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Dollar Shave Club and the bull case for eCommerce

By | Ecommerce, Uncategorized | No Comments

The cue for this post was Harry Stebbing’s 20MinuteVC interview with David Pakman, the partner at Venrock who led the Series A and Series B rounds at Dollar Shave Club and recently had his faith justified with a $1bn exit to Unilever.

He said that when he made those investments in 2012 and 2013 eCommerce wasn’t a hot sector with VCs and that remains the case now, but here at Forward Partners we’ve made a number of ecommerce investments and, like David and his partners at Venrock, think there will be more Dollar Shave Club scale exits going forward. We are happy investing in sectors where we see opportunity, even if others don’t.

If you poll investors for reasons not to invest in eCommerce you will generally hear three things: low margins, low multiples on exit and high working capital. Some will also throw in the threat of competition from Amazon for good measure.

These are all great points. There are plenty of eCommerce companies where these characteristics are risks and realities. Great care is advisable before investing in them. Without some extra bit of magic they will be unlikely to achieve huge exits.

But there are also eCommerce companies that escape some or all of these issues and many of them are good investment prospects. Here are three reasons why:

  • Consumers are hungry for direct relationships with the brands they buy. That’s part of the story behind Dollar Shave Club, Nike, Apple and many other iconic brands today. However, most traditional brands (think P&G, Unilever, much of traditional fashion) have never dealt directly with their customers and don’t know how. Meanwhile sales through their traditional retail channels are falling fast: creating the opportunity for upstart brands to steal significant market share. These direct-to-consumer eCommerce brands are often able to leverage their relationships and data to win on the basis of superior product. Example companies: Dollar Shave Club, Bonobos, Warby Parker and amongst our partners Spoke and Lost My Name.
  • Few traditional retailers are nailing it online. Their skills of supply chain management, curating a catalogue of product to fill their shops and in store merchandising are less important in the current online and omnichannel era. Today, inventory can be an order of magnitude larger and there are huge opportunities for curation and re-imagining supply chains. All the while, declining High Street revenues and high fixed cost bases are starving them of cash to invest in innovation. In their place what you might call eCommerce 2.0 businesses are offering consumers compelling personalised selections from massive inventories with marketplace, no-stock or stock-light models. They are able to scale rapidly and go global quickly. Amazon is the proto-typical example in this category, others include Jet.com, ASOS and amongst our partners Thread.comLive Better With, Hubbub and Patch.
  • Consumers have a range of preferences, styles and budgets and it’s hard to picture a future in which we don’t buy from a range of online retailers. Shoreditch locals don’t want to shop in the same places as investment bankers a mile south of here. As you might have read on this blog I have a ton of respect for Amazon but they aren’t going to take the whole market. In particular they aren’t good at the product categories where people don’t know what they want and traditionally look to retailers to help them make choices.

Online penetration of retail is now pushing 20% in the UK, so there is still a long way to go in this market. In his interview David said that after little interest in Series A and Series B rounds at Dollar Shave Club the Series C and Series D rounds were hotly contested. I think we will see a similar turnaround in investor appetite for eCommerce more generally.

Q2 US investment data suggests fears of a slowdown are overdone

By | Uncategorized | No Comments

“Keep calm and carry on” is so deeply ingrained into the British psyche that we’ve made a national joke out of it, but that’s how I feel about business at the moment. Many in the venture world fear for the future following the slowdown in investment activity last year and the Brexit vote two weeks back, but in my opinion there’s a high chance that in the startup world the next couple of years will be similar from a prosperity perspective to 2010-2012. In other words, times will be good, but not crazy.

I say that because the fundamentals are still strong. Change is happening faster and faster which is pushing innovation into smaller and smaller companies, and the overall economy is in reasonable shape.

There are risks to this scenario, to be sure, including a messy divorce from Europe and a crash in the venture market, but I don’t think these risks are worse than other systemic risks we’ve seen in recent times – e.g. the Greek debt crisis.

I’m writing all this now because the June investment data from Mattermark is out for the US. Their post is titled Series A Rounds Slip in Q2, but to me the chart below shows that activity is pretty much flat over twelve months. That’s better than the picture looked at the end of May when we feared activity might be trending down. We shouldn’t over-egg the significance of what is so far only a one month pick up in June, but to me this data says we should keep calm, and carry on.

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Top 100 venture VC investments each year average $100-150m gain

By | Uncategorized, Venture Capital | One Comment

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This chart is from a Cambridge Associates research report into where VCs make their returns. Cambridge Associates is a service provider to the Limited Partners that invest in venture capital funds that’s known for the quality of its research.

The conclusion of the report is that returns in venture capital are distributed across a larger number of companies and across a wider number of venture capital funds than is widely believed. Their advice to LPs is to catch these distributed returns by investing in emerging managers outside of traditional US venture heartlands. That’s good news for newish funds in the UK.

I reproduced this chart because it shows what a great VC investment looks like. Looking at 2011 and 2012 the top 100 investments created c$10-15bn in value. That means the average top 100 investment created $100-150m in value. One way of creating $100-150m is to invest early, take a lot of risk to get a meaningful stake and hope to get a massive multiple on a small investment. That’s the Forward Partners way. The other way of creating $100-150m is to invest more money a bit later on when the required multiple will be smaller, but the exit value will be higher. Running the maths early stage investors with healthy stakes can get into the top 100 with exits at half the level Series A investors require and maybe 10% of what very late stage investors require.

One of the things I like about the early stage investing we do is that there are many many more $300-500m exits than $1bn+ exits, so we are swimming in a pool with more targets. Another good thing is that if we’re lucky some of our $400m companies will hold out for bigger exits and will end up at $1bn or more, which will drive the returns even higher.

I’m going to finish with a caveat. The dangerous thing for early stage investors is dilution by later stage investors. That’s why smaller funds and angels have a preference for capital efficient companies. In the maths above I’ve assumed that everyone follows their money to protect their stake. That can be challenging for very small funds, although is getting easier with the rise of AngelList special purpose vehicles.

Evaluating the prospects for life changing inventions

By | Startup general interest, Uncategorized | One Comment

This morning Chris Dixon posted The typical path of life changing inventions:

  1. I’ve never heard of it.
  2. I’ve heard of it but don’t understand it.
  3. I understand it, but I don’t see how it’s useful.
  4. I see how it could be fun for rich people, but not me.
  5. I use it, but it’s just a toy.
  6. It’s becoming more useful for me.
  7. I use it all the time.
  8. I could not imagine life without it.
  9. Seriously, people lived without it?
  10. It’s too powerful and needs to be regulated

That’s pretty accurate, but with the exception of 10. maybe not that surprising. It reminds me of the Mahatma Ghandi quote “first they ignore you, then they ridicule you, then they fight you, and then you win”, but extended and ported to a different context.

However, most would be life-changing inventions don’t make it all the way to number 10 and the interesting thing for future gazers, including VCs, is assessing how far a product will get. That requires an understanding of customers, use cases, ecosystems, cost trajectories and distribution, and it’s definitely not sufficient to think that if a product is at one stage it will progress to the next. For example, most products that people know about but don’t understand it (i.e. at stage 2) whither and die, and to know that any given product is different requires a hypothesis about how people will come to understand it and see how it’s useful.

Key elements of a brand

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

Brand is on my mind this morning. Mat Braddy, formerly CMO of Just Eat and now founder of Rock Pamper Scissors gave a great talk on building challenger brands at our FP Live last night and this morning I read OpenView’s brilliant teardown of how they re-invented their brand.

OpenView are one of my favourite venture capital funds, largely because they are one a small number of VCs globally pioneering a similar model to Forward Partners. Like us they have a bigger team than most other VCs so they can offer a better service to their portfolio companies, and, critically, they have chosen to be very focused so they can build expertise and offer better support. They are focused on expansion stage SaaS companies in the US. We are focused on idea and seed stage ecommerce and marketplace companies in the UK.

I don’t only like them because they think similarly to us, I also love their insight, rigour and clarity of thought, which shines through in the way they went about rebuilding their brand and the way they tell the story.

For me, these are the key insights from last night’s talk and the OpenView process.

  • Strong brands are built from the inside out – they begin with great products and cultures
  • Brands can’t be externally crafted and then applied, they must be truly aligned with what the company does and how it does it
  • The goal of a brand is to articulate the company story in a clear, focused and consistent way
  • A brand is both what the company stands for (mission, vision, values) and how the company is presented (messaging and visual identity)
  • The brand should be informed by both inside and outside perspectives – employees, customers and partners (not just the exec team)
  • The brand can lead and shape how people think about the company, but it needs to be congruent with existing perceptions
  • The best companies present consistent, but different brands to customers/partners, employees, and maybe investors
  • Above all, authenticity is the goal

Just Eat is a great case study for all this. In his talk last night Mat described how they made sure their brand was aligned to the core values of the product (convenience, simplicity), the culture of the company (fun and mischievous), and how they developed it with an inclusive process. Because they were a challenger they wanted to be controversial and that took them to the tagline “Don’t cook, Just Eat”, with the positioning that take-away is better than cooking. His advice to other challengers is to adopt something similarly controversial and then really commit. Just Eat pushed their commitment to the tagline and mischievous positioning as far as forming the Don’t Cook political party and putting forward a candidate in the Corby by-election (check out the jet-pack…).

OpenView followed a similar process but they’re a VC in the serious business of helping companies succeed, so they took a more serious tone. Their tagline is now “Powering Expansion”, which neatly captures what they do for the Series A and B companies they back.

Forecasting in venture capital

By | Startup general interest, Uncategorized | 2 Comments

Good VCs need to be good forecasters. We need to predict which companies are going to succeed and second guess future trends so we can develop our firms to stay ahead of the curve. Deloitte have just published an interesting synopsis of Tetlock’s Superforecasting which gives us some insights into the types of people we need to recruit and the habits we need to cultivate to be good at the forecasting game.

The main and most surprising insight is that deep expertise doesn’t produce more accurate predictions. Tetlock ran prediction competitions over five years with multiple teams and found that the best predictions came from people with the following characteristics:

  • broad expertise
  • open minded
  • sceptical of deterministic theories
  • cautious in their forecasts
  • quick to adjust their ideas as events change
  • embrace complexity
  • comfortable with a sense of doubt
  • highly numerate (but don’t use sophisticated mathematical models)
  • reflective
  • learn from their mistakes

This is a good list for VCs too. One thing that stands out as a little different for me is that the best investors get behind big themes – e.g. the internet, open source software, SaaS, ecommerce, mobile, marketplaces – which feel a bit like the deterministic theories that super forecasters are sceptical of. However, even with these it’s important to keep an open mind and back off quickly if they aren’t playing out as planned. Mobile is a great example. As a category it’s yielded some amazing companies and investments, but many investors went too early and lost money – me included. I made my first mobile internet investment in 2000 in a business that was years ahead of it’s time helping banks to get their services on WAP phones. I’m not saying I’m a super forecaster, but I did learn from that and backed off from mobile until after the iPhone.

The other interesting point from Tetlock is that prediction skills can be improved by good sharing and debating within teams and by training focused on thinking in terms of probabilities and removing thinking biases.

 

 

 

 

Fundraising is a numbers game

By | Startup general interest, Uncategorized, Venture Capital | 9 Comments

These are Forward Partners dealflow stats for the first four months of 2016

  • 832 leads
  • 47 first meetings (6% of leads)
  • 8 second meetings (17% of first meetings)
  • 2 deals (25% of second meetings)

We met an additional 53 companies at FP Office Hours. In some ways they are like first meetings and they do sometimes lead to deals, but they are only 15 minutes long and many of them are speculative in nature so I excluded them from the analysis.

I imagine other investors have a similar leads:meetings:deals ratios and the headline here is that it’s only once you’ve got to a second meeting that there’s a reasonable chance of getting investment, and even at that point it’s only 25%. Getting a first meeting is an achievement in itself which often makes it feel like the prospects of getting investment are better than they are, but that feeling can lead to dangerous complacency. The numbers say you need four second meetings and as many as 24 first meetings to have a good chance of a deal.

Raising money is best thought of as selling equity in your business, and the fundraising process is a sales process. Unless you have strong relationships it’s a numbers game.

If you do have strong relationships then it’s about how strong they really are – e.g. if you know investors well enough that you are in effect coming in at second meeting level then you only need 4.

The smartest founders have a strategy for their fundraising and build a plan which they execute with discipline. They know who their targets are and which investor is their favourite, and they make sure they have enough names in their pipeline.

 

Being a VC isn’t about having all the answers

By | Startup general interest, Uncategorized | One Comment

This tweet really hits home for me. As VCs and board directors we’re often assumed to have great knowledge about startups, and that’s fair enough given we’re there to help. However, we end up feeling under pressure to live up to the assumption, i.e. to look competent and to be able to help.

As I remember all too clearly, that pressure is particularly intense for younger VCs who are building their experience. We all know that sometimes the only route to success is to ‘fake it till you make it’ – and that applies just as much in venture as in other industries.

None of this is to say that it isn’t great being a VC, it is. Just not great all the time.

So what should we all do?

  • Investors: take Steve Schlafman’s advice and realise that going and finding an answer from someone else is almost as good as knowing it yourself, and a lot better than guessing. CEOs can usually tell anyway. Believe me.
  • CEOs: instead of asking for opinions or advice ask investors for examples of similar situations to the one you’re facing.

 

Knowing your customer is key to conversion rate optimisation

By | Startup general interest, Uncategorized | No Comments

Conversion rate optimisation is a hot topic these days. Google Trends identifies it as an official “breakout” term meaning searches for that phrase are up over 5,000% over the last few years.

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We’re looking at an arms race here. Most of these people searching will be improving their conversion rates which will enable them to pay more for traffic and still hit their customer acquisition cost targets, and unless you match them you will find it hard to compete.

The chart above comes from an article I was reading this morning with nine principles for conversion rate optimisation. They are principles you can use before you have enough traffic to run meaningful AB tests.

  • Speed – Amazon estimates that for every 100ms increase in page load time there’s a 1% decrease in sales, and more generally page load times over 2-3s leads to massive customer drop off.
  • Singularity/Simplicity – pages with only one goal and no clutter convert much better. A Whirlpool email campaign improved clickthrough by 42% when they reduced the number of calls to action from four to one.
  • Clarity – meet your audience’s expectations with a plain language statement of how the customer benefits from the call to action and clear design
  • Identification – know your audience’s aspirations, lifestyles and opinions and reflect them in your design and copy
  • Attention – sites have eight seconds to grab a user’s attention. Headlines are the most useful tool and should generally be less than 20 words.
  • Desire (a subset of attention) – show the user what’s in it for them. Likeability, social proof, hero images and customer logos are good tools.
  • Fear (a subset of attention) – show the user what they lose by not taking the call to action, particularly effective when the pain of the customer problem has been made clear. Urgency (order in 40mins to get delivery by Wednesday) and scarcity (only 5 left in stock) fall into this category.
  • Trust – people trust sites that look good, show customer service contact details, and have customer testimonials. They make their minds up on trust in 50 milli-seconds.

The eagle eyed amongst you might have noticed there are only eight items on the list, that’s because I combined a couple. There’s much more detail and lots of good examples in the original post, which is well worth a full read.

 

Six of these eight tips (singularity, clarity, identification, attention, desire and fear) require that you know your customer, yet a remarkable number of founders start building their products and sites without developing that understanding. Your intuition probably isn’t good enough. What’s more remarkable still is that every entrepreneur we talk to knows that understanding their customer is important and most of them have done some superficial research, but only a minority have a deep enough understanding to make the calls that will give them the conversion they need to kickstart their business. That’s one of the reasons many businesses founder just after launch.

The tools to get the understanding are available to everyone so there’s no excuse. All it takes is well some well structured customer interviews.

Short term clarity vs long term upside

By | Startup general interest, Uncategorized | No Comments

We’re all happy in the Forward Partners office this morning because one of our partner companies has just sent an update showing they’ve been growing at 30% per week for the last fourteen weeks. That’s quite some growth and I couldn’t be happier for the team there. It’s well deserved.

But it got me thinking about the trade off between short term clarity and long term upside in seed stage investing. Every business that’s successful raising venture capital has a plan that gets them to a massive exit, or at least that’s the way it should be. That plan will show short term activities that generate value and significant revenues in the out years. The interesting thing is that all the plans I can think of are noticeably stronger at one end or the other. Either there’s a lot of clarity about the short term plan but the upside story is hazy, or it’s clear that if they nail it the upside is huge, but there’s uncertainty about how to achieve success in the first six to twelve months.

To be clear all this is a matter of degree. Good companies that get funded have good answers to the short term and long term questions, they just don’t have excellent answers to both. Not when they’re at the seed stage.

Deep tech investments (think Palantir) tend to be stronger on the long term than the short term, whereas ecommerce and marketplace businesses (think Amazon or ebay) are generally stronger on the short term. People are successful investing on either side of this trade off, but in our seed stage experience companies with relatively more clarity on the short term have better chances of success. They are more likely to generate momentum in the short term which gives them the platform to raise more money so they have time to develop clarity on the big picture. Conversely I’ve seen too many companies with amazing upside stories fail because they didn’t make enough progress after their seed round. Momentum is everything.

All of this is part of the reason Forward Partners focuses on transactional businesses in fashion, healthcare, travel, fintech and so on. We’re invest very early and these types of companies are able to quickly generate momentum and get the proof points they need to raise their next round of finance, as we’re seeing with our partner who’s growing at 30% per week.