The chart above shows that the ratio of businesses started per head in the UK to the US is maybe 3.8:7.6 – i.e. about 0.5 – whilst the ratio of VC investment as a percentage of GDP is 0.04:0.17 – i.e. 0.2. That tells me that the UK venture industry needs to grow 2.5x to match the US in size relative the economy and population.
I’ve been saying for a while now that the UK startup ecosystem is underfunded. It’s nice to put some numbers around it.
I pulled this chart from Saul Klein’s excellent presentation to Dublin Web Summit earlier this year.
I think it’s generally accepted now that in ecommerce faster sites convert better. For many startups, though, investment in improving site performance need to be weighed up against other initiatives that can improve growth or profits. Here’s some data that can help in that decision (courtesy of VentureBeat).
These are meaningful numbers, but I was a little surprised they aren’t higher. At the early stages improving things like merchandising, design, email campaigns may have a bigger impact. That said every good ecommerce company has a fast site and speed impr0vements shouldn’t be put off for too long.
Amazon has long pursued a strategy of winning by pricing low. Many of you will have experienced that strategy first hand with regular price reductions from Amazon Web Services, but it goes right across their business. Their approach has led to strong revenue growth but few profits which has analysts sharply divided – some believe they will never make large profits and the shares aren’t worth much whilst others believe that they are building controlling positions in market after market which will put them in great position to improve margins over time. I’m in the latter camp.
I just read the following story about how their low price ethos played out when they entered the DVD market in 1998. It’s a great case study about the importance of playing to your strengths, having a clear mission and running sustainable strategies. Stay with it through the first paragraph…
If you have bigger lungs than your competitor, all things being equal, force them to compete in a contest where oxygen is the crucial limiter. If your opponent can’t swim, you make them compete in water. If they dislike the cold, set the contest in the winter, on a tundra. You can romanticize all of this by quoting Sun Tzu, but it’s just common sense.
I worked on the launch of the Amazon Video store, Amazon’s third product after books and music. At the time of the launch, DVDs had just launched as a product category a short while earlier, so the store carried both VHS tapes and DVDs. The day Amazon launched its video store, the top DVD store on the web at the time, I think it was DVD Empire, lowered its prices across the board, raising its average discount from 30% off to 50% off DVDs.
This forced our hand immediately. Selling DVDs at 50% off would mean selling those titles at a loss. We had planned to match their 30% discount, and now we were being out-priced by the market leader on our first day of operation, and just before the heart of the holiday sales season to boot (it was November, 1998).
We convened a quick emergency huddle, but it didn’t take long to come to a decision. We’d match the 50% off. We had to. Our leading opponent had challenged us to a game of who can hold your breath longer. We were confident in our lung capacity. They only sold DVDs whereas we had the security of a giant books and music business buttressing our revenues.
After a few weeks, DVD Empire blinked. They had to. Sometime later, I can’t remember how long it was, DVD Empire rebranded, tried expanding to sell adult DVDs, then went out of business. There were other DVD-only retailers online at the time, but none from that period survived. I doubt any online retailer selling only DVDs still exists.
The key takeaway for me is that Amazon’s mission of being a low cost supplier coupled with the knowledge that they were financially stronger than DVD Empire made the decision to match the price cut a no-brainer and hence easy to take quickly, whilst DVD Empire probably should have known their bluff would get called.
LPs, the investors in VC funds, have a difficult job to do, largely because they have to work with poor quality data and only a small fraction of VCs deliver the returns that make them worth investing in. The problem is made worse by the fact that LP demand to invest in the handful of serially successful VCs well outstrips supply and most LPs have to invest most or all of their venture allocation in other VC funds.
The CB Insights Investor Mosaic sets this out very well. They also describe the factors that they think LPs should use to make those tough decisions:
Past performance – unlike most other asset classes in venture capital past performance is a good predictor of future performance. CBInsights calls this ‘Performance Persistence’.
Network centrality – “how connected a VC firm is with other VC firms in the industry, as networks have been proven to be a critical driver of VC performance”
Brand – “brand is important in venture capital as firms with great brands and reputations see higher quality dealflow, gain entry into emerging industries and can also achieve better economics because they are a preferred source of capital for company founders.”
Investment discipline – “VC returns have been shown repeatedly to be tied to discipline. Discipline spans fund size as well as sector, geographic and stage preferences. Disciplined stage and sector investing fosters learning opportunities and the development of stage and sector specific knowledge and skills. Discipline also helps to keeps a venture fund’s loss ratio low which is important as they are ultimately stewards of LP investment funding.”
Selection aptitude – “a measure of dealflow quality and selection prowess for each investor. It highlights each investor’s ability to source and ultimately select high quality investments and then shepherd them to favorable outcomes. While the platitude that 1 of 10 VC investments is a homerun is often thrown around, the reality is that some venture capital firms are significantly better at hitting homeruns then the rate of 1 in 10. Conversely, several VCs are much worse.”
Illiquid portfolio strength – “this score measures the quality of current, non-exited companies in an investor’s portfolio and also looks at the investor’s entry point into the company.”
This is a really good list and at Forward Partners we aspire to be great on all these dimensions, but for me selection aptitude stands out above all the others as a driver of success. It is the least measurable (aside from looking at past performance) and as a result LPs often focus more on the other drivers. To my mind that’s a mistake. The analogue with VC investing is being comfortable assessing entrepreneurs without a track record of success, and getting that right is one of the best ways to get big wins.
A 2012 Google study found that users judge a website ‘beautiful’ or not in 0.02-0.05 seconds and that visually complex websites are consistently rated less beautiful – unsurprising given the little time available to process complexity
Simple websites require less physical work from the eyes and brain
One of the best ways to make a site simple for users is to have it conform to their expectations. Ecommerce sites should have the elements that people expect in the places they expect to see them – e.g. big image of the product front and centre (check out the asos home page).
That said, great design is an increasingly important driver of business success, norms evolve, and it isn’t at all true that designers should simply copy others in their category. They should, however, be aware that too much deviation from prevailing norms can result in users spending valuable cognitive resources figuring out how to use the site leading to lower conversions. That said, deviation from norms can sometimes to be very powerful. As ever with startups, there is no one-size-fits-all answer, but the point here is that bold designs carry a risk that should be carefully weighed up against more incremental innovations.
I’m stoked that Appear Here, brainchild of Ross Bailey and one of our portfolio companies has raised £1m in funding from a range of strong investors. Howzat Partners led the round with participation from Playfair Capital, MMC,
and a small number of strategic investors from the property industry. This funding is just rewards for a hard working team that deserves the success they’re getting. See the Telegraph and Techcrunch for more details.
Appear Here is a market place for short term lets on the High Street. This video tells their story.
They are also a great example of how we work with companies here in our offices at Forward Partners. We backed Ross last November when it was just him, a plan, and some encouraging conversations with landlords. Since then he and his team have been sitting alongside us in these offices and we’ve partnered with them to validate their assumptions, launch a v1 product in month 3, build traction and then raise their next round of funding. Having an up close view of Ross sell, hustle, hire and obsess over his product and customers has been a joy and a privilege.
Every company will be different, but the Appear Here journey is a rough a template for how we would like to work with other very early stage companies going forward.
We also invest in slightly later stage companies who work out of their own offices.
Data just out from UK corporate finance boutique Ascendant shows that venture activity in the UK is slowing. £178m was invested in Q3, down slightly from £183m in the year ago quarter, but that combined with a slow Q2 compared with 2012 makes it look like we will be down for the year. Ascendant are now predicting that £800m will be invested in UK companies in 2013, which compares with £987m in 2012.
I’ve written before about the great work of BJ Fogg and Nir Eyal, both pioneers in the applied psychology of building habit forming services. Nir has just released a new presentation on Slideshare which takes their work to the next level. This is the money slide:
Core to Nir’s work is the Trigger, Action, Reward, Investment model which gets users hooked on a service in an infinite loop. The chart above shows the loop for Pinterest where the triggers in the form or emails, notifications or boredom cause people to log in, whereupon they get a little dopamine hit from seeing what their friends have pinned or finding cool new content, they then invest a little in the service by pinning or repinning which makes them more likely to respond to a trigger in the future, and so on.
The full slide deck is designed to help companies build their own infinite loops so they get a large base of regular users and the valuation that goes along with it. There are 137 quick read slides which I highly recommend to anyone trying to build a service that people keep coming back to (the Pinterest loop is on slide 113).
Steve Denning is one of my favourite writers on the future of capitalism and management. As part of an article about the New Centre of Gravity of Management yesterday he reiterated what is fast becoming a cliche amongst the entrepreneurs I talk to, namely, that all the best business are ‘purpose’ or ‘mission’ driven. Making money (for shareholders) is the result of having a mission to help customers, not a goal in itself. He gave four examples:
In the private sector the mission of a company is create a customer
In health it’s to help patients
In education it’s to teach students
In government it’s to help citizens
Similarly, our purpose here at Forward Partners is to help entrepreneurs. Our belief is that the better we are at helping entrepreneurs the more we will be able to get into the best deals. We talk more about partnering than helping, but the idea is the same.
In line with our purpose we look at everything we do and ask ‘how does that help the entrepreneur?’. We have restructured our due diligence process to be quick and transparent and are introducing a workshop which is designed to benefit the company as well as help us evaluate the opportunity. We are also restructuring the way our operational team partners companies after we’ve invested to be more transparent and deliver more value. More on that to come in the near future.
Ari Newman has a guest post on Brad Feld’s blog which gives some great examples of how a board of directors can be useful. This is not your usual ‘access their rolodex and give strategic guidance’ faire which gets regularly served up, but more about how a board can help founders avoid mistakes, including mistakes that can kill a company.
Ari makes his points vividly by telling a story about a fictitious company he calls ACME SaaS corp which raises a convertible debt round and then doesn’t form a board. One of the many differences between a convertible debt round and an equity round is that convertible debt rounds don’t stipulate investor presence on the board of directors. At the highest level Ari’s point is that even though they don’t have to companies that have raised convertible debt should appoint investors to their board to subject themselves to regular scrutiny and make sure they regularly open the kimono to trusted advisors. That process forces companies to properly think through their budgeting and cash out date and make sure they face up to difficult situations early enough to fix them.
The story format is great because it illustrates how easy it is to walk unwittingly into problems. As with most forms of discipline and rigour at one level having a board with investors can seem like an unnecessary pain in the ass, but also as with most forms of discipline and rigour they are a great way of optimising outcomes. If you’re not sure you agree with this point I urge you to go read the story.
The caveat here of course is that the board members must be good board members. I recently heard a very famous and successful west coast investor say that 90% of investors destroy value, 9% are neutral and 1% add value. I think that is probably overly dramatic but it nicely illustrates the importance of choosing directors carefully.
The chart above shows that the ratio of businesses started per head in the UK to the US is maybe 3.8:7.6 – i.e. about 0.5 – whilst the ratio of VC investment as a percentage of GDP is 0.04:0.17 – i.e. 0.2. That tells me that the UK venture industry needs to grow 2.5x to match the US in size relative the economy and population.
