Nic Brisbourne's view from London on technology and startups

Evaluating whether a sector is interesting as an investment target

By | Venture Capital | No Comments

We have been thinking about how to evolve our investment strategy recently. I will write about the full process when we’re done and I’ve got a better sense of which bits have worked and which haven’t, but for now I want to highlight a post by another VC which highlights a lot of the methods we like to use when thinking about the attractiveness of potential focus areas.

The post was written by Bradford Cross, partner at Data Collective. Superficially it’s a listicle with Five AI Startup Predictions for 2017, but you don’t have to read very long before finding some good structured analysis and original thinking.

It turns out that four or Bradford’s five predictions are about things that won’t work and one about something that will work. Each of his points has generalisable lessons that can be applied to analysis of any potential investment sector.

  1. Bots go bust – main reasons: bot interactions are utilitarian and don’t meet our emotional needs, and for most use cases they are less efficient than other UI paradigms (e.g. apps and menus – note that Facebook has just added menu features to Messenger).
  2. Deep learning goes commodity – main reason: the number of grad students with deep learning skills has mushroomed and the premium paid for deep learning acqui-hires will fall because companies now other options for bringing in talent.
  3. AI is cleantech 2.0 for VCs – main reason: cleantech failed as an investment category because it’s a cross-cutting societal concern with a self important save-the-world mentality and not a market. AI has similarities, albeit the self-important element is about forming ethics committees and saving the world from the fruits of it’s own labour – super intelligences that destroy humanity and robots that take all our jobs.
  4. Machine-learning as-a-service dies a death – main reason: machine learning APIs are two dumb for AI experts and too difficult for AI novices. They don’t have a market.
  5. Full stack vertical AI startups actually work – main reason: low level task based AI gets commoditised quickly whereas vertical AI plays solve full-stack industry problems with subject matter expertise and unique data which make them defensible.

The generalisable lessons here are:

  • Use cases are paramount to good investing  (ref points 1, 3 and 4). Bots are failing because they don’t solve any new use cases and are worse at their job than other options. Horizontally focused investment themes are tough because they don’t start with use cases. Machine learning APIs aren’t solving a problem for anyone. Good candidates for investment focus areas have easy to understand use cases – e.g. I buy from ecommerce companies because it’s more convenient and the range is better.
  • Valuable businesses have strong barriers to entry (ref points 2, 3, 4 and 5). Deep learning, and AI more generally, got hot in part because talent was scarce. This reached the point where $m per PhD was talked about as an acquisition metric. However, talent is not a barrier to entry over the long term and neither is clever implementation of new algorithms. Proprietary data and uniquely trained models on the other hand, can provide a basis for high margins over the long term.
  • Hype is dangerous (points 1, 2, and 3). Hyped sectors draw in lots of VC dollars which drive valuations up, creating an illusion of success which brings in more VC dollars (sometimes spurred on by M&A). It is possible to make quick money from investing in startups in hyped markets but it’s a lottery. Moreover, all the mania often causes founders and investors to lose their focus on use cases. Unsexy is harder work, but it wins in the end.
  • Good focus areas allow for shared learning (point 3). One of the reasons that cleantech was a difficult place to make money is that there was little in common between different cleantech companies. Solar, wind, and biofuels, for example, all have very different technologies, different customers and different company building best practices. Mobile games, in contrast, has been a successful investment focus for many investors because key disciplines around game mechanics, monetisation and marketing are common across companies.

Many VCs are opportunity driven. Their primary strategy is to work on building their networks and then they invest in the best of what they see. Our belief is that focusing yields better results because deep understanding of a sector leads to better decision making and a greater ability to help entrepreneurs succeed. However, focusing is hard. It takes deep thought and hard work to find interesting areas and then it takes strong discipline to stick to your strategy. Focusing is also risky. If you choose a bad area to focus on at a minimum you will look stupid and if you don’t course correct in time you will have a bad fund. Still, if venture has taught me anything it’s that fortune favours the brave 🙂

The importance of happy endings

By | Startup general interest | No Comments

I’ve come across Kahneman’s Peak-End concept before but only just grasped it’s significance. As with much of his work Kahneman is highlighting an area where our minds don’t work rationally. In this case it’s how we remember experiences.

If we were rational we would remember experiences as some kind of average of how they felt at the time, adjusted for their duration. However, it turns out we remember them as a function of two moments – the peak moment (best or worst) and the last moment. Duration and average are less important.

Kahneman makes his point by citing research into how patients undergoing conscious surgery rated their experiences. Their post-surgery rating of the overall experience correlated with the peak moment of pain and how the surgery ended rather than the average of their minute by minute scores for how much pain they were suffering. Indeed, changes in the final moments of their operation dramatically skewed their overall perception of how well it had gone, in both directions.

This difference between how patients experienced their operations and how they remembered them exists with all experiences, both pleasant and unpleasant.

That has big implications for how startups should build products. Customers come back or tell their friends because of how they remember the experience of a product or a service, not because of how they experienced it at the time. Accordingly products should be engineered to deliver moments of delight and happy endings rather than maximum overall utility.

At Forward Partners we always look for those moments of delight, which we call “eyes-light-up moments”. Going forward I will be pushing us to pay equal attention to the closing moments of a customer experience.

Courage and facing up to failure

By | Startup general interest | No Comments

I’ve just read Atul Gawande’s Being Mortal, a book lots of people seem to be talking about all of a sudden. It’s a great book, and one I highly recommend. Mostly it is about making better choices for ourselves and our loved ones as we grow old, which is a far cry from startups.

One passage is different though. It’s about courage, which is required in spades if we are to make the most of our old age and if we want to make the most of our startups.

Gawande starts by turning to Plato who wrote “Courage is strength in the knowledge of what is to be feared or hoped” and “Wisdom is prudent strength”.

Which brings me to startups. It takes great courage to found and build a company, to maintain conviction in the face of naysayers, to get back up again when you get knocked down and to persevere when things look helpless. But it is also important to be wise. To know when to carry on or when to change course, or even give up. It was only after Ev and Biz Stone gave up on Odio that we got Twitter.

Gawande goes to on say that at least two kinds of courage are required in ageing and sickness. The courage to seek out the truth of what might happen both on the upside and the downside, and then the courage to act upon it. Again that’s super important at startups – the best founders tirelessly look for ways to expand the upside and ways their companies can go wrong. Other founders put their heads in the sand.

In a further parallel with startups, Gawande notes that ageing and sickness are highly complicated and uncertain, and that it is very hard to build an accurate picture of what’s going on or of the implications of any particular course of action.

It is in this uncertain environment that we must find the courage to act. Very often that choice means deciding which is more important, our hopes or our fears. Do we want the chance of a much better life, or do we simply want to stay alive?

That last question is as relevant in startup boardrooms as it is in the Emergency Room, but it is rare to see the difficult topic of potential permanent decline and failure addressed well enough that the the following course of action gives the best chance of happiness to all concerned. More common is to raise more money if it’s available, keep going with more or less the same plan and only make radical changes when the writing is well and truly on the wall. By this point there is much less cash left, the options for remedial action have become limited and the chances of achieving even a half decent outcome are much reduced.

The starting point for most founders is that they can overcome all the obstacles in their way and overcome what, to many, look like impossible odds. Possessing the self-confidence and resilience to maintain this perspective is an amazing gift that has enabled many entrepreneurs to achieve amazing things and it is something we look for in the founders we back. My closing point in this post though, is that in some situations the right thing to do is to stop trying to achieve the impossible, reduce our level of ambition and start building the best possible future within the constraints that face us.

Contemplating anything other than success is tough for most people involved with startups. Nobody likes a naysayer and fear of being thought of as unambitious or lacking tenacity made me think twice about writing this post. I decided to press ahead because the truth is that only a small fraction of startups achieve unfettered success (we will be happy if one in three of our portfolio are that lucky, and even those will face difficult periods). For the rest finding the courage to face the truth and make difficult decisions early will make them happier in the long run.

Nailing go-to-market strategy

By | Startup general interest | 2 Comments

This chart, from First Round Capital’s recent post Leslie’s Compass: A Framework for Go-To-Market Strategy is super interesting. It’s first use is for founders to work out whether they should have a sales intensive or marketing intensive go-to-market strategy. That’s the point of the post and the summary is that if your business has the characteristics on the left hand side then your strategy should be marketing intensive and if you’re more like the right hand side you should be sales intensive. If you’re thinking this problem through at all I would highly recommend reading the whole post.

The second use, which they don’t cover, is assessing whether a business idea is likely to be successful. It’s an obvious thing to say, but unless a business can find a successful go-to-market strategy, sales will be limited and it won’t succeed. The power of this framework is that it can expose fundamental challenges to the viability of a plan even when it is only a concept, and then it can suggest ways to address those challenges.

Simple plans are easiest to execute and in this case the simple plans are ones that are either marketing intensive, or sales intensive. Plans that sit somewhere in the middle are ok, but products that have some marketing intensive characteristics and some sales intensive characteristics have an inherent contradiction that if left un-addressed will undermine success.

The most common and obvious contradiction that we see is complicated and high touch products that are inexpensive (or have low margins). Even if the product is a bullseye hit with what the customer needs, it won’t be possible to persuade them of that fact without an expensive sales effort, which won’t be covered by the value of the sale.

Other contradictions to watch out for include B2C : complex products and many customers : low fit, but the most important one is definitely cheap products that require a sales lead approach.

Business plans with contradictions like this aren’t necessarily fatally flawed, they are just more difficult to execute, and that brings us to the third and final use of this framework, which is to inform product strategy. If there is a contradiction then one solution is to resolve it through product innovation – if the contradiction is between low price and complexity/high touch then either find a way to either to take the complexity out or to charge more.

Usually those product innovations will be to enable a more marketing led approach, and to generalise, companies that move product categories from being more sales intensive to being more marketing intensive make promising bets. The shifts don’t have to be big either – convenience is a winning proposition. Examples are legion, but Slack is a great one. Last May they became the fastest company to reach a $2bn valuation in large part because they succeeded in making a product that works with a go-to-market strategy that is close to 100% marketing led. Looked at through this lens, their genius was in taking all the complexity out and enabling low touch adoption.

Amazon: A true success story

By | Amazon | No Comments

For about three weeks I’ve been meaning to write about the amazing success that is Amazon. Back then it was when I read they were planning to create 100k US jobs in the next 18 months, are worth more than the next eight biggest US retailers combined (see chart above), and that they now employ 45k robots, up 50% year-on-year. I finally put pen to paper today (so to speak) because I saw the additional news that they are building a $1.5bn hub for their own cargo airline (sic), have 0.7% of the UK grocery market a mere six months after launching here, and had a record holiday season in 2016 shipping over 1 billion items.

That’s quite a list, and unsurprisingly their share price has been tracking an exponential curve over the last few years.

When I think about what’s got them there, the list of characteristics are exactly the sort of things we love to see here in startups here at Forward Partners:

  • Execution oriented
  • Determined
  • Disciplined
  • Relentless
  • Logical
  • Keep it simple
  • Independent thinkers
  • Experimental
  • Not afraid to make mistakes
  • Values driven

That list makes them sound a bit like The Borg and whilst I love Amazon I will admit there’s some validity in that comparison, also noting that The Borg were hugely successful. That said, new startups trying to emulate Amazon would be well advised to make sure they also have a good dose of creativity and brand story.

Finally, there’s a great entrepreneur at the heart of every great business and Jeff Bezos is perhaps the greatest out there at the moment. I still love this video I posted back in 2010 where he shares some stories about Amazon’s first days and then tells us “everything he knows” in about five minutes. He has an incredible ability to distill complex concepts into simple insights.

There’s no denying that Amazon have had and still have their critics and naysayers, but from an entrepreneurial perspective, we could all aspire to be a little more Amazon.

“Don’t run for trains”

By | Startup general interest | One Comment

Around nine years ago I read Nicholas Taleb’s seminal texts The Black Swan (2007) and Fooled by Randomness (2001) and I loved them both. For venture investors everywhere The Black Swan suddenly provided a framework and lingua franca for understanding our business – betting on extreme outcomes that have a low probability of occurring, and perhaps more subtly for those working in this world, an understanding role of chance is critical to distinguishing talent from luck (although we all need luck).

But for me the books were about more than these two key takeaways, they were also an amusingly written philosophy of life and a celebration of avoiding the herd mentality and thinking differently.

One small part of that which has stayed with me is Taleb’s oft repeated advice “Don’t run for trains”. I like this advice because running for trains is stressful and it seems to me that we often take on that stress without really thinking it through. There’s a problem, however, which is that sometimes when we miss trains it makes us late, and it’s rude to be late.

When I was riding my bike to work this morning, Taleb’s advice “Don’t run for trains” popped into my mind. That’s happened a fair few times over the years and as I’ve done before I rehearsed the argument made in the previous paragraph. Then, rather than return to thinking about my day as usually would, I pondered the advice a little longer. I wanted to resolve the dichotomy between the good and the bad sides of “not running for trains” and maybe get a better idea of what Taleb was getting at.

For me the answer is that Taleb’s point is to avoid over-valuing short term gains. If you run and get the train it feels good for a short while, but you will have forgotten it before long, so why put yourself through it. Better surely to apply yourself to something that will deliver value over the longer term. This chimes with Taleb’s long term investment strategy. In his books he repeatedly shows his disdain for investors who chase short term gains (he calls them “yield hogs”) whilst not understanding their long term risks. Moreover, running for trains is often a frenzied activity of the type that with hindsight turns out to be ill-advised.

In the startup world, examples of “running for trains” mostly involve chasing short term growth at the expense of long term value:

  • Selling a poor quality product or service which undermines the brand
  • Putting so much advertising on a web page that it destroys the customer experience
  • Tricking people onto a website with a misleading promise

Long on vision, short on execution?

By | Startup general interest | One Comment

magic-leap-whale-bs

I love the idea of Magic Leap and wish them every success in the world. Who wouldn’t want to see whales leaping out of floors like the one in the picture above?

I also don’t have any inside information about how they’re doing. But I have noted that some in the press are questioning their prospects, alleging that their videos are in effect fakes (including the one from which the still above was taken).

One of the articles I read, finished with a list of tell-tale signs that indicate a company is long on vision, but short on execution (or in this case real tech):

  • Refusing to give a launch date.
  • Refusing to talk about the tech, claiming confidentiality or trade secrets.
  • Using news of investments or hires as evidence of technological progress.
  • Promoting itself on a big stage rather than in a small room.
  • Offering a well-crafted message and vision but becoming immediately vague when pushed on actual details.
  • Offering “exclusive access” – with restrictions.
  • Confusing working hard with making progress.

I offer this list up because some of you will be writing investment decks over the holidays to start fundraising in the New Year and if that’s you, these are mistakes you want to avoid making. At the early stages at which Forward Partners invest, the most common mistakes on this list are being strong on the vision but weak on the details (particularly the short term plan) and assuming time spent on a project equates with progress.

In essence, make sure that when preparing to pitch for funding you have an inspiring big vision, but also ensure the picture you paint is underpinned with a strong plan for execution.

UK: Tech talent remains

By | Startup general interest | No Comments

screen-shot-2016-12-06-at-12-57-05

This is a chart from Atomico’s 2016 State of the Nation report. As a UK investor and citizen it’s pleasing to see that we’re the top destination for tech industry migrants by quite some distance.

What’s interesting is that this is a self-reinforcing metric. As noted elsewhere in the report, when people move country to start their company, access to talent is their primary consideration. More talent, therefore, will attract more founders, who will in turn attract more founders.

The UK has always been a very open country, and immigration from the US and India (two countries with whom we have strong historical ties) are a big driver of this statistic – although we are also the top destination for intra European tech migrants too.

We built this success story in the pre-Brexit era. Our challenge now is to maintain it post-Brexit.

Pre-seed investments work best when there’s a clear plan for short term value creation

By | Forward Partners, Startup general interest | One Comment

Most VCs will say that to evaluate deals they look at the market size, the product and the quality of the team. Different investors place different weights on the three elements but as a rule earlier stage investors place more emphasis on the team and later stage investors place more emphasis on the market. That’s because early stage companies find it easier to change their market than their team whilst later stage companies find it easier to change their team than their market.

Some very early stage investors go as far as to say that for them team is everything. If the founder is great that’s all they need to know to write a cheque. At Forward Partners we don’t go that far. We always say that the minimum requirement to back a company is a great founder AND a great idea, then for us a great idea encompasses an inspiring product vision in a large market.

Breaking that down a little further, what we’ve learned over the three and a half years we’ve been operating is that our pre-seed investments work best when the ‘great idea’ includes a clear plan for value progression in the first six months. In the sectors in which we invest that nearly always means building momentum with customers. Completing product development and hiring team members definitely helps, but it’s dangerous to assume that will be valued by new investors.

With seed stage investments and later it’s usually obvious how value will be created – by maintaining current growth in revenues or engagement. Hence spending time thinking hard about short term value creation is mostly a discipline for the pre-seed stage.

This week our thinking was put to the test by a highly competent serial entrepreneur with a great team who has a strong idea in a large market but who has yet to build out a clear plan for driving value in the short term. We compared his case with a couple of others in which we’ve invested where the short term plan was much clearer but the longer term thinking was hazier and decided we prefer the latter.

Here’s why.

Given time great entrepreneurs will find their way to big opportunities. The question then becomes “how do we give them the greatest chance of having enough time?”. The best answer to that is to generate the short term momentum which will allow them to raise more money and buy more time to navigate to the big upside. If the short term momentum doesn’t arrive then either the next round will be difficult or the company will fail – both outcomes we seek to avoid.

With most things in life, if you plan for it you are more likely to get it, and generating the momentum required to create value in the short term is no exception.

 

Fear of failure can be a good thing, absence of courage never is

By | Startup general interest | 3 Comments

Last night at FPLive I was chatting with an entrepreneur called Nick who has just closed his startup. He talked impressively about what he’d learnt and has an interesting idea for his next company which I am keen to investigate.

There’s an important point lurking in there. He has just failed with his first company but that isn’t putting us off looking at his second. In fact, the lessons he’s learned help his case.

It doesn’t happen as much as it used to but people still talk about the ‘fear of failure’ as being a much more acute problem here in the UK than it is in America, and how that dissuades people from starting companies and holds our startup ecosystem back. That talk gets my back up a bit, partly because fear of failure is rational (it hurts), but mostly because it becomes a self fulfilling prophecy – would be entrepreneurs hear that fear of failure holds our startup ecosystem back which makes them think that failure is more likely and deters them from starting their company.

Returning to my conversation with Nick. He has been working with a large corporate innovation lab and we were talking about what large companies can do to hold onto the entrepreneurs in their ranks and harness their creative power. Getting the incentives right is a big topic, covering 1) how much money they should be allowed to make, 2) how much control they should have and3) what should happen if they fail.

As an investor who’s worked with lots of entrepreneurs I know that if the aim is to retain the best talent the answer to the first two parts of this have to be 1) they can make an awful lot of money and 2) they need to be given control of their startup.

Prior to last night my view on the third point was that companies should make it easier for their employees to be internal entrepreneurs by guaranteeing their jobs in the event of failure. Now I’m not so sure. Nick pointed out that fear of failing is often highly motivating. When your back is up against the wall you are more likely to be out of bed at 6am fixing things, morel likely to burn the midnight oil, and generally more likely to keep battling when the odds start to look impossible. What he has seen is that when people can walk back to their old jobs they are less afraid of failing, that they work fewer hours, and that they give up on the startup idea more easily.

So my emerging view is that fear of failure is not really the problem here. Rather I think we should be working on the other side of the equation – courage. More specifically – how do we help people muster the courage to start companies, even when they understand that painful failure is a possibility.

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