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Cultivate the calmness that comes from knowing you will succeed

Reading this tweet from Paul Graham I immediately thought that this is great advice for multiple situations, not just YC interviews. Job interviews are one such other situation. Negotiations are another – knowing you will succeed whatever the outcome gives you the power to walk away.

Knowing you will succeed takes a special kind of confidence. That starts with self belief, which an entrepreneur needs in spades. I wrote a while back about the cognitive biases that an entrepreneur need, and personal exceptionalism is top of the list, you should believe that you are the top of your cohort and that your work is snowflake special. You know you will succeed because you know you are good enough to find a way. I’m not sure if you can cultivate this kind of confidence.

But self-confidence isn’t enough on its own. You also need a good plan. It might not be possible to do anything about your levels of self confidence, but you can make sure you have a good plan. The first thing you need is a good idea. That isn’t the same as the best idea you’ve had so far. It should be something that you have a great feeling about. Then you need to test it thoroughly. Look at it from every angle. One way we help entrepreneurs do that is to list out all the assumptions that are made and then examine each for reasonableness. Another good way is to talk to as many people as possible and listen carefully to any criticisms they have. Listen, process, and then figure out whether they are right. Don’t fall into the habit of dismissing a commonly heard objection. If you hear it a lot, think about it a lot.

By way of an example, here at Forward Partners the most common criticism of our business is that our returns won’t be good (enough) because we spend much more money than conventional VCs supporting our partner companies. The argument runs that we would be better off using that money to invest in a larger number of companies. Our belief is that the tools and services we offer make it a little easier for companies to achieve success which brings two important advantages. Firstly it gives us an edge in winning deals and secondly that our partner companies will do better as a result. We take the critique seriously and have modelled out how much that edge in winning deals needs to be worth and how much more success our companies need to achieve. The assumptions look reasonable and we continue to test them against reality as we do more deals and gather more data points.

Combining a good plan which has been thoroughly stress tested with a high level of self confidence puts you in a good place, but there’s one final ingredient you need before you know you will succeed, and that’s a back up plan. If you are founding a company there will be huge unknowns and associated risks. If you’ve done your planning well you will have confidence that they are all manageable, but you need to know that you will prevail even if you get unlucky. In our case we ran the analysis to see what happens if the extra money we spend supporting our partner companies makes no difference, and the conclusion is that the returns to investors will still be ok. Not where we hope to end up, but still ok.

Designing for experiences

I love this tweet! It sums up the opportunity for new product and service development beautifully. Here at Forward Partners we often talk about backing companies building amazing products and brands that people will love, and when we’re talking with companies we always ask how they know customers will think their products are amazing. Good answers show an understanding of how people will use their products and how they think about the alternatives. In particular they show an understanding of the emotions surrounding their product category. A product is amazing when it evokes emotion.

The example above says that it’s better to ‘design a better way for people to enjoy flowers in the home’ than to ‘design a new vase’. Firstly I like the tightness of the definition – it’s not just a vase, it’s a vase for flowers, in the home. It’s better to start with an amazing product in a smaller market and then grow the market than start with an average product for a huge market and try to improve the product. Secondly, the purpose is clear – it’s to increase enjoyment. When you frame the problem in this way the importance of understanding how people currently enjoy flowers in the home become clear. If the challenge is described as ‘design a new vase’ then it’s too easy to focus on aesthetics and ignore the use cases. Too many product designers make this mistake, which is why our homes are filled with products we don’t use. It doesn’t have to be that way.

$1bn sales in 17mins 58s – Alibaba

Singles Day has just started in China. It’s a day where single people celebrate, and was selected because of the number of ‘1s’ in the date – it’s 11/11. It’s also the largest online shopping day in China and the news this morning is that Alibaba racked up $1bn of sales in the first 17mins 58s, and $2bn in the first hour.

In comparison, sales for the whole of Cyber Monday in the US last year were $2.3bn.

Back to Alibaba – $1bn of sales in 18mins is just phenomenal. Very few companies ever get to do that in a year. For further comparison, Amazon did $20bn in the three months to September 3o.

And, investors love Alibaba. The company went public in September in the largest ever tech company IPO and the share price has risen 28% since then giving the company a market cap of $296bn. That compares with Amazon’s market cap of $141bn and Google’s of $375bn. The business was founded in 1999.

At heart this is mostly a story about the size of China, but it also talks to the power of the internet as a platform for building large scale enterprises.

High growth startups are a big deal for the UK economy – new research

There’s a new report out on the impact of high growth small businesses on the UK economy. Last week I wrote about some new research showing that nearly all job creation in the US comes from young companies and concluded by saying it would be great to see some similar research in the UK. And now we have some already. With this publication and the upcoming Scale Up report I hope it will be very clear that high growth startups are the engine of growth for employment and the UK economy more generally.

That’s important for two reasons. Firstly we should all feel good about the work we are doing within the startup ecosystem – the work we do is the difference between growth and stagnation, and secondly it will encourage government to continue and extend their support for our work, particularly with policies to improve access to finance and the depth of the talent pool. The Startup Manifesto is a good read if you want to bone up on what government should do for startups here in the UK.

The research was conducted by Centre for Economics and Business Research and commissioned by Octopus Investments (thank you) and took the form of a survey of 400 high growth small businesses (defined as companies with £1-20m turnover and 20% growth per year over three years). There are 30,000 businesses like this in total in the UK. The key findings are that high growth small businesses:

  • generated 256,000 new jobs 2012-13, which was 68% of the total. That’s huge, particularly given that theses companies only accounted for 3.4% of the economy, and
  • accounted for 36% of the increase in GVA in 2013. GVA, or Gross Value Add, is a measure of economic output similar to GDP.

As with the American study, note that the growth comes from small high growth companies, not all small companies.

What would be interesting to see now is a breakdown of which companies within the 30,000 high growth small businesses in the UK are responsible for most of the employment growth. Just as we have learned that if growth is our objective we should focus our support on the portion of small businesses which are growing fast, it may be that we can make a further refinement to a particular industry or sector.

“When the train of history hits a curve, the intellectuals fall off”

When the train of history hits a curve, the intellectuals fall off

Karl Marx

Vinod Khosla wrote an article yesterday about the coming impact of artificial intelligence. In the final paragraph he uses the above quote from Karl Marx (one of my favourite philosophers) to make the point that history might not be a good guide for what’s going to happen next.

Let me explain.

Automation from artificial intelligence and robotics puts up to 40% of developed world jobs at risk over the next couple of decades. When large numbers of jobs have been wiped out in the past new jobs have been created to take their place. The transition might have been painful, but it happened without too much disruption.

This time round it might be different. History might not be a good guide because for the first time the old jobs might disappear much more quickly than new jobs can be created. Or, and this is worse, for the first time robots and computers might become better than people at whole classes of jobs and the jobs may never come back. That’s the scenario that Khosla raises.

Another thing that’s new is that we live in a global economy. Capital and people are mobile now, particularly wealthy people. As a result, national taxation systems are no longer effectively able to redistribute wealth.

Unless we do something I think we are looking at a future of high unemployment and increasing wealth inequality. At the very least that’s a plausible scenario, and it will be dangerously unstable.

As Khosla says, we may well need a new type of capitalism.

How to handle existing investors when negotiating a new round of investment

In the last year we have had new investors lead rounds at about ten of companies  (including two that are about to complete). In every case we are happy our new partners have come on board,  but there were some processes that went better than others.

Here’s what I think makes a process a good one from the perspective of the existing shareholders in a startup. I’m focusing on the factors that are only important for existing investors, not the factors that make a process good for everyone (quick, transparent, competitive tension, etc).

  1. Over communicate. If you have a small number of shareholders keep them abreast of the process and share key terms early, including before there is a formal termsheet. You don’t need to go overboard and report every investor meeting, but do keep the updates regular. If you have lots of shareholders try to find one or two who will represent the rest and treat them as above. Explain to the others how the process is working and send them updates at key moments, including when you decide how much you will raise, when you accept a termsheet and when you will need them to review documents.
  2. Understand the appetite to follow on and make sure there is sufficient space in the round to accommodate everyone who wants to make a further investment. This isn’t always easy. Existing investors may have a hard time deciding how much they will follow on until the round has taken shape and your new investor may want to take most of the round for themselves. Persevere. Remember it was your existing investors who supported you first.
  3. Make sure that at least your key shareholders are aware of anything that is likely to be controversial and don’t take silence as assent.
In practice it’s often difficult to find the time to keep existing investors in the loop. Events move fast, deals are a complex balance of multiple factors that are difficult to explain, due diligence is very time consuming,  AND there is a business to run.

On top of that it’s not always easy to know how much detail to share and how to communicate bad news. My advice is just to get on with it. Don’t wait until you want some help or advice before you get in touch. A good advisor or board member can be an enormous help, both in shaping the communication and in taking on some of the work.

Finally, it’s not all on the founder. Existing shareholders have a responsibility too. CEOs run companies and interfering, being too needy for information, or offering unwanted advice is definitely not best practice and makes management less likely to give regular updates.

Marketplaces: winner takes all, category approaching saturation

This deck on marketplaces from SVB gives a great breakdown on the category.

One of the big takeaways is the extent of the winner takes all dynamics. Due to the network effects at play in marketplaces you would expect the leaders to be worth considerably more than the followers, but the analysis on slide 10 shows that it’s a surprising 10x+.

The other takeaway is that the marketplace category is approaching saturation. You can see that from slide 11 which shows that an increasing percentage of marketplace investments are in B and C rounds, and slide 12 which shows that over $2bn has been invested in transportation marketplaces and nearly $1bn each in food delivery, financial and hospitality. The opportunity now lies in the less obvious and more niche markets. The opportunity can still be large, but not Uber scale…

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Job creation comes from startups: new and better data

KauffmanFoundation-Job-Creation-1988-date

It’s often repeated that startups are the engine of growth, particularly in employment, but this is the best data I’ve seen backing that up (albeit still only for the US). It was conducted by the Kauffman Foundation who do a lot of great work supporting entrepreneurship and was reported on Forbes.

The takeaways are:

  • Companies under five years old are responsible for nearly all net job creation and 20% of gross job creation
  • It’s young companies not small companies that are making the difference

I would love to see a similar study for the UK. Our startup ecosystem still isn’t as robust as America’s, but I suspect the picture here would be broadly similar.

The work we’re all doing building and investing in young companies is important!

Your MVP should have a minimal amount of everything

I saw this diagram on Twitter this morning (thanks @keiran0) and loved it so much I had to reproduce it here:

Screen Shot 2014-11-03 at 18.33.08

There is a lot confusion out there as to what constitutes an MVP (Minimum viable product) and this cuts through to the heart of the matter. An MVP has to be good enough that some people will use it, which means that to an extent it needs to touch their emotions, be usable, and reliable, as well as having the minimum viable function.

Getting the emotional design and usability right is really hard without a deep understanding of customers, and I mean deep. The most common mistake we see founders make is to build a product that is functional and reliable but doesn’t map well to how users want to interact with it, or which fails to excite. The worst version of that mistake is when they spec out the MVP and then give it to an outsource developer who has even less understanding of the customer.

Tips for companies attending office hours

Every month we run an open office hours. It’s a great way for us to meet with lots of founders, improve our deal flow and hopefully give a little back to teh community.. Many other VCs do something similar.

We’ve just had our October office hours, and we’ve now met with approaching 100 founders through this programme. Most entrepreneurs come here to pitch us. They don’t have to, the session is theirs to do what they want with – take advice, ask about market trends, anything – but most choose to pitch. Some do it well, whilst others do it badly.

The meetings are only fifteen minutes, and that makes them difficult. Here are some tips you could follow if you are pitching and want to get the most out of the session:

  • Don’t talk fast. The meetings are only fifteen minutes, but the trick is to choose your words carefully and not try to say everything.
  • Try not to be nervous.
  • Do your research on Forward Partners ahead of time (or other VCs if you are meeting them) – you want the whole 15 minutes to be about you.
  • Think about what you want to say before you get here and leave more time than you would think for discussion.
  • Paint the big picture AND show you have a grip on the detail of execution in the short term.
  • Don’t use slides, or if you do keep it to one or max. two.
  • Be clear what you want to get out of the session. Tell us.
  • Ask what the follow up will be.
  • Respect the 15 minute time limit.

Our next open office hours will be on November 21st. You can apply here.

NB 15 minute meetings are a little painful, but I think that’s worth it because we can meet more people. Literally twice as many as if they were 30 minute meetings.