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

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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.


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

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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.

Why some big firms struggle to compete with startups

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Founders and investors in their startups have to choose which markets to attack and by extension which companies to compete with. Most often that’s done by looking for industries where there has been little innovation and/or the founder has a plan that leads to a sustainable competitive advantage. As an example from our portfolio, has built a personalisation algorithm which allows men to “dress better without trying”. They are competing with offline and online fashion brands that haven’t changed the buying experience much beyond putting their inventory online.

It’s interesting to ask why it takes a startup like to exploit this ‘personalisation’ opportunity. Selfridges, Mr Porter or any other established fashion brand could have gone after it at the same time or earlier and with more resources.

A big part of it is that change happens very fast these days and big companies inevitably gravitate to a manageably small number of opportunities that are most likely to move the needle in the short term, taking them towards the obvious and away from ideas that are higher risk/higher return.

However, another part of it is that many big companies aren’t organised to innovate well. Drucker foundation strategist Steve Denning says that focusing on short term share price movements is a big part of the problem:

Why are firms failing to be entrepreneurial and invest in long-term growth? The answer isn’t hard to find. Once a firm embraces maximizing shareholder value and the current stock price as its goal, and lavishly compensates top management to that end, management naturally focuses on exploiting the existing business and bolstering the stock price by increasing dividends and share buybacks, at the expense of innovation and investing in the future.

And focusing on shareholder value requires a culture that’s incompatible with innovation:

Even worse, shareholder value theory has joined forces with hierarchical bureaucracy. Once a firm embraces shareholder value theory, the C-suite has little choice but to deploy command-and-control management. That’s because making money for shareholders and the C-suite is inherently uninspiring to employees. The C-suite must compel employees to obey. With only one in five employees fully engaged in his or her work, and even fewer passionate, innovation and entrepreneurship are even less likely.

Not all big companies are like this of course, but most are. Interestingly, many of the world’s biggest companies today have eschewed shareholder value theory and remain entrepreneurial to the core – Apple, Amazon, Google and Facebook are four good examples.

When assessing whether industries are ripe for disruption looking at the DNA of leading players is informative even before the disruptive idea is formed. Companies focused on shareholder value (including many PE backed businesses) and, more obviously, those which are hierarchical and bureaucratic, make good targets. Those that are entrepreneurial to the core, not so much. Returning to Thread, the large entrepreneurial companies in fashion are mono-brand plays innovating through supply chain management, and the multi-brand retail focused companies that might be competitors are more stuck in the bind that Denning describes.

Three types of acquisition – view from a public company CEO

By | Exits, Uncategorized | 2 Comments

At a conference last week Autodesk CEO Carl Bass said that he thinks about acquisitions in three buckets:

  • companies that are really people who have a technology that Autodesk wants to build up (acquihires)
  • middle-size companies, meaning they have product that they’re selling, maybe even internationally
  • large scale acquisitions

He wants to make lots of acquisitions in the first category, a handful in the second, and only rarely in the third. For context note that Autodesk is a $13bn market cap company, and are thus likely to make fewer large scale acquisitions than much bigger businesses.

This sort of tallies with my experience and what I’ve heard lots of investment bankers say over the years, which is that companies get acquired for up to around $100m without having to show that they are sustainable in the long term. But as deals get bigger analysis of forecasts and the financial impact on the acquirer become much more important.

In terms of Carl Bass’s categorisation, I would say that most acquihires are sub $50m and that middle-sized companies get you up towards the $100m level and maybe a little way beyond.

$10-20m revenues is the threshold for most high growth businesses that gets you into what I would call ‘large scale’ territory of $100m+ exits.

Also very important to note is that the number of acquisitions declines precipitously as the valuation rises.

Finally, a huge caveat, I put these rules and recommendations out there because I think they are a useful guide, but the quality of revenues varies hugely between companies and intellectual property and other elements can also drive valuation. Moreover, much is driven by luck in this industry and individual counter-examples abound..

All this is written primarily with ecommerce, marketplace and software companies in mind.




Challenges for conversational commerce

By | Startup general interest, Uncategorized | One Comment

I’m excited by the prospect of conversational commerce. Accessing the services we want from inside the messaging apps where we hang out is a powerful proposition. No downloads, easier registration, more context, fewer clicks – what’s not to like?

The problem we’re wrestling with is how the vision will be realised.

I wrote before that service discovery will be a problem for startups, and now having read this post from Betaworks investor Matt Hartman I’m mindful of a couple of other issues:

  • The most exciting part of the conversational commerce vision is bots conversing with users on messaging services. At a minimum that will take learning a set of commands and some people are talking about ‘command line interfaces’. The issue is that I can’t see mainstream users learning many commands, let alone any syntax. Matt talks a lot about this and rightly notes that the value of a service deteriorates rapidly with the number of commands a user has to learn. He also points out that services may be able to pull data from the phone which reduces the need for the user to remember commands or answer questions, and that they will be able to use their conversation history to remind themselves of commands they have used in the past. I’m not sure either of these is enough to make services easy enough for users outside of techy early adopter groups. None of the successful services I know ask users to learn anything analogous.
  • The conversational commerce meme is more driven by developers and investors than consumer demand. When suppliers generate hype around a new idea that is designed to make them more money I call it ‘vendor push’, and it often ends with a whimper. Cell broadcast and 3DTV are two examples that spring to mind, but there have been many others, mostly in software and telecoms for some reason.

I’m optimistic by nature, which is one of the reasons I’m excited by conversational commerce, but as an investor you have to look for reasons why things might not work. In this case the growing number of issues is starting to dent my optimism.

It’s tough building a startup in your evenings and weekends

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Deliveroo founder Will Shu was interviewed by CityAM and gave a piece of advice that is close to my heart:

Unlike many higher flyers turned entrepreneurs, Shu doesn’t advocate seeing your startup as a Saturday project – if you’ve got an idea, you need to go for it. “Guys from finance are taught to hedge themselves – ‘I’ll work at Goldman, do my startup on the weekend or advise a couple of good ones and see if I can get in on that’ – but it’s important to be irrational, actually. Unless you give it 100 per cent, it’s very hard to succeed.

This advice mirrors what we’ve seen over and over again. Some people do manage to really get their startups moving without giving up their day job, but they are definitely the exceptions. Much more common is that founders find they can only develop their idea a small way without diving in full time. That was the case with Luke McCormick, the founder of Edge Retreats who we backed at the beginning of last year, was the case with Ben Furber of The Gifting Co who we backed in September last year, and is the case with the founder of what I hope will be our next investment (we’ve signed terms and are in exclusivity now, so I can’t reveal who it is).

Luke started Edge Retreats over a year before we invested. He did the evenings and weekends thing, and got a friend to code his first site, also in his spare time. He got his first few customers during that period but it wasn’t until he left his job at Secret Escapes that the business took off. It was at the same moment that we invested and our team became his team so there were multiple factors at play, but Luke’s full time commitment was the key that unlocked our investment and therefore everything else. Twelve months on from there he closed his next round of investment and is properly off to the races.

Conversely, we’ve been talking with one founder who has been doing the evenings and weekends thing, used his bonus money to get an agency to build the first version of his site and start transacting, but he won’t leave his job and is struggling to raise funds to keep the business growing. There are lots of other people in this situation who struggle to get their business past first base, mostly because potential investors and employees don’t want to follow founders who aren’t sure enough of their business to commit full time. These companies also have two related problems; progress is slow because the founder is only part time on the project and building great product with outsourced development is very hard.

So Will is right, it’s important to take the leap of faith and give 100%. Otherwise it’s very hard to succeed.

UPDATE: A couple of you have pointed out that it can work to do the research and analysis piece of starting a company in evenings and weekends, including building prototypes and first product, and that it’s only when you start ramping up that it’s important to fully commit. I agree and wasn’t trying to say anything different. That’s what Luke did.


Startups strategies should work in good times and bad

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Startup founders should expect that it will take seven or more years to exit their company. Some get lucky and the exit comes more quickly, but it’s foolish to plan for luck. Over seven years it is almost inevitable that the markets will turn bad at some point. If I think back over the sixteen years I’ve been investing in startups the market for private company investing was tough from 2000-2004, from 2008-2011 and is getting tough again now. At no point have we gone more than four or five years without hitting a tough point when investor sentiment goes south.

To quote Foundry Group partner Seth Levine, when the markets turn:

the growth imperative shifts to a profit focus, [and] companies with high burn and weak operating metrics can get stuck in the lurch

Moreover, as Seth also notes, when the shift comes, it comes quickly, and there’s little time to adjust. Hence the smart thing for founders to do is not to get stuck in the lurch. Where there’s a trade off to be made, and there is in most companies, that means opting for stronger operating metrics at the expense of growth, boring as it may be.

It’s complicated in practice of course and every strategy needs to be adaptive, but however frothy markets are, they always turn at some point and if the plan is to build a big sustainable business it’s more important to be able to survive the transition than to maximise valuation and growth while the going is good.

Be helpful, not right

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I’m very excited about our FP50 mentor network which we launched last night with a dinner for mentors and a couple of our portfolio companies. wrote about it under the headline Tech leaders unite to support UK’s fledgling e-commerce start-ups, and that’s about right. I was humbled by the quality of our guests.

We put a great deal of thought into making sure FP50 will be really helpful to our startups. We asked CEOs and founders what they want from mentor relationships, asked mentors what works for them and looked extensively at other mentor schemes in operation.

What we learned boils down to two things:

  • Long term mentor/mentee relationships deliver the most value
  • It’s crucial that FP50 adds value to mentors as well as mentees

So those are our two objectives.

One of the ways we can add value is to help people be better mentors and mentees, so at the dinner we had a talk from startup coach Richard Hughes-Jones on how best to give advice. It was his thoughts on the difference between directive and non-directive coaching that provoked the most discussion on my table afterwards.

When mentoring, the first instinct of many of is to jump into solution mode and try to fix problems by suggesting solutions. Often the advice is framed as “I’ve seen this situation before and you should do X”. That’s a direct coaching style and is appropriate in some circumstances, particularly in the very early stages of a company where there’s lots of things to do and the founder doesn’t have much time to think about any of them. A non-directive coaching style helps the founder to think through the problem and come up with their own solution. It takes more time, but is often more powerful, particularly if the situation is complicated and the match with the mentors previous experience not perfect.

It was in this context that Richard said “It’s better to be helpful than right”, which is my takeaway quote for the evening.

Simply giving the right solution to a founder is no use if they don’t understand it or internalise it well enough to implement it properly, or it hasn’t been explained well enough for them to tweak it to their precise situation. In these scenarios it’s better to help founders think through the problem a little bit, even if they don’t get to a final solution. Best of all is for them to have the right solution and be fully ready and able to implement it, but that isn’t always possible.

The next step with FP50 is to get those long term relationships started. The Slack group we set up is busy with people introducing themselves and hopefully that combined with direct introductions will be enough to get the ball rolling. Our next event will be in three months.

It’s not just generation Z that craves authenticity

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Business of Fashion wrote yesterday about what brands should do to tap into generation Z – that is youngsters born from the mid-90s onwards. They identify a number of interesting differences between generation Z and their forbears:

  • Online nearly all the time – born digital and never experienced life without technology
  • Spend less money on fashion (down from 45% to 38% of teenage spend 2005-2015) and more on technology (up from 4% to 8% of spend) and food (up from 7% to 22% of spend)
  • Surveys also show that they care less about fashion
  • Teenage spend is down overall – one survey says down 31% from 1997-2014
  • They scrutinise brands carefully – reading backstories looking for congruence with their own values
  • Todays teenagers are more altruistic and entrepreneurial than previous generations
  • They value shareable experiences – in part because social capital comes more from social media than wearing logos
  • They reject the exclusivity that underpinned brands previously popular with teenagers – e.g. Abercrombie and Fitch

I can see two trends at play here. First is greater use of technology and the second is an increase in the value of authenticity. It’s no accident that the two arrived together, because whilst social media is often used to promote image and falsehood a much greater part of it’s use is genuinely authentic, largely because it’s now much harder to hide the truth.

Generation Z may be the more extreme than their elders in adopting these trends, but they are not alone. Where I live in north London the adult population is strongly favouring companies with quality products sourced sustainably – i.e. brands that are authentic to them – and I see this trend more widely.

When I look for opportunity I look for trends to back, and this trend towards authenticity is reaching ever larger parts of society and has a long way to go.