CityAM reported yesterday that fundraising in London’s tech sector is currently up over 30 per cent on last year’s $719.3m total, and there’s still three months still left in 2014. The figures are from London and Partners, the Mayor’s promotions agency.
Mayor Boris Johnson said:
These figures show, without any question, that this is an incredible period for technology firms in our city
And I have to agree.
To repeat a brief history of the UK venture industry that I’ve given before – the startup ecosystem only got started in the UK in the mid to late 1990s and was pummelled by the April 2000 internet crash when it was still in its infancy. We’ve been growing and recovering since then, but the markets have been tough and we’ve been subscale. The number of good entrepreneurs and quality startups has steadily increased, but this is a two sided market, and the other side, the capital, has been slower to grow. The lack of cash has restricted the growth in the number of startups and often resulted in those that do adopting more conservative growth plans than they would in a market where capital flowed more freely, like it does in California.
Things are definitely getting much better. I don’t think we will know we’ve reached critical mass until we are definitively past it, but it’s starting to feel to me like we might be close. Government support in the form of EIS and SEIS, and support to the VC industry has been critically important in recent years and this year we’ve had a slew of big exits – Zoopla, AO and Just-Eat all IPOd this year for over £1bn. That coupled with a hot economy is, I think, what’s making the difference.
We do, of course, have to be careful of irrational exuberance. If we end up in another bubble followed by a crash we may well find ourselves set back a few years. I don’t think we are at that point now though.
Last week Marc Andreessen fired off one of his now famous Tweetstorms about the problems that having too high a cash burn can bring. These are the money tweets (if that’s a thing..):
Marc was talking about large companies with huge burn rates, but they also apply at the earlier stages. I regularly get asked about the dangers of raising too much money, and these tweets nail it. Investors will only invest a lot of money if they’ve been sold a plan that needs it. Hence once the money is raised the burn will go up, and if that’s premature then the problems above ensue.
Mark Suster recently wrote a good post on this subject. His advice to startups is to raise at the upper end of normal. That’s good advice.
Paul Graham published his latest essay this week. It takes the form of advice to college students about starting companies and as usual there’s lots of good stuff.
The section that stood out for me was this:
So this is the third counterintuitive thing to remember about startups: starting a startup is where gaming the system stops working. Gaming the system may continue to work if you go to work for a big company. Depending on how broken the company is, you can succeed by sucking up to the right people, giving the impression of productivity, and so on. But that doesn’t work with startups. There is no boss to trick, only users, and all users care about is whether your product does what they want. Startups are as impersonal as physics. You have to make something people want, and you prosper only to the extent you do.
Most everywhere else in life unscrupulous people can progress by gaming the system. People figure out how to pass exams with the least work, they lie on their CVs, they even cheat on their partners. PG’s point is that there’s is no analogy for this in startup-land. The one exception is that investors can be tricked – but that’s like a sugar rush – it feels good in the short term, but doesn’t help in the long run.
The slightly depressing news then, is that the only way to succeed in a startup is to work hard and do things thoroughly. PG also makes the point that it doesn’t get any easier as companies grow. That’s what he’s heard from all the most successful YC founders and what we’ve seen too.
So if you are founding a company, be prepared for the long haul. This topic is on my mind this week because we were in discussions with an entrepreneur who told us at the eleventh hour that after six months he wanted to drop back to a part time role in his startup. I’m glad he thought it through and told us, and that we didn’t do the deal and find out later, but it illustrates the point – founders should be prepared for up to a decade of hard work.
I’m very pleased to let you all know that we have invested in Dataloop.io. The announcement went live yesterday.
Dataloop provides infrastructure monitoring for cloud services and they fall into our ‘late seed’ category of investment. That means they are up and running and on a 12-18 month path to their Series A. (Our other category of investment is ‘idea stage’, often with solo-founders.)
The starting point with this one was the team. We got to know David Gildeh, the CEO and one of three co-founders, around this time last year. At that time he was talking about infrastructure monitoring, doing customer development work but had yet to start the company. The first thing we liked was that the team was scratching their own itch. They were coming out of Alfresco where they’d built a custom solution to monitor their infrastructure as they’d moved from an on premise software company to a cloud play. On top of that we liked the fact that David was being very thorough with his customer development work and the fact that Dataloop was to be his second startup (his first was acquired by Alfresco).
From a market perspective we liked the fact that companies everywhere are building their own custom cloud monitoring solutions using open source software – just like David and his team did at Alfresco, and that as cloud penetration increases demand for cloud monitoring solutions is only going to grow.
We kept in touch for the next several months, during which time David incorporated Dataloop with his two co-founders Stephen Acreman and Colin Hemmings, closed their first two customers, created the successful DevOps Exchage meetup, and took Dataloop through the Microsoft Accelerator programme in London. As they came out of that programme they started talking with investors about raising their first round.
We were encouraged by their progress so we dived in deep to develop our understanding of the market. It’s a complicated and deeply technical story, but once we’d wrapped our heads around it we began to get quite excited. Simply put, Dataloop is part of the growing ‘DevOps’ meme that’s arising because infrastructure management is growing in importance and complexity. The underlying drivers are the continuing shift into the cloud, the growing complexity of online services, and the trend towards continuous deployment – all trends with legs. The brittle custom built solutions currently in place are increasingly inadequate for the task and the competing products out there either demand that developers learn new languages or are not the main focus of their companies. We were significantly aided in our understanding by the developers in our team who have been living some of the problems that Dataloop is solving.
A strong team, an attractive market and a good dose of momentum are the key ingredients for a seed stage software investment and Dataloop has those in spades. I’m looking forward to being part of their journey.
We have been interviewing lots of solo founders recently as we look to deepen our understanding of one of our key customer segments. ‘What do they want?’ and ‘Where do they hang out?’ are our two main questions.
I will report on what comes out of this customer development work in due course, but today I want to share an observation about one of the things that separates solo-founders we’ve backed from those that we haven’t, and that’s curiosity.
A strong desire to learn is a characteristic shared by many successful entrepreneurs, and within our sample that manifested itself in frequent attendance at startup events, fervent reading, and networking with experts to increase domain knowledge and validate/tweak business plans. Other entrepreneurs simply got their heads down and started building.
Interestingly, everyone had read The Lean Startup and professed to follow it’s guidance, although many did things that we would not regard as lean. It’s common to read books like that and then find them difficult to adhere to in practice.
Finally, a caveat – there are, of course, great entrepreneurs who have built large companies without attending startup events, reading books or networking with experts. My point is that we’ve seen a correlation between potential for success (as evaluated by us) and these activities.
Do Purpose was the first book published by our portfolio company Unbound under it’s ‘channels’ initiative. Unbound is a crowdfunding platform for authors and has now published several notable books working directly with authors, including best seller Letters of Note and The Wake which was shortlisted for the Man-Booker prize. The channels initiative is a way for traditional publishers to work with Unbound to crowdfund the books that they then publish. That’s exciting because it opens up crowdfunding as an option for many more authors than Unbound can work with on it’s own.
I finally got round to reading Do Purpose last weekend. It was like a shot of caffeine in the arm. Short, to the point, and highly inspirational. The book is structured as a series of vignettes with titles like “Speed matters”, “Patience matters”, “Your people are your brand”, “Teams gather around change” and “Sleep is the multiplier of energy” that made me think and reflect on my life, Forward Partners, and some of our portfolio companies. There wasn’t much that I hadn’t heard before, but reading this book helped me reconnect with what’s important and gave me new resolve and energy.
Lots of entrepreneurs I talk with don’t business books because they take too much time. Not this one. I got through it in under an hour.
Running a startup (and an investment studio…) is a marathon not a sprint. It will be hard work, and unlike a true marathon there will inevitably be periods when you have to run flat out, but you need to look after yourself if you want to get to the end of the journey.
There’s a lot of talk about what that means, but in Leading the life you want Stuart Friedman usefully sets out four areas of your life that need balancing (review and summary here):
- home or family
- community or society
The trade-off between work and family is the most visible – you work late at the office and it matters to those waiting for you at home – but the other two are equally important. Looking after yourself through exercise, meditation or whatever floats your boat is key to performing well at home and at work.
The trick that the most successful people pull off, according to Friedman, is to stop thinking about work-life balance as a zero sum game and find activities that improve all the elements of their lives. Compromises are still made, but with a full understanding of what’s most important. Three tips for doing that are to be real (i.e. authentic), bring the different parts of your life together, and look for creative solutions to work-life balance problems.
CBInsights analysed 101 startup post mortems and found the following reasons for failure:
Many of these can be prevented with discipline. My friend Stephen Allott who was CEO of Micromuse, a UK startup that peaked with a $3bn valuation on NASDAQ, once described managing a startup as a process of identifying problems, putting a box round them and then finding and implementing solutions. Taking that approach it is possible to avoid failing for many of the reasons on this list.
E.g. failing because the team isn’t right is preventable in most cases. It’s difficult, because it takes discipline to look at team questions thoroughly and real courage to address issues when they arise, but discipline and courage are two of the things that separate great entrepreneurs from the rest.
Going further down the list, poor marketing, ignoring customers and losing focus are all also questions of discipline and execution.
Going back to the top, even failing because there is ‘no market need’ shouldn’t really happen. Taking the ‘identifying problems’ approach I described above you would make establishing market need the number one priority. That puts you in the mindset of testing demand before you put much effort into building a company, and if it turns out there is no market lead it feels more like an experiment that didn’t yield the result you hoped for than a failed company.
The big take away here is to be structured and deliberate about the way you build your business and to face the hard problems first.
In my fifteen years as a VC I must have seen well over a thousand pitches and advised over a hundred entrepreneurs on their pitch decks. Here at Forward Partners we work with very early stage companies which has meant more time spent helping craft stories to raise investment than when I was at DFJ. In short, ‘how to pitch well’ is an important topic for us and one we spend a lot of time reading and thinking about.
Tomasz Tunguz of Redpoint Ventures writes a good blog, and given the above when I saw his headline The secret ingredient to the best startup pitches I clicked straight through.
The secret, which I’ve already given away in the headline, is to cultivate a sense of inevitability. Tunguz put it like this:
The most successful pitches argue the market will unfold inexorably in the way the founders envision on a relevant time scale. And, that this startup in particular will dominate share in that new world.
That’s great advice. When I think back to the investments that I’ve been most excited about it’s when I’ve been certain that the world will develop in a given direction and that other investors haven’t yet woken up to the new reality. I haven’t always been right, but at the point of investment I have felt strongly that a certain market outcome is inevitable.
There are a myriad of techniques for making a story convincing, but everything starts with the conviction of the storyteller. Entrepreneurs following this advice should make sure they really believe, and then be clear about the inevitability they are predicting and why it’s happening. Simply pointing to trends is much less powerful..
I wrote the post below for Crowdcube, one of the UK’s leading equity crowdfuding sites. It went up on their blog yesterday.
Two developments have changed the face of startup investing in the UK in recent years.
The first development is increased capital efficiency. Entrepreneurs can now achieve an awful lot with very little money. We see this all the time at Forward Partners where we invest right from the idea stage and most of the companies get a first version of their product live for less than £30k (that generally includes founder salaries and time spent doing customer research). When startups can do more with less money the returns from investing small amounts of money go up, and that can be seen in rising Series A valuations and declines in the average amount of money raised before exit.
The second development is SEIS and EIS. Along with many other governments around the world ours believes that a healthy startup ecosystem is critical to the future long term economic health of the country. That has resulted in a number of policies designed to stimulate startup activity of which the most important is the Enterprise Investment Scheme (EIS) and it’s younger brother the Seed Enterprise Investment Scheme (SEIS). Both of these schemes use the tax code to make it more attractive for high-net-worth individuals to invest in startups.
These two developments combine to make startup investing much more exciting than it ever used to be and we have seen a massive increase in the number of individuals who want to be angel investors.
However, finding and assessing investment opportunities is still a difficult and time consuming business. I’ve been a venture capitalist since the first internet bubble and what I’ve learned is that it’s hard to assess investment opportunities unless you have a thorough understanding of the company’s product and market and unless you’ve spent some serious time doing due diligence on the business. Similarly, from the other side of the table fundraising is still a tough thing for entrepreneurs to pull off and building a company remains as hard as ever.
Forward Partners and Crowdcube are both attacking elements of these problems.
The great thing about Crowdcube is that it makes it easier for people to invest in startups. For me the most important things they do are select start-ups they think are likely to succeed and give investors a standardised investment process that’s almost as easy as buying a movie on iTunes. That makes it possible for investors to cost-effectively invest small amounts and make lots of small bets on different startups.
Rather than help individuals to make investments Forward Partners focuses on making it easier for entrepreneurs to build great companies (it’s still hard though…). I could give lots of examples but perhaps the best is the way we work with solo-founders. Rather than pitching their powerpoint idea to potential technical co-founders, solo-founders who take investment from us pair with our developers and customer development team to quickly validate their idea and launch a site. Then, after a couple of months they can work with our Head of Talent to find a co-founder from a position of strength. We recently published a case study of how that played out for our portfolio company Snaptrip.
Whilst we have different models both Crowdcube and Forward Partners work to make investments in startups, and whilst we haven’t done a deal together yet I hope that we might do in the future. We add value in different areas and should compliment each other nicely.