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“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…


Job creation comes from startups: new and better data


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.

The rise of native advertising


There’s an interesting post up on Stratechery asking whether we are approaching Peak Google which features the graphic above. The central argument is that in the way IBM fought to protect their PC platform and missed the Windows opportunity and Microsoft fought to protect its Windows franchise and missed the web opportunity Google will fight to protect their search platform and miss the native advertising opportunity. Search is a c$50bn out of a total advertising market of c$450bn, and hence a winner in native advertising winner could be bigger than Google.

I’m a big believer in the increasing importance of native advertising. The best companies these days have interesting products and brands that lend themselves to this new medium. That said, I’m not sure that means another company will eclipse Google. Search always looked like it might have one major winner, but I don’t see the same network effects at play in native advertising which will find its audiences on the multiple content sites where they hang out.

More big IoT numbers: 33bn connected devices by 2020

Screen Shot 2014-10-22 at 14.26.45

33bn connected devices in the next six years, up from 12bn predicted at the end of this year. That will be four for every person on the planet. As others have said before me, our grandparents could count their electric motors, our parents could count the things they owned with a chip inside, and we can count our connected devices….

Here’s a quick list off the top of my head of inventions enabled by integrated circuits and/or electric motors.

  • Computers
  • Plasma and LCD screens
  • Remote control cars, copters etc.
  • Satellite and cable TV
  • Washing machines and dishwashers
  • Modern radio and television

Most, if not all, of these things would have been impossible to imagine one hundred years ago and it’s reasonable to expect that similarly unimaginable inventions will be spawned by the internet of things. And it will happen faster this time.

Our goal is to partner with the companies creating that future.

The best of times, the worst of times

I read two startling different commentaries on the health of the UK as a society this morning that made me recall the “best of times, the worst of times” quote from Dickens.

First up was a highly optimistic piece in the Financial Times titled Miserablism risks causing Britain serious harm which argues that we should all wake up to the fact that times are good right now and be wary of policies and politicians proposing radical moves that might well make things worse – e.g. price interventions and exiting Europe. This is the money quote:

Look at Britain as an informed foreigner might. Here is a country that responds to a secessionist threat to its existence by holding a free and fair referendum. It has evolved an economic model that is more hospitable to business than much of Europe and kindlier to the poor than America. It cuts public spending year on year without any civil disorder to speak of. Crime is falling. Unemployment is at 6 per cent. The politicians are small-time but basically honourable. The capital city is a miracle of the modern world.

Then I read the Guardian’s Bleak figures show a relentless slide towards a low-pay Britain which featured the graph below showing that real wages in Britain have now been declining for seven years in a row – only the third time that has happened in the last 150 years.


Between them these too perspectives capture the overall situation well. On the plus side the economy is performing well and society is stable, but on the downside, the spoils of growth are going to the rich, wage inequality is increasing and the social contract is in danger of falling apart.

The important question is what will happen next. The Guardian suggests two possibilities. The first is that unemployment is now reaching levels where there is little slack in the labour market and employers will find themselves having to increase real wages for the lowest paid. The second is that technological advances will continue to take jobs from mid-skilled workers, forcing them into lower paid jobs and driving real wages down. I’ve written about this before: Robots and artificial intelligence are replacing jobs.

Cycles in the economy and labour market will come and go, but the trend towards automation will run and run. For me the most likely scenario is that tightness in the labour market will force wages up over the next few years, but when the cycle turns again real wages will cycle sharply downwards. Our opportunity is take action now to help the situation. A couple of weeks ago rich Americans were worrying that The pitchforks are coming … for us plutocrats. That will be our fate too, unless we do something.

The solution is not to protect jobs or try to limit the adoption of technology, but to invest heavily in programmes that help people re-skill and get back to work. That would be the play that keeps us as when of best performing societies in the world. If we get through the current period of austerity successfully there might just have the money to do it.

Optimism and skepticism in evaluating startup investments

In a recent interview Marc Andreessen said:

I’m optimistic arguably to a fault, especially in terms of new ideas. My presumptive tendency, when I’m presented with a new idea, is not to ask, “Is it going to work?” It’s, “Well, what if it does work?”

That got me thinking. Andreessen is a smart guy who has a lot of experience with startups and who spends a lot of time thinking about the best ways to invest and build businesses. I don’t agree with everything he says, but when I don’t agree I always stop to think why. In this case I half agree, but think that only asking “Well, what if it does work?” is too simple.

I half agree because asking “Well, what if it does work?” forces you to think about how big something can get and to focus on the upside. The startup investment game is, as we know, all about finding big winners. For us that’s £100m+ exits. For Andreessen I’m sure it’s over $1bn. Thinking optimistically about the upside helps you find those big winners.

However, there’s no point in backing something that has no chance of succeeding, so it’s also important to think about whether an idea will work. In particular, it is important to think about whether the company will deliver it’s plan over the next twelve months (or at least something resembling it’s plan). This has two parts, asking “Does the plan work?” and asking “Can the team execute on the plan?”. Skepticism is helpful when asking these questions.

Time is plentiful when it comes to delivering the upside and it’s reasonable to assume that entrepreneurs can and will figure a way to make things happen – provided there are no fundamental reasons why they won’t be able to (e.g. it requires chip speeds we won’t see for another ten years). When it comes to delivering the next twelve months time is short and there is limited scope for experimentation and re-work. If Plan A fails badly everyone is going to wish they had done something else so it makes sense to think hard about whether it’s going to work. There will inevitably be lots of unknowns but identifying those assumptions up front leads to smarter investments and better plans.