Category Archives: Venture Capital

399 scale-ups in UK, 208 in Germany, 205 in France

By | Venture Capital | 2 Comments

Screen Shot 2015-07-06 at 14.05.27

The Startup Europe Partnership (SEP) just published their SEP Monitor: From Unicorns to Reality. There’s a wealth of good data there on fundraising in different categories split by geography. “Scaleups”, companies that have raised $1m-10m, are where we focus and are shown in the picture above. The report also covers companies that have raised over $100m, termed “Scalers”, M&A, and IPOs.

Focusing on amounts raised is an improvement to focusing on valuations but is still a far from perfect measure of startup activity/progress, largely because some great companies raise little or no money. That said, this new analysis largely confirms the geographic picture we’ve been seeing for a while, namely that approaching half of Europe’s startup/venture activity happens in the UK.

Andreessen Horowitz: No bubble but rebalancing from IPO to late stage venture

By | Venture Capital | No Comments

Earlier this week Benedict Evans/Andreessen Horowitz published a great deck with their thoughts on whether we are in a bubble or not. The whole thing is well worth a read, but two slides stood out for me.

Firstly this table comparing 1999 and 2014 on key bubble-related metrics. As you can see this time round the funding is both smaller in scale and more conservative, and we are operating in a much, much bigger market. Hence from a high-level macro perspective current funding levels look sustainable.Screen Shot 2015-06-16 at 09.11.16

 

But second there has been a big shift from IPOs to late stage private rounds.

Screen Shot 2015-06-16 at 09.16.00

Investors in these late stage rounds are traditionally public market investors who have moved to the private markets because companies are going public later and the returns are now pre-IPO. That makes sense, but it looks to me as if they have less valuation discipline than we normally see in either the public markets or in smaller venture rounds.

So definite signs of a bubble in late stage private rounds.

However, Andreessen Horowitz conclude that so far the frothy late stage activity isn’t moving down the chain to smaller or earlier stage rounds, pointing out that the rise in the number of seed deals is a result of declining costs to start a company. I think that’s largely true. Here in the UK, we’ve seen some examples of heady activity in the early stages, but nothing widespread.

 

A new unicorn in the UK every six weeks

By | Forward Partners, Venture Capital | 4 Comments

 

 

 

Companies in Europe worth over $1bn
Screen Shot 2015-06-15 at 18.17.38

The above chart is lifted from a recent GP Bullhound report European Unicorns: Do They Have Legs?. It paints a pretty picture, for the UK and for Europe. In the last twelve months there were 8 new unicorns in the UK and 13 in Europe. That compares with 22 new unicorns in the US over the same period.

The fact that we’re creating larger numbers of big companies gives confidence to investors and provides fertile training grounds for the next generation of entrepreneurs and angels. It’s great to see.

That said, I’m going to finish with a caveat. For the reasons I gave above it’s critical that we create huge companies, but I think the pendulum has swung too far and the unicorn thing is now overdone. There are lots of great companies created which don’t get to $1bn value and at the earliest stages of investment the market opportunity generally isn’t clear enough to make investing in unicorns a viable strategy. The key discipline for every investor should be to ensure that every deal can be a fund returner, and with small funds that doesn’t require $1bn+ valuations. The real skill is putting yourself in a place to get lucky.

For Forward Partners that means investing in companies that can return the fund with exits in the £100-300m range but have a chance of going on to be much bigger. 60% of European unicorns are in the sectors on which we focus: ecommerce, marketplaces and software.

Investors shouldn’t finance races to the bottom

By | Venture Capital | 3 Comments

I just read Albert Wenger’s post about profit destroying innovation and am left wondering if we are entering a period where startups are tearing down incumbents but won’t become sustainable companies in their own right. We have become very efficient at creating super fast growth companies with low or non-existent potential profitability from their existing revenue models. These are often marketplaces with 0% take (i.e. they don’t charge for listings or purchases) or SaaS companies giving away features that competitors charge for in the hope of charging for something else later.

As Bill Gurley wrote recently:

it is materially easier to take a company to substantial revenue if you generously relax the constraint of profitability. Customers will love you for giving away more value than you charge

The dangerous dynamic we should be avoiding is financing businesses to substantial revenues that won’t eventually generate significant profits. That’s happening increasingly often as late stage investors pay up handsomely for high growth businesses without clear/credible strategies for reaching positive cash flow. These un-profitable startups undermine the profitability across entire markets in a way that may not be recoverable. Albert Wenger’s said the same thing differently when he wrote the benefits of innovation are accruing to customers rather than providers. When that happens it is investors who foot the bill.

Design is critical: Value proposition is paramount

By | Startup general interest, Venture Capital | 2 Comments

I’ve just read an interesting post on Venturebeat lamenting the fact that investors get carried away with design and user experience:

If the user experience seems to be great, often investors will conclude the founders have found product-market fit and the basic unit economics become less relevant. The path to profitability in most cases becomes: You’ll get profitable if you’re big enough.

The better alternative they say is to build something people want:

In 2014, we went through Y Combinator, whose mantra famously is “Build Something People Want” not“Build Nice Things, People May Want Them.” This is certainly something we take to heart.

At the end of the day this final conclusion is the right one. It is more important to build something people want than to build something that looks nice. Going further, what every company actually needs is a strong value proposition, where:

Value (to the customer) = Benefits – Cost

That’s an equation out of strategy textbooks from the 1990s, but it is entirely relevant to startups. Not only do you have to build something that people will want (i.e. it has benefits) you have to do so at cost that is acceptable to the customer and allows you to make a profit.

Design and user experience have grown more important in recent years because the benefits of convenience and joy in using a product are increasingly used as competitive weapons, but it is important to remember that without a strong primary benefit convenience means nothing and there is no joy.

In practice startups should focus first on building a product that resonates emotionally with customers. That product will have a strong primary benefit (e.g. quotes from four lawyers within 24 hours from our portfolio company Lexoo) and just enough design to make it usable by early adopters. If investors are over-indexing on design it is likely because ‘just enough design’ is becoming more and more as higher standards of design are becoming more pervasive generally.

 

Bright future for London VC scene

By | Venture Capital | One Comment

Techcrunch reported yesterday that London startups raised $647m in Q1 this year, passing $500m in a quarter for the first time and up 67% from $411 in Q4 2014, which was itself a record. That’s great news for the startup ecosystem which has been short on capital for some time now, with the twin results that some companies are forced to invest more conservatively than they otherwise might whilst others move to the US and we lose their jobs and talent.

And there are lots of new funds coming online, so the growth looks set to continue:

  • Over the weekend the news broke that Rory Sterling, Harry Briggs and Simon Calver are launching a new £200m fund
  • Last night I was at a UK launch party for 500Startups (they have been doing deals here for a bit but are basing people here for the first time as a prelude to stepping up activity)
  • Gil Dibner has built a $550k syndicate on Angel List which Techcrunch says is ‘thought to be the largest outside the US’
  • There’s another decent sized fund by a prominent VC that’s launching shortly
  • Mosaic Ventures and Google Ventures launched last year and are still getting going

Meanwhile the longtime stalwarts of the UK VC scene are still busy making investments. Balderton, Accel, Index, Octopus, MMC and Wellington are the ones we’ve co-invested in at Forward Partners.

 

For those worried about bubbles, comparison with Silicon Valley suggests there should be plenty of headroom for growth in London and UK venture capital. The $647m invested in London startups in Q1 was just 13% of the $5.05bn invested in Valley startups (of which San Francisco was $2.13bn). Investment over there was therefore much higher than here both on an absolute and on a per capita basis.

Cost ratios as a measure of fund efficiency

By | Forward Partners, Venture Capital | No Comments

Fund managers are assessed, in part, on their ratio of expenses to assets under management. This applies to all classes of fund managers, including pension fund managers, IFAs, private equity fund managers, and venture capital fund managers. In most cases the logic for looking at expense ratios is very strong:

  • the more money that is spent on fund expenses the less gets invested in underlying assets and hence the performance of those investments has to be better to achieve a given level of return
  • fund expenses are largely composed of investors’ salaries and office costs, above a certain level higher salaries and nicer offices don’t translate into better performance

Therefore, the lower the expense levels the better. Moreover, history is littered with examples of fund managers getting rich on the back of high expense ratios and then not delivering good returns to investors (that’s a bad practice that we want no part of).

Forwards Partners, and an increasing number of higher value add VC firms (see here for a partial list) have different models which require a new way of looking at things. The difference is that fund expenses are increasingly spent on people who work with the portfolio companies to make them more valuable, invalidating the second reason for looking at expense ratios in the above list of bullets – fund expenses are not ‘largely composed of investors’ salaries and office costs’. In our case eight out of our team of thirteen spend all or most of their time working with our portfolio companies.

In fact, our strategy is to have higher expenses in order to attract the best entrepreneurs and help their companies achieve better results. We invest more in support to drive higher returns. That’s on the first page of our pitch deck.

Rather than look at our expenses as a percentage of assets under management, which is high compared with our peers, the right question to ask is whether our investment in supporting our portfolio is working. Does it enable us to do better deals?, and are the investments we make more successful as a result of the help we offer?

The definitive answer to these questions will come over time as our portfolio matures, our companies exit, and we can demonstrate a high cash to cash IRR. Until then investors wishing to assess our model can look at the companies we have invested in to date, the success they are having, and hear about the help we are providing on a day to day basis.

 

VC value add: trends and challenges

By | Venture Capital | No Comments

In recent years VCs have been rushing to add value by hiring non-investors to help their portfolio companies. I touched on this subject last week when I wrote that Capitalism is being replaced by talentism. This week I want to talk a little more about what VCs are actually doing.

This is a list of the funds that are working hardest to add value beyond capital, strategic advice, and the partners’ contacts. These are just the ones I know. Please shout if you know other examples and I will update. (Note: I haven’t included accelerator programmes or incubators. They do add value, but they are different to venture funds.)

  • Andreessen Horowitz: organise executive briefings where portfolio CEOs meet senior execs at potential customers, have a large talent function to hire for their companies (and have built software to support it), have staff dedicated to helping portfolio companies network effectively
  • Google Ventures: has teams that help portfolio companies with design, engineering, recruiting, marketing and partnerships
  • First Round Capital: built a software platform to help entrepreneurs collaborate, have a talent team, run a large number of events for their portfolio
  • OpenView Partners: has teams to help their portfolio companies with recruiting and sales and marketing
  • Index Ventures: has a ‘platform team’ of nine people, key activities are organising functional support communities for their portfolio execs and running events
  • Greylock: have a data scientist who helps their portfolio
  • NextView Ventures: have a director of platform
  • True Ventures: run an undergrad programme
  • Spark Ventures: have a director of platform, primary activity seems to be events
  • Founder Collective: hired a journalist to help their portfolio with PR
  • Playfair Capital: recently hired a Facebook recruiter to hire for their portfolio
  • Balderton Capital: have a head of PR and content, a data scientist, and a talent and development analyst
  • Frontline Ventures: have a head of platform

And there’s us. Forward Partners has a team of eight to help our partners with product, design, development, customer acquisition and recruitment.

That’s the activity. The major trend is that there’s more and more of it over time.

The challenge is that it’s hard to find ways to make a difference, particularly across a large multi-sector portfolio. Jay Acunzo, director of platform at NextView Ventures recently wrote on Techcrunch:

In the last three months, every frustrated director [of platform, at a VC] I’ve met with (and there have been multiple) had the same complaint about a lack of focus confusing their work and yielding generic-sounding, ineffective projects.

As I wrote last month, focus is one way to address the challenge. We only invest in early stage ecommerce companies so there is a lot of commonality in the problems they face and we have built a team focused on those areas. OpenView partners has done something similar for expansion stage software companies. As Joe wrote in his Techcrunch post, one option for VCs with less focused investment strategies is to build sector and stage focused value add capabilities.

New Mattermark data: late stage investment up 120%

By | Venture Capital | No Comments

Screen Shot 2015-04-14 at 10.16.40

Mattermark just released their report on Q1 2015 venture activity in the US (download here). As you can see activity is up across the board but it is only late stage venture that has seen a massive jump. This picture is consistent with what I’ve been seeing and reading generally – if there is a bubble, and I now think there may well be, then it is confined to late stage investments. Activity is heady in the Seed through to Series C sections of the market but year-on-year growth rates in investment of 19-47% aren’t in bubble territory.

The interesting question is: where do we go from here?

I think we will either see a correction in late stage investment or the mania will spread down to the earlier stages. Or, more accurately, the late stage mania will continue it’s trickle down to the earlier stages until we either get a late stage correction or we are in a cross-stage bubble.

Corrections are typically stimulated by events – the last time we had a late stage bubble troubles at Groupon and Facebook’s poor share price performance immediately post-IPO took the heat out of the market. Following that logic, this time round I think the market will keep getting hotter until we see trouble at 2-3 of the leading unicorns – Uber ($40bn valuation), Snapchat ($15bn), SpaceX ($12bn), Pinterest ($11bn), Airbnb ($10bn),  and Dropbox ($10bn).

Are accelerator programmes backing more mature companies?

By | Uncategorized, Venture Capital | 3 Comments

This tweet from YC’s Sam Altman was in my feed this morning:

You can see why he’s pleased. Lots of his companies have got a $1mm revenue run rate which is a sign they are valuable.

It takes a while to get to a $1m run-rate and I’m wondering if YC is trending towards backing more mature companies and fewer true startups.

Here in the UK it seems to me that Seedcamp and Techstars have made a similar shift in strategy. It makes sense, they get similar equity positions in businesses with more proof points that are therefore more likely to be successful. On top of that the introductions these programmes can make to potential investors, customers and advisors are more valuable to companies that have product and revenues.

That leaves a gap for true startups. Which is where we play :-)

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