Category Archives: Venture Capital

European venture growing nicely – UK remains strong

By | Venture Capital | 2 Comments

Gil Dibner just published this great analysis of Q3 venture activity in Europe and Israel. It’s very comprehensive and well worth flicking through the full 55 pages if you are investing or raising money over here.

Here are the seven points that stick in my mind.

  • Investment activity is growing fast – up roughly 2x year on year (slide 4)
  • UK and Israel dominate with France and Germany next at approx half the size (slides 10 and 11)
  • UK saw $897m of investment in Q3 – ($622m if you exclude the $275m investment in Fanduel) (slides 10 and 11)
  • The number of $100m+ ‘mega-rounds’ is increasing with 4 in Q3 and 6 in Q2
  • US VCs participate in around 20% of European deals, with a heavy skew towards later rounds (slides 18 and 19)
  • Consumer investments are the biggest sector – likely because consumer markets are local markets and therefore less vulnerable to competition from Silicon Valley backed startups (slides 22 and 23)
  • Fintech is the largest sector, particularly in the UK (slides 36 and 41)

The mindset of a good investor

By | Uncategorized, Venture Capital | One Comment

There were two articles on my Twitter list today about the mindset of good investors. The first was a Techrunch article explicitly about bias in VC decision making. They identified six cognitive biases investors suffer from (similarity bias, local bias, anchoring, information overload, and gender bias) and offer some tips for making bias free decisions. I’m fascinated by cognitive bias because by definition it’s hard to weed out, and reading the Techcrunch article this morning I wondered if that fascination is rooted in a subconscious desire to keep working on myself to be a better investor.

Stepping up a level, the conclusion I’ve come to over the years is that the key to avoiding bias and making good investment decisions is total objectivity. No emotions, thorough analysis, and clearly understood reasons.

The tips in the Techcrunch article are in fact all tactics for keeping discipline in these three areas. Documenting decision making processes, establishing and constantly refining investment criteria, and following principles are all ways of taking the emotion out, making sure the analysis is thorough and the reasons understood.

I haven’t thought of it in this way before but a number of the things we do at Forward Partners serve to bring thoroughness and clarity to our investment analysis. The most important are clearly understood deal criteria (top of the list: every deal must have the potential to return the fund), standard format investment papers, and a culture of open debate and shared ownership of deals.

The second article was an Economist review of Superforecasting: The Art and Science of Prediction. By Philip Tetlock and Dan Gardner, which details the characteristics of people who are good at predicting the future. They drew on a contest run by American spies in the wake of the Iraq debacle:

Begun in 2011, it posed hundreds of geopolitical questions (“Will Saudi Arabia agree to OPEC production cuts in November 2014?” for instance) to thousands of volunteer participants. A small number of forecasters began to pull clear of the pack: the titular “superforecasters”. Their performance was consistently impressive. With nothing more than an internet connection and their own brains, they consistently beat everything from financial markets to trained intelligence analysts with access to top-secret information.

Tetlock analysed the superforecasters and found they shared the following characteristics:

  • clever, but “by no means geniuses”
  • they viewed the world as complex, requiring different approaches to understand different areas (no simple rules or models)
  • comfortable with numbers and statistical concepts like regression to the mean, but not statisticians
  • hungry for information
  • willing to revisit predictions in light of new data
  • able to synthesise material from sources with very different outlooks on the world
  • self aware and reflective
  • willing to learn from their mistakes
  • more interested in why they are right or wrong than whether they are right

All of these traits are learnable and for the investors amongst you this is a good checklist of things to be doing and/or to work on. Investing, after all, is about predicting the future.

Desirable growth from a startup: AirBnB case study

By | Startup general interest, Venture Capital | 3 Comments

AirBnB growth

The chart above shows the number of guests AirBnB has hosted each summer for the last five years. It was on Techcrunch this morning.

It’s an amazing chart. AirBnB has delivered on the proverbial hockey stick growth that I imagine they had in their pitch deck back in 2010. They’ve lived the dream.

We can draw lessons for this for new startups. In particular for founders who plan to emulate the success of AirBnB.

First, two facts:

  • If you do the maths then 353x growth in five years works out at 3.2x per year, compounded
  • Also note that growth gets harder with size – eyeballing the chart suggests AirBnB was in the 2-3x range for the last couple of years

This means that founders who want to grow as fast as AirBnB should be growing at well over 3.2x in their early years. For very young companies the forecasts should show this level of growth, whilst companies at Series A or later will have to have shown this level of growth in the past as well as in their forecasts.

Not every company needs to have the ambition of reaching AirBnB’s $25bn valuation (although that’s what the biggest and best funds are looking for) but if you want to get to any kind of scale in five years then the maths shows that 3x growth is what you need in the early years. We advise our partner companies that 20-30% growth per month puts them in good shape to raise a Series A. These companies are typically in their first or second year and therefore growing off a small base, and they don’t usually manage this level of growth every month for a twelve months in a row, but if they did it would make them 9-23x up over the year.

Small funds are in a better place to invest in new markets

By | Venture Capital | 5 Comments

In a post yesterday VC Rob Go correctly identified that one of the most common reasons investors pass on investments is some version of “it’s not big enough”. He’s dead right. Most good VCs have a strong discipline of only making investments that can return their fund and that rules out a lot of potential investments.

If a VC has a $200m fund, a 20% stake in a $1bn exit will net them $200m and hence be a fund returner. $200m funds, therefore, should only invest in companies they believe are in markets large enough to sustain companies with an enterprise value of $1bn (assuming they will average 20% stakes at exit).

With the same assumptions $50m funds can invest in markets they have confidence can sustain $250m exits.

When new markets first emerge they are highly speculative with little to no evidence for investors to go on. Then over time evidence accumulates. First there’s enough to be sure there’s a tiny market, then a small, one and so on, until, assuming the best, several $100m+ revenue companies have emerged and all analysts everywhere agree the market is huge.

Small funds are able to take bets earlier in this process and are hence best placed to invest in emerging markets.


That’s why at Forward Partners we have kept our fund size small ($50m). We invest at concept stage when there’s often very little to go on with regard to market size and, just like Rob says, insufficient confidence in the scale of the opportunity is one of the most common reasons we pass. If our fund was any bigger we’d have to pass on even more deals.

When assessing opportunity size we actually look for two things. Firstly that there’s reasonable grounds to believe the opportunity is large enough to return our fund, and secondly there’s a chance that the opportunity will turn out to be much larger. Then we hope that as the evidence accumulates it will become clear that the company has the potential not just to return our fund, but to return a multiple of our fund.

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.)

YC follows a well trodden path for investment firms: drifts later stage

By | Venture Capital | 2 Comments

If you read this Techrunch post profiling 50 of the current YC companies you will notice that many of them are up and running with customers and revenues. That marks a shift in the YC investment strategy which used to focus on younger businesses. In the words of an alum from the 2006 cohort:

Companies are joining YC at a much later stage.  When I started YC, most companies wrote their first line of code in the first week in the program.  Today, most new YC companies have been operating for a year or longer and have customers and revenue before starting.  If the companies in my batch applied to YC today, I doubt that any of them would get in.

That relates to a second change he observed:

Companies are much more ambitious now.  In 2006, getting acquihired by Google for a couple million buckets was considered a fabulous outcome and basically the goal of every company.  Today, there are six YC companies worth over a billion dollars, and as a result new startups aim much higher.

I think there are three inter-related reasons for these changes.

  • Now that the YC portfolio is worth over $30bn (a number they put on their homepage) acquihires don’t move the needle. The work of investing and mentoring only feels worth it if it can impact the $30bn figure, and returns of less than around $1bn aren’t significant in that context. Note that these returns are from the value of YC’s stake in the company, not the total valuation. Hence they back companies with more ambition. Much more.
  • Because Sam Altman & co have enjoyed a lot of success good entrepreneurs and investors alike are rushing towards YC in the hope that the magic will rub off on them. This creates a virtuous circle of demand and enables YC to invest in better companies than before. Better often means less risky, and hence more mature companies.
  • Assessing the potential scale of an opportunity is one of the hardest things to do for startups and the earlier you invest the harder it is. To have more confidence that their investments match their new found levels of ambition I imagine the YC partners are drawn towards companies that have more validation of their market size.

As I mention in the headline this is a well trodden path for successful investment firms. The usual VC path is slightly different to YC in that it’s also linked to fund dynamics, but the flow from initial success to larger fund to targeting larger exits has been seen many times over. Perhaps the best example is Apax, from here in the UK who started out as one of the first venture capital firms and over time morphed themselves into a private equity company doing multi-billion dollar deals.

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.

Market size determines funding strategy, not vice versa

By | Venture Capital | 2 Comments

Market size – or more accurately addressable margin opportunity – determines how valuable a company can be, and the size of the exit in turn determines how much a company should raise. Alex Iskold, MD of Techstars New York put it like this in a recent post:

Venture Capitalists are looking to deploy millions of dollars, and they are looking for multiple times return on that capital. That is why, in addition to founders, VCs focus heavily on the size of the market. If they don’t believe the market is large enough, they won’t invest.

There is nothing wrong with starting a business in a smaller market. You can still get capital, but not necessarily via VCs. Understanding the size of your market before going out to raise money is an important thing to do for every single business.

Simply put, if the exit is £100m and you want to keep £50m for yourself then the investors will get £50m, so if they are going to make 10x+ then the company can have raised a maximum of £5m.

Investors at every stage are doing this maths, and the exit size is a function of the market. That’s why investors with large funds obsess so much over market size. Investments in small or medium sized markets won’t move the needle for them.

A lot of entrepreneurs approach this subject the wrong way round. They figure out how much they want to raise and then they write a deck and writing the market becomes an exercise in selling the investor and justifying the amount of money they are seeking. When the market is genuinely huge that works fine, but often times it isn’t, and investors will walk away if they don’t feel it’s big enough for them to make a meaningful return. Worse, market size can be a difficult topic to give feedback on. If an entrepreneur has claimed the market is worth billions and the investor feels it is worth much less then feeding that back can invite confrontation, particularly if the founder has made a big play about the size of the opportunity. Good investors want to give feedback when they say ‘no’ to investments, but they say ‘no’ a lot and unless they have had meetings they will want to minimise the amount of time they spend giving it – and that means avoiding back and forth debate on questions like market size.

There are plenty of entrepreneurs who have used their sales skills to raise money this way even when the market is small, but that usually doesn’t work out so well in the medium term when the burn rate is high and everyone is disappointed because the market has limited growth.

It’s much better to have a firm view on the opportunity size and build the fundraising strategy from that.

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.


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