Category Archives: Uncategorized

Making sense of the bubble talk and the impact on startups

By | Startup general interest, Uncategorized, Venture Capital | No Comments

There’s a lot of contradictory advice out there at the moment. On the one hand you have the ‘entrepreneurs should just do their thing and not pay attention to the markets’ folk and then on the other hand there are plenty of observers saying that a bubble has burst.

Many people I respect are in the former camp. Tomas Tunguz said it clearest with his recent post Why the bubble question doesn’t matter which lists the things good companies do and points out that they are the same in bull markets and bear markets. I’ve read posts from Brad Feld in the past saying he doesn’t pay attention to bubble talk and in a post earlier this week Fred Wilson quoted someone else quoting him saying “Markets come and go. Good businesses don’t.” (although he did also point out that if companies need to raise money then the capital markets can affect them).

I have sympathy with this view. Startups and venture funds run for 5-10+ years, are likely to see a recession at some point in their lives (maybe two) and hence need to be able to survive and prosper in both recessionary and growth environments. Moreover, predicting when crashes and recessions will happen is nigh on impossible so trying to manage according to where we are in the cycle is a fools game.

But at same time market crashes changes things for startups. I saw that in 2000 and then again in 2008. When the macro economic climate is tough less money flows into venture funds and startups, so fewer deals get done, valuations are lower and more companies fail. On top that everyone is nervous and deals take longer to complete. Making things worse still, consumers and enterprises have less money to spend and startups find it harder to grow revenues.

It takes time for the impact of crashes to be fully felt in the startup market though. I remember this most clearly from 2000 when I was in a fund that was investing heavily pre and post crash and the VC adjustment took 8-9 months. I think the reaction is slow because VC funds aren’t directly linked to the stock market, VC deal cycles are long, because LPs don’t want VCs to try and time markets and because VCs have staffed up to deliver multi-year investment plans. After a while though VCs find themselves spending more time with portfolio companies struggling with the new environment and the amount of new money in the market drops, and these forces combine to stretch out deal times, reduce the number of deals done and reduce valuations.

Mark Suster set out a number of the dynamics at play in his post Making Sense of the Stock Market Drops in Relation to Venture Financing

Pulling it all together I think the difference between the camps is that the ‘pay no attention to the markets’ folk are talking about best practice startup management in general whilst Suster and others are talking about the impact of crashes in the here and now.

 

I have no idea if the stock markets will continue to go down or recover but it’s pretty clear to me (and probably to you too by now) that if things don’t get better we will get the negative impacts described above, and if they do recover late stage VC markets will continue to get frothier and that will eventually trickle down to Series A and seed.

 

I think the best outcome is that the bear market continues long enough to take the heat out of late stage venture but isn’t severe enough to create a rout.

Until we find out founders should follow the old adage ‘hope for the best, but plan for the worst’, prepare themselves for longer fundraising cycles, and think seriously about taking any offers of cash that are on the table, even if the valuation is lower than hoped for. (And, in case you’re wondering we don’t have any low valuation termsheets out there at the moment. Our valuations have remarkably consistent over the two year life of Forward Partners.)

Advice on changing organisational culture

By | Startup general interest, Uncategorized | 3 Comments

I’ve written a lot in the past about how smart entrepreneurs harness company culture as a tool to drive success. Most of that work has centred around being clear on vision, mission and values and it’s never too early for founders start thinking about these things. Sometimes things go awry though and the culture needs to be changed. That’s a difficult thing to do and I’ve just come across a brilliant 2011 post by Steven Denning which sets out the problem and provides a framework for finding solutions.

If you’ve got time, go read the whole thing. For the attention starved amongst you, what follows is a summary.

Culture change is hard and often fails because culture resists change. Here’s why:

an organization’s culture comprises an interlocking set of goals, roles, processes, values, communications practices, attitudes and assumptions.

The elements fit together as an mutually reinforcing system and combine to prevent any attempt to change it. That’s why single-fix changes, such as the introduction of teams, or Lean, or Agile, or Scrum, or knowledge management, or some new process, may appear to make progress for a while, but eventually the interlocking elements of the organizational culture take over and the change is inexorably drawn back into the existing organizational culture.

But if the culture isn’t working then the company won’t work until it’s fixed, and this framework lays out the tools at a manager’s disposal to create a solution.

Tools-for-changing-minds

The best approach is to start at the top and systematically work down, only using the pure ‘Power Tools’ of coercion, threats, fiat and punishments as a last resort. Common mistakes are to use the ‘Power Tools’ too early and to articulate a new vision without putting in place the management tools to get buy-in and re-enforce the message.

Those mistakes are common, but so easy to make, particularly as an investor. Just writing these sentences is bringing back painful memories of working with CEOs to articulate a new vision, strategy, or direction and then watching as months rolled by and little changed. With the benefit of this diagram it’s clear to me that when things didn’t work it was because I didn’t do enough to make sure the management tools were in place, particularly those designed to ensure top-to-bottom buy-in. That contrasts with companies where we successfully used OKR type structures to get full alignment.

Three common mistakes founders make when analysing other companies

By | Startup general interest, Uncategorized | 3 Comments

Drawing inspiration from other companies is an important part of every entrepreneurs toolkit. To misquote Isaac Newton, we all stand on the shoulders of giants. It’s easy to get it wrong though, and there are three common mistakes that founders make.

1. Assuming mistakes made by competitors are because they are dumb. This is from Aaron Harris’s Presumption of Stupidity

I’ve noticed a common bias that shows up in some founders: they believe that their competitors are stupid or uncreative. They’ll look at other businesses and identify inefficiencies or bad systems, and decide that those conditions exist because of dumb decisions on the part of founders or employees.

This is a bad belief to hold. In truth, competitors in the market are usually founded and run by intelligent people making smart and logical decisions. That doesn’t mean that all the decisions they make are necessarily the right ones, but they’re rarely a function of outright stupidity.

Where companies do things that diverge from what seems smart from the outside, it’s a much better idea to ask why those companies are doing things from the presumption of intelligence and logic rather than the presumption of stupidity.

2. Assuming everything that successful companies do can be copied. Every successful company makes mistakes, and some successful companies have habits they hold out as drivers of their success which it doesn’t make sense to copy. Apple is the best example here, great as he was, Steve Jobs’ management style and his insistence on relying on his vision and not talking to customers aren’t things that will port well to many other companies.

As Paul Graham wrote in a recent article advising startups that can’t secure the .com domain for their name:

There are of course examples of startups that have succeeded without having the .com of their name. There are startups that have succeeded despite any number of different mistakes.

The most common version of this mistake is to cite a habit of another successful company as justification for bad or lazy behaviour – e.g. Steve Jobs had the courage to rely on his own vision of what’s best for customers and so do I.

Another, more insidious, version of this mistake is to copy startups that have had some early success but haven’t definitively succeeded yet. Often this is European startups copying American startups that have reached the Series B or Series C stage. The problem here is that you might be copying something that fundamentally doesn’t work (as with many of the GroupOn clones) or where the reasons for the success they are enjoying aren’t apparent.

3. Success can come from copying others rather than being different (which takes more courage). In The Possibility for Outrageous Failure Max Wessel wrote:

Warren Buffet has famously stressed for folks to be greedy when others are fearful. Clay Christensen has cautioned that profitable markets face the greatest pressure towards commoditization. Even inside today’s tech landscape, we have Peter Thiel appropriately pointing out that there is only likely to be one Google, one Salesforce, one Facebook, one Uber, and so on. The next conquerors of industry are likely to arise in surprising spaces where there isn’t a clear opportunity.

Summing up, the overall message is that getting to know your competitors and what drives success at other companies is a great thing to do, but use that as the basis for your own critical and ‘from first principles’ thinking. Then don’t rely on your ability to out execute the competition, but be bold and above all seek a source of competitive advantage. Often a piece of information you have or something you believe that others don’t can be that source of competitive advantage.

Hat tip to Mattermark’s daily newsletter today which had links to the three articles I quote here. It’s a great source for content.

Three success criteria for ‘Assistant-as-app’ companies

By | Startup general interest, Uncategorized | 2 Comments

Nir Eyal recently wrote a great post speculating that ‘Assistant-as-app’ companies might be the next big tech trend. I think he’s right – it’s a trend that has legs, but it’s also a trend that has been going for a couple of years already but hasn’t yet been given a good label. Magic and Operator are the companies in this space that have made the biggest splash recently but companies like Thread.com and Big Health from our portfolio and like Native and Vida Health that Nir mentions have been pursuing variations on this theme for a while.

In another post Nir proposes the following definition:

I’ve proposed “assistant-as-app” to mean: an interface designed to enable users to accomplish complex tasks through a natural dialogue with an assistant.

He emphasises ‘natural dialogue’ because the first success criteria is that users don’t have to learn a complicated interface. Few people can be bothered to do that for anything, let alone when there’s a simple option available which will probably get you to a result faster on the first couple of times through. Complicated interfaces are in effect asking people to make an investment of learning time against a highly uncertain outcome – not an attractive proposition.

However, the key point is that there is no learning curve, so rather than ‘natural dialogue’ I would use the more inclusive term ‘easy to use interface’.

The second success criteria is that the service delivers something more than the fully human equivalent. That doesn’t mean it’s better on all dimensions, but that it is demonstrably better on at least one important dimension. For example Big Health is a therapy service for insomniacs that offers 24-7 access to an AI therapist called The Prof. Human therapists typically see their clients for an hour per week, whist The Prof checks in multiple times per day and if you wake up in the middle of the night he’s there (in his dressing gown) to help you get back to sleep.

It seems to me that the main ways that ‘Assistant-as-app’ services can be better than humans are:

  • 24/7 presence and immediate response
  • Price – high levels of automation bring some services to a price point that works for consumers (although note the third success criteria below)
  • Access more information about the user and use better analytics to deliver the service – e.g. data from wearables, activity diaries, transaction history
  • Access more components to build a customised solution – human services are limited to what the human operator knows, Assistant-as-apps can access all the inventory on the web

If you can think of more ways ‘Assistant-as-app’ services can be better I’d love to hear them.

The third success criteria for ‘Assistant-as-apps’ is that the economics work. To get to a price point that’s attractive to consumers typically requires some heavy duty automation on the back end, often leveraging AI. Most companies in this space start out delivering the service manually and initially lose money on every transaction. Predicting the extent to which those manual activities can be automated and can be difficult at the outset, but it’s critical to the business model and should be addressed early on. It’s easy to build an amazing service that will never make money and I suspect we will see some high profile companies make this mistake.

 

Matching product solutions with problem spaces

By | Startup general interest, Uncategorized | One Comment

We held our monthly office hours yesterday morning, meeting with twenty idea stage founders over a period of two hours. It’s a a high octane set of fast paced meetings that I look forward to very much. It’s great meeting lots of great people and learning about lots of great ideas so quickly.

The last one I met had identified a large and fast growing market riven with inefficiency. The more we delved into it the more excited I got. Big markets with lots of opportunities for improving things are great places to start new companies. Then, when we got to discussing his company’s product/service, I knew that he wasn’t yet at the point where we could have a serious investment discussion. He knew that existing products in his market were of inconsistent quality and that consumers go to extreme lengths to buy them anyway (often gathering in groups to buy wholesale on AliExpress), but was only just coming to the conclusion he wanted to build a product company and had a feeling that the best opportunity lay at the premium end of the market but couldn’t articulate what his product differentiation would be or how he would price it.

That’s fine. We will keep talking and help him through that process, but right now he has identified a great problem space but hasn’t matched it with a compelling product solution.

That contrasts with another company we are talking with where the founder started selling a product to his friends and family because he loves delivering it and they love buying it. In this case the product solution is already defined in great detail and we have been working with him to work out how big the opportunity is.

In other words he has built a compelling product solution and it’s unclear whether it’s in a great problem space.

The best business opportunities match great problem spaces with compelling product solutions. Most businesses start with one and then work to find the other. “Technology looking for a problem to solve” is a cliched way of describing interesting solutions with poor problem spaces, and perhaps more common but lacking a common descriptor is companies in interesting problem spaces constantly ideating in search of a product people want.

Entrepreneurs who know their problem space but not their solution should, with discipline, be able to ideate, research and iterate their way to a compelling product. Entrepreneurs with a compelling solution are in a more binary situation – either their problem space is interesting enough or it isn’t.

 

Ecommerce companies’ team requirements in the first six months

By | Uncategorized, Venture Capital | No Comments

What follows is a generalised model for startup team building. Every company is, of course, different, but using this model as a starting point will, I hope, be helpful.

Team structure in early stage ecommerce and marketplace companies is a function of manpower and skills necessary to build the company and the founder(s)’ skillset(s). Companies with lots of cash sometimes add people more quickly, but that drives the burn rate up, often without a compensating increase in the chance of success..

In the first couple of months the focus should be on making sure the idea is valid, requiring the following activities:

  1. Development of the company vision and strategy
  2. Search for a point of deep emotional resonance with customers – research work
  3. First iteration of the product vision
  4. First iteration of company messaging
  5. Design and development of landing pages and prototypes
  6. Finding the first few customers

Items 1 and 2 should be done by founders and require generic business skills. Items 3-6 are more specialised and can be done by founders if they have the necessary product, development and marketing experience, otherwise they need outside help. The development requirement might be full time, or approaching full time, but the product, design and marketing requirements are part time. As a guide, the companies that we work with at this early stage generally need around 10 hours per week of product work, 20 hours per week of design and 5 hours of marketing, but there’s a lot of week on week volatility.

The minimum team to move quickly for these first couple of months is a full time founder, a full time developer (or FTE), and part time product, design and marketing support. Bigger teams move faster but overall efficiency can suffer.

The next few months should then be about the product – proving that the idea can captured in a product that resonates with customers. The key activities at this point are:

  1. Develop version one of the product – strong enough to scale
  2. Build deep understanding of early adopters
  3. Develop brand values and core messaging
  4. Build version one of the visual identity
  5. Get into the habit of month on month growth
  6. Start tracking key metrics and build a company dashboard
  7. Operational activities to support growth

The man hour requirements for this product step will be the same as for the idea step, but with another 0.5-1 developers, double the marketing time (now circa 10 hours per week), and then sufficient interns and customer service people to cover the operations. A lot of the operational activities will fall to the founder, but it’s common to have 1-2 interns or early hires at this time. It’s important by this point to have someone numerate on the team. Also, early hires should be capable of dealing with ambiguity and fuzzy role definitions.

I’m writing this post in part to get my thoughts straight ahead of a conversation with a founder we’d like to back who is weighing up the pros and cons of working with Forward Partners vs building her own team. As a reminder, we bundle talent and office space with cash when we invest in companies, allowing the founder to spend more time working on the company and less time hiring. One of the other benefits is that companies can dial up and down the time they need from us more easily than they can with freelancers or employees. And the quality of our team is awesome.

A company should, of course, get it’s own team pretty quickly. We help with the tough problems of finding developers on day zero and resourcing part time roles with varying time requirements. And then we help with talent acquisition too (recruiting is difficult!), so companies get started fast and become self sufficient within six months. We’ve also seen our companies able to save money by hiring for talent over experience and leveraging the experience in our team to bring people quickly up to speed.

_____

Shout out to Matt Buckland, Head of Talent at Lyst for his comments on an earlier draft.

The shrinking digital divide

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Screen Shot 2015-07-13 at 10.41.59

A certain amount of inequality is essential to the functioning of the capitalist system under which we all toil, and which is, for now at least, the best system available for organising the world’s resources. However, when there’s too much inequality a strong sense of unfairness kicks in and markets stop functioning well, as those who feel a strong sense of injustice vote for politicians with radical policies or turn to violence. Examples in history abound, with the French and Russian Revolutions being best understood as resulting from unsustainable levels of inequality.

More recently we’ve seen this play out with riots and public disturbances within advanced economies like the US, the UK and France and arguably on a global scale with widespread anti-American feelings in parts of Asia and Africa. This points to the relatively new development that extreme inter-national inequality is emerging as a problem in the same way that extreme intra-national inequality has been for some time. It’s a new development, but one that’s perhaps unsurprising given the massive increases in international trade and travel (including migration) and the way technology is shrinking distance.

The digital divide contributes to the economic divide and so it’s great to see the pace at which mobile internet penetration is growing. 94% of the world’s population now have access to a mobile signal, 48% can access the mobile internet and 28% are subscribed to a mobile internet service, and you can see from the chart above that penetration is growing fast. Barriers still remain and there’s plenty of work to be done, not least in bringing costs down and bringing local language content online, but those with internet connections have a better chance of rising out of poverty than those who don’t.

Film and TV distribution startups please roll up

By | Startup general interest, Uncategorized | One Comment

I’ve just read an awesome description of the disruption going on in all the major storytelling media by one Hugh Hancock. I haven’t come across Hugh’s writing before, but he gets right inside the worlds of film, TV, games, prose, virtual reality and comics, with an insider’s knowledge and a light and witty style.

It’s the TV and film pieces that got me the most. In both cases production is changing at an unbelievable pace with new technology driving down cost and opening up new possibilities. This paragraph from Hugh’s post gives you a good sense of what’s going on:

Cameras are becoming cheaper, sure, but they’re also becoming lighter. At the same time, brushless motors and cheap IMUs mean that robot camera stabilisers are taking over from Steadicams for stable moving shots. And all of that means that a shot which used to require a guy who’d trained with a Steadicam can be done to 90% of the same quality by some untrained muppet (me) with a basic knowledge of how to walk smoothly and a magic box that does the rest of the work. And that magic box means that directors can rethink the rest of their shoot too, changing dolly shots (big pile of kit, couple of big hairy grips to work it) into a shot with a gimbal and a $200 self-balanced scooter. But all that might be irrelevant too because who the hell needs to wobble about on a scooter when you can probably just get a drone to do the shot?

And I could have chosen a couple of other paragraphs describing a similarly dazzling but very different array of changes.

So far so amazing. But the problem is that distribution hasn’t changed and we are now in a world where it is apparently a cliche to say:

There’s never been a better time to get your movie made, and never been a worse time to get anyone to watch it.

That’s a situation that can’t persist for very long, hence the title of this blog post.

That said, media distribution startups aren’t easy. It’s been obvious for some time that the legacy world of TV channels and movie studios is ripe for disruption and lots of entrepreneurs have had a crack at it, yet the old world remains largely unchanged. The biggest reason for that is money. TV and film makers need money to fund their production and the people who control distribution are in the best place to cut those cheques precisely because they control distribution. New distribution platforms have faced the catch 22 of needing to cough up lots of money to get good content to get an audience and needing an audience to get the money to cough up for good content. Netflix cracked the code by building a big DVD rental business and using the cash from that to fund rights acquisition but others have found it more difficult, including many startups that used VC dollars to buy rights and try to crack the code that way.

Still, difficult problems require creative solutions and that’s where entrepreneurs excel, and the growing imbalance between production and distribution can only be making this problem space more tractable over time.

Thoughts on curated marketplaces and perfect competition

By | Startup general interest, Uncategorized | One Comment

Jeff Jordan, now a partner at Andressen Horowitz, and previously CEO of OpenTable and senior exec at Paypal and eBay, has a post up on the A16Z blog about online marketplaces. He argues that all online marketplaces are fundamentally the same and hence should be managed by the same principle of “nurturing and managing perfect competition”.

Jeff offers a full definition of perfect competition in his post that’s worth reading. …. If you want the quick version, perfect competition is when the market is totally open, with full price transparency, full information for buyers and no concentration of either supply or demand.

I agree with Jeff, but only about half the time. For marketplaces like eBay, Craigslist and Etsy he is right. The more they can nurture perfect competition the stronger the proposition will be for consumers and the easier it will be for high quality sellers to rise to the top.

But there are plenty of marketplaces where pursuing perfect competition isn’t the best answer.

Uber is perhaps the most visible example of such a marketplace right now. If they were promoting perfect competition they would allow drivers to set their own prices, but they found that consumers prefer consistency and convenience over price transparency and went for a different model.

Another example is Lexoo, one of our portfolio companies. They are a marketplace connecting businesses with legal services. Perfect competition isn’t the best model for Lexoo because the services from different lawyers aren’t equivalent and buyers prefer to be connected to pre-screened quality lawyers than go through the difficult process of working out for themselves which lawyers are best.

Lexoo and Uber are both curated marketplaces – i.e. marketplaces where the marketplace does some work on behalf of the buyer and doesn’t just rely on market forces to optimise the user experience. There are lots of markets where this is the best model.

Why writing makes you smarter

By | Startup general interest, Uncategorized | 3 Comments

I started writing this blog back in 2006 when Twitter was only three months old and long form content user generated content was all the rage. Back then lots of people wrote blogs whereas today most folk rely on Twitter to share their views and news with the world. Periodically I revisit whether I should change from my pattern of daily blogging in favour of more tweeting, which would give me more reach for less effort, but I haven’t made the switch in part because of the feeling that blogging helps with my thinking.

I’ve historically explained how it works by saying that blogging forces me to complete my thoughts, but reading this Business Insider article titled Learning hacks that will maximise your memory I’m now thinking it is more accurate to say that writing makes me smarter. I always love a good listicle, and this one lists seven ways to make yourself smarter by improving your memory. It turns out that writing long form content forces you to do five of them.

  • Retrieval – remembering things before writing them creates new neural connections and strengthens the memory
  • Elaboration – connecting ideas to other ideas also creates new neural connections
  • Generation – creating hypotheses on directions of markets and startup best practice enhances learning and memory
  • Reflection – reading posts back before publishing them is a powerful tool for self-improvement
  • Calibration – feedback from blog posts and on Twitter helps immensely with learning (especially when it’s tough feedback)

The logic of this extends to all long form contemplative writing, whether on blogs or private memos. The nice thing for me about blogging is that the public scrutiny makes it easier to keep the habit of daily posting. If I was writing in a private journal I would find it more tempting to miss a day, or write notes instead of complete sentences.

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