by citing research into how patients undergoing conscious surgery rated their experiences. Their post-surgery rating of the overall experience correlated with the peak moment of pain and how the surgery ended rather than the average of their minute by minute scores for how much pain they were suffering. Indeed, changes in the final moments of their operation dramatically skewed their overall perception of how well it had gone, in both directions.

This difference between how patients experienced their operations and how they remembered them exists with all experiences, both pleasant and unpleasant.

That has big implications for how startups should build products. Customers come back or tell their friends because of how they remember the experience of a product or a service, not because of how they experienced it at the time. Accordingly products should be engineered to deliver moments of delight and happy endings rather than maximum overall utility.

At Forward Partners we always look for those moments of delight, which we call “eyes-light-up moments”. Going forward I will be pushing us to pay equal attention to the closing moments of a customer experience.

Courage and facing up to failure

By | Startup general interest | No Comments

I’ve just read Atul Gawande’s Being Mortal, a book lots of people seem to be talking about all of a sudden. It’s a great book, and one I highly recommend. Mostly it is about making better choices for ourselves and our loved ones as we grow old, which is a far cry from startups.

One passage is different though. It’s about courage, which is required in spades if we are to make the most of our old age and if we want to make the most of our startups.

Gawande starts by turning to Plato who wrote “Courage is strength in the knowledge of what is to be feared or hoped” and “Wisdom is prudent strength”.

Which brings me to startups. It takes great courage to found and build a company, to maintain conviction in the face of naysayers, to get back up again when you get knocked down and to persevere when things look helpless. But it is also important to be wise. To know when to carry on or when to change course, or even give up. It was only after Ev and Biz Stone gave up on Odio that we got Twitter.

Gawande goes to on say that at least two kinds of courage are required in ageing and sickness. The courage to seek out the truth of what might happen both on the upside and the downside, and then the courage to act upon it. Again that’s super important at startups – the best founders tirelessly look for ways to expand the upside and ways their companies can go wrong. Other founders put their heads in the sand.

In a further parallel with startups, Gawande notes that ageing and sickness are highly complicated and uncertain, and that it is very hard to build an accurate picture of what’s going on or of the implications of any particular course of action.

It is in this uncertain environment that we must find the courage to act. Very often that choice means deciding which is more important, our hopes or our fears. Do we want the chance of a much better life, or do we simply want to stay alive?

That last question is as relevant in startup boardrooms as it is in the Emergency Room, but it is rare to see the difficult topic of potential permanent decline and failure addressed well enough that the the following course of action gives the best chance of happiness to all concerned. More common is to raise more money if it’s available, keep going with more or less the same plan and only make radical changes when the writing is well and truly on the wall. By this point there is much less cash left, the options for remedial action have become limited and the chances of achieving even a half decent outcome are much reduced.

The starting point for most founders is that they can overcome all the obstacles in their way and overcome what, to many, look like impossible odds. Possessing the self-confidence and resilience to maintain this perspective is an amazing gift that has enabled many entrepreneurs to achieve amazing things and it is something we look for in the founders we back. My closing point in this post though, is that in some situations the right thing to do is to stop trying to achieve the impossible, reduce our level of ambition and start building the best possible future within the constraints that face us.

Contemplating anything other than success is tough for most people involved with startups. Nobody likes a naysayer and fear of being thought of as unambitious or lacking tenacity made me think twice about writing this post. I decided to press ahead because the truth is that only a small fraction of startups achieve unfettered success (we will be happy if one in three of our portfolio are that lucky, and even those will face difficult periods). For the rest finding the courage to face the truth and make difficult decisions early will make them happier in the long run.

Nailing go-to-market strategy

By | Startup general interest | 2 Comments

This chart, from First Round Capital’s recent post Leslie’s Compass: A Framework for Go-To-Market Strategy is super interesting. It’s first use is for founders to work out whether they should have a sales intensive or marketing intensive go-to-market strategy. That’s the point of the post and the summary is that if your business has the characteristics on the left hand side then your strategy should be marketing intensive and if you’re more like the right hand side you should be sales intensive. If you’re thinking this problem through at all I would highly recommend reading the whole post.

The second use, which they don’t cover, is assessing whether a business idea is likely to be successful. It’s an obvious thing to say, but unless a business can find a successful go-to-market strategy, sales will be limited and it won’t succeed. The power of this framework is that it can expose fundamental challenges to the viability of a plan even when it is only a concept, and then it can suggest ways to address those challenges.

Simple plans are easiest to execute and in this case the simple plans are ones that are either marketing intensive, or sales intensive. Plans that sit somewhere in the middle are ok, but products that have some marketing intensive characteristics and some sales intensive characteristics have an inherent contradiction that if left un-addressed will undermine success.

The most common and obvious contradiction that we see is complicated and high touch products that are inexpensive (or have low margins). Even if the product is a bullseye hit with what the customer needs, it won’t be possible to persuade them of that fact without an expensive sales effort, which won’t be covered by the value of the sale.

Other contradictions to watch out for include B2C : complex products and many customers : low fit, but the most important one is definitely cheap products that require a sales lead approach.

Business plans with contradictions like this aren’t necessarily fatally flawed, they are just more difficult to execute, and that brings us to the third and final use of this framework, which is to inform product strategy. If there is a contradiction then one solution is to resolve it through product innovation – if the contradiction is between low price and complexity/high touch then either find a way to either to take the complexity out or to charge more.

Usually those product innovations will be to enable a more marketing led approach, and to generalise, companies that move product categories from being more sales intensive to being more marketing intensive make promising bets. The shifts don’t have to be big either – convenience is a winning proposition. Examples are legion, but Slack is a great one. Last May they became the fastest company to reach a $2bn valuation in large part because they succeeded in making a product that works with a go-to-market strategy that is close to 100% marketing led. Looked at through this lens, their genius was in taking all the complexity out and enabling low touch adoption.

“Don’t run for trains”

By | Startup general interest | One Comment

Around nine years ago I read Nicholas Taleb’s seminal texts The Black Swan (2007) and Fooled by Randomness (2001) and I loved them both. For venture investors everywhere The Black Swan suddenly provided a framework and lingua franca for understanding our business – betting on extreme outcomes that have a low probability of occurring, and perhaps more subtly for those working in this world, an understanding role of chance is critical to distinguishing talent from luck (although we all need luck).

But for me the books were about more than these two key takeaways, they were also an amusingly written philosophy of life and a celebration of avoiding the herd mentality and thinking differently.

One small part of that which has stayed with me is Taleb’s oft repeated advice “Don’t run for trains”. I like this advice because running for trains is stressful and it seems to me that we often take on that stress without really thinking it through. There’s a problem, however, which is that sometimes when we miss trains it makes us late, and it’s rude to be late.

When I was riding my bike to work this morning, Taleb’s advice “Don’t run for trains” popped into my mind. That’s happened a fair few times over the years and as I’ve done before I rehearsed the argument made in the previous paragraph. Then, rather than return to thinking about my day as usually would, I pondered the advice a little longer. I wanted to resolve the dichotomy between the good and the bad sides of “not running for trains” and maybe get a better idea of what Taleb was getting at.

For me the answer is that Taleb’s point is to avoid over-valuing short term gains. If you run and get the train it feels good for a short while, but you will have forgotten it before long, so why put yourself through it. Better surely to apply yourself to something that will deliver value over the longer term. This chimes with Taleb’s long term investment strategy. In his books he repeatedly shows his disdain for investors who chase short term gains (he calls them “yield hogs”) whilst not understanding their long term risks. Moreover, running for trains is often a frenzied activity of the type that with hindsight turns out to be ill-advised.

In the startup world, examples of “running for trains” mostly involve chasing short term growth at the expense of long term value:

  • Selling a poor quality product or service which undermines the brand
  • Putting so much advertising on a web page that it destroys the customer experience
  • Tricking people onto a website with a misleading promise

Long on vision, short on execution?

By | Startup general interest | One Comment

magic-leap-whale-bs

I love the idea of Magic Leap and wish them every success in the world. Who wouldn’t want to see whales leaping out of floors like the one in the picture above?

I also don’t have any inside information about how they’re doing. But I have noted that some in the press are questioning their prospects, alleging that their videos are in effect fakes (including the one from which the still above was taken).

One of the articles I read, finished with a list of tell-tale signs that indicate a company is long on vision, but short on execution (or in this case real tech):

  • Refusing to give a launch date.
  • Refusing to talk about the tech, claiming confidentiality or trade secrets.
  • Using news of investments or hires as evidence of technological progress.
  • Promoting itself on a big stage rather than in a small room.
  • Offering a well-crafted message and vision but becoming immediately vague when pushed on actual details.
  • Offering “exclusive access” – with restrictions.
  • Confusing working hard with making progress.

I offer this list up because some of you will be writing investment decks over the holidays to start fundraising in the New Year and if that’s you, these are mistakes you want to avoid making. At the early stages at which Forward Partners invest, the most common mistakes on this list are being strong on the vision but weak on the details (particularly the short term plan) and assuming time spent on a project equates with progress.

In essence, make sure that when preparing to pitch for funding you have an inspiring big vision, but also ensure the picture you paint is underpinned with a strong plan for execution.

UK: Tech talent remains

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screen-shot-2016-12-06-at-12-57-05

This is a chart from Atomico’s 2016 State of the Nation report. As a UK investor and citizen it’s pleasing to see that we’re the top destination for tech industry migrants by quite some distance.

What’s interesting is that this is a self-reinforcing metric. As noted elsewhere in the report, when people move country to start their company, access to talent is their primary consideration. More talent, therefore, will attract more founders, who will in turn attract more founders.

The UK has always been a very open country, and immigration from the US and India (two countries with whom we have strong historical ties) are a big driver of this statistic – although we are also the top destination for intra European tech migrants too.

We built this success story in the pre-Brexit era. Our challenge now is to maintain it post-Brexit.

Pre-seed investments work best when there’s a clear plan for short term value creation

By | Forward Partners, Startup general interest | One Comment

Most VCs will say that to evaluate deals they look at the market size, the product and the quality of the team. Different investors place different weights on the three elements but as a rule earlier stage investors place more emphasis on the team and later stage investors place more emphasis on the market. That’s because early stage companies find it easier to change their market than their team whilst later stage companies find it easier to change their team than their market.

Some very early stage investors go as far as to say that for them team is everything. If the founder is great that’s all they need to know to write a cheque. At Forward Partners we don’t go that far. We always say that the minimum requirement to back a company is a great founder AND a great idea, then for us a great idea encompasses an inspiring product vision in a large market.

Breaking that down a little further, what we’ve learned over the three and a half years we’ve been operating is that our pre-seed investments work best when the ‘great idea’ includes a clear plan for value progression in the first six months. In the sectors in which we invest that nearly always means building momentum with customers. Completing product development and hiring team members definitely helps, but it’s dangerous to assume that will be valued by new investors.

With seed stage investments and later it’s usually obvious how value will be created – by maintaining current growth in revenues or engagement. Hence spending time thinking hard about short term value creation is mostly a discipline for the pre-seed stage.

This week our thinking was put to the test by a highly competent serial entrepreneur with a great team who has a strong idea in a large market but who has yet to build out a clear plan for driving value in the short term. We compared his case with a couple of others in which we’ve invested where the short term plan was much clearer but the longer term thinking was hazier and decided we prefer the latter.

Here’s why.

Given time great entrepreneurs will find their way to big opportunities. The question then becomes “how do we give them the greatest chance of having enough time?”. The best answer to that is to generate the short term momentum which will allow them to raise more money and buy more time to navigate to the big upside. If the short term momentum doesn’t arrive then either the next round will be difficult or the company will fail – both outcomes we seek to avoid.

With most things in life, if you plan for it you are more likely to get it, and generating the momentum required to create value in the short term is no exception.

 

Fear of failure can be a good thing, absence of courage never is

By | Startup general interest | 3 Comments

Last night at FPLive I was chatting with an entrepreneur called Nick who has just closed his startup. He talked impressively about what he’d learnt and has an interesting idea for his next company which I am keen to investigate.

There’s an important point lurking in there. He has just failed with his first company but that isn’t putting us off looking at his second. In fact, the lessons he’s learned help his case.

It doesn’t happen as much as it used to but people still talk about the ‘fear of failure’ as being a much more acute problem here in the UK than it is in America, and how that dissuades people from starting companies and holds our startup ecosystem back. That talk gets my back up a bit, partly because fear of failure is rational (it hurts), but mostly because it becomes a self fulfilling prophecy – would be entrepreneurs hear that fear of failure holds our startup ecosystem back which makes them think that failure is more likely and deters them from starting their company.

Returning to my conversation with Nick. He has been working with a large corporate innovation lab and we were talking about what large companies can do to hold onto the entrepreneurs in their ranks and harness their creative power. Getting the incentives right is a big topic, covering 1) how much money they should be allowed to make, 2) how much control they should have and3) what should happen if they fail.

As an investor who’s worked with lots of entrepreneurs I know that if the aim is to retain the best talent the answer to the first two parts of this have to be 1) they can make an awful lot of money and 2) they need to be given control of their startup.

Prior to last night my view on the third point was that companies should make it easier for their employees to be internal entrepreneurs by guaranteeing their jobs in the event of failure. Now I’m not so sure. Nick pointed out that fear of failing is often highly motivating. When your back is up against the wall you are more likely to be out of bed at 6am fixing things, morel likely to burn the midnight oil, and generally more likely to keep battling when the odds start to look impossible. What he has seen is that when people can walk back to their old jobs they are less afraid of failing, that they work fewer hours, and that they give up on the startup idea more easily.

So my emerging view is that fear of failure is not really the problem here. Rather I think we should be working on the other side of the equation – courage. More specifically – how do we help people muster the courage to start companies, even when they understand that painful failure is a possibility.