Nic Brisbourne's view from London on technology and startups

Thoughts on curated marketplaces and perfect competition

By | Startup general interest, Uncategorized | One Comment

Jeff Jordan, now a partner at Andressen Horowitz, and previously CEO of OpenTable and senior exec at Paypal and eBay, has a post up on the A16Z blog about online marketplaces. He argues that all online marketplaces are fundamentally the same and hence should be managed by the same principle of “nurturing and managing perfect competition”.

Jeff offers a full definition of perfect competition in his post that’s worth reading. …. If you want the quick version, perfect competition is when the market is totally open, with full price transparency, full information for buyers and no concentration of either supply or demand.

I agree with Jeff, but only about half the time. For marketplaces like eBay, Craigslist and Etsy he is right. The more they can nurture perfect competition the stronger the proposition will be for consumers and the easier it will be for high quality sellers to rise to the top.

But there are plenty of marketplaces where pursuing perfect competition isn’t the best answer.

Uber is perhaps the most visible example of such a marketplace right now. If they were promoting perfect competition they would allow drivers to set their own prices, but they found that consumers prefer consistency and convenience over price transparency and went for a different model.

Another example is Lexoo, one of our portfolio companies. They are a marketplace connecting businesses with legal services. Perfect competition isn’t the best model for Lexoo because the services from different lawyers aren’t equivalent and buyers prefer to be connected to pre-screened quality lawyers than go through the difficult process of working out for themselves which lawyers are best.

Lexoo and Uber are both curated marketplaces – i.e. marketplaces where the marketplace does some work on behalf of the buyer and doesn’t just rely on market forces to optimise the user experience. There are lots of markets where this is the best model.

Half of browsing and a third of purchases on mobile

By | Mobile | No Comments

Screen Shot 2015-06-22 at 09.54.27

This slide is from Benedict Evans’ presentation Mobile is eating the world. The subtitle reads “Smartphones and tablets taking half of browsing and a third of purchasing”. Pause to take that in for a second. A massive and growing share of the market is on iOS and Android. The growth in these market share figures continues to surprise me.

Lots of mobile usage is in the home of course, and to a very large extent mobile means smartphones. Hence the smartphone user experience is key to growth. Riding with the tide of change is almost always the right call, especially for those with limited resources. Like startups.

We’ve been talking about mobile for years now, long enough for several mobile first companies to achieve massive scale, not least Uber. The massive shift to mobile is not the new news, then. What’s new is how far that trend has gone. One third of purchasing and one half of browsing. Mobile first is moving from an innovative strategy to the new normal.

UK startup job creation growing 80% per year

By | Startup general interest | One Comment

Screen Shot 2015-06-19 at 15.48.07

CityAM reported today that UK tech startups are expected to created 20,000 jobs this year and that tech startup vacancies are up 80% on last year. The data from Adzuna.

It’s great to see the startup scene making a real and growing impact on job creation and the economy.

To put that into context, 202,000 jobs were created over Q1 in the UK economy as a whole (see ONS). Over the year then 20,000 jobs would be about 2.5% of total jobs created, albeit they will be amongst the best jobs.

Why writing makes you smarter

By | Startup general interest, Uncategorized | 3 Comments

I started writing this blog back in 2006 when Twitter was only three months old and long form content user generated content was all the rage. Back then lots of people wrote blogs whereas today most folk rely on Twitter to share their views and news with the world. Periodically I revisit whether I should change from my pattern of daily blogging in favour of more tweeting, which would give me more reach for less effort, but I haven’t made the switch in part because of the feeling that blogging helps with my thinking.

I’ve historically explained how it works by saying that blogging forces me to complete my thoughts, but reading this Business Insider article titled Learning hacks that will maximise your memory I’m now thinking it is more accurate to say that writing makes me smarter. I always love a good listicle, and this one lists seven ways to make yourself smarter by improving your memory. It turns out that writing long form content forces you to do five of them.

  • Retrieval – remembering things before writing them creates new neural connections and strengthens the memory
  • Elaboration – connecting ideas to other ideas also creates new neural connections
  • Generation – creating hypotheses on directions of markets and startup best practice enhances learning and memory
  • Reflection – reading posts back before publishing them is a powerful tool for self-improvement
  • Calibration – feedback from blog posts and on Twitter helps immensely with learning (especially when it’s tough feedback)

The logic of this extends to all long form contemplative writing, whether on blogs or private memos. The nice thing for me about blogging is that the public scrutiny makes it easier to keep the habit of daily posting. If I was writing in a private journal I would find it more tempting to miss a day, or write notes instead of complete sentences.

Andreessen Horowitz: No bubble but rebalancing from IPO to late stage venture

By | Venture Capital | No Comments

Earlier this week Benedict Evans/Andreessen Horowitz published a great deck with their thoughts on whether we are in a bubble or not. The whole thing is well worth a read, but two slides stood out for me.

Firstly this table comparing 1999 and 2014 on key bubble-related metrics. As you can see this time round the funding is both smaller in scale and more conservative, and we are operating in a much, much bigger market. Hence from a high-level macro perspective current funding levels look sustainable.Screen Shot 2015-06-16 at 09.11.16

 

But second there has been a big shift from IPOs to late stage private rounds.

Screen Shot 2015-06-16 at 09.16.00

Investors in these late stage rounds are traditionally public market investors who have moved to the private markets because companies are going public later and the returns are now pre-IPO. That makes sense, but it looks to me as if they have less valuation discipline than we normally see in either the public markets or in smaller venture rounds.

So definite signs of a bubble in late stage private rounds.

However, Andreessen Horowitz conclude that so far the frothy late stage activity isn’t moving down the chain to smaller or earlier stage rounds, pointing out that the rise in the number of seed deals is a result of declining costs to start a company. I think that’s largely true. Here in the UK, we’ve seen some examples of heady activity in the early stages, but nothing widespread.

 

A new unicorn in the UK every six weeks

By | Forward Partners, Venture Capital | 4 Comments

 

 

 

Companies in Europe worth over $1bn
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The above chart is lifted from a recent GP Bullhound report European Unicorns: Do They Have Legs?. It paints a pretty picture, for the UK and for Europe. In the last twelve months there were 8 new unicorns in the UK and 13 in Europe. That compares with 22 new unicorns in the US over the same period.

The fact that we’re creating larger numbers of big companies gives confidence to investors and provides fertile training grounds for the next generation of entrepreneurs and angels. It’s great to see.

That said, I’m going to finish with a caveat. For the reasons I gave above it’s critical that we create huge companies, but I think the pendulum has swung too far and the unicorn thing is now overdone. There are lots of great companies created which don’t get to $1bn value and at the earliest stages of investment the market opportunity generally isn’t clear enough to make investing in unicorns a viable strategy. The key discipline for every investor should be to ensure that every deal can be a fund returner, and with small funds that doesn’t require $1bn+ valuations. The real skill is putting yourself in a place to get lucky.

For Forward Partners that means investing in companies that can return the fund with exits in the £100-300m range but have a chance of going on to be much bigger. 60% of European unicorns are in the sectors on which we focus: ecommerce, marketplaces and software.

Will we persist with two mobile app ecosystems?

By | Apple, Google, Mobile, Uncategorized | 4 Comments

In the Apple App Store and the Google Play Store we currently have two vibrant mobile app ecosystems. Going back a few years the prevailing wisdom was that network effects would ultimately make this a winner takes all markets and that over time users and developers would eventually coalesce on a single platform. That was the lesson we all learned from Windows in the 1990s.

Then more recently people have been saying that both the ecosystems are large enough to be self-sustaining and that Google and Apple have both ‘won’.

That view made sense to me. Both ecosystems were growing and Apple’s dominance at the high end meant that developers mostly built for iOS first giving them sustainability in the face of Android’s faster growth. That’s part of the reason I ditched my long term allegiance to Android and bought an iPhone earlier this year.

Now new data from Apple and Google compiled by Benedict Evans is an early indication that the duopoly might not be stable after all (caveat: this analysis is based on a small number of datapoints and may be subject to large rounding errors).

IOS Growth Slow

The news is that iOS growth looks like it has stopped – Apple App Store revenue has flatlined at $10bn. Meanwhile Google Play Store revenues are continuing to grow fast. Extrapolating the trend lines for the last year suggests that Play Store revenues could overtake App Store Revenues this year.

There are many more Android devices out there and hence the revenue per device is significantly lower on Android, but there too the gap is closing.

For developers gross revenue on the platform and average revenue per device are key numbers and if/when the Play Store passes the App Store on these metrics I expect increasing numbers of developers will choose to go Android first, which will bring users across and further accelerate the growth of Play Store revenues. That in turn will encourage more developers to switch and we may see a repeat of the Windows movie from the 1990s when the winner takes all.

And I will have to switch back to Android.

 

Mindfulness makes you better at work

By | Startup general interest | 5 Comments

My friend Josh March recently said that meditation is “an essential part” of his “entrepreneurs toolkit”, a sentiment I’m hearing echoed by increasing numbers of entrepreneurs and startup execs. As you may have read here before I have been practicing mindfulness and meditation for two years now and found it hugely helpful in dealing with stress and improving my interactions with people, and at Forward Partners we have regular mindfulness sessions for all staff organised by Calmworks.

The way it works is that mindfulness practice, and in particular meditation, results in physical changes to two areas of the brain which affect these behaviours. The following is lifted from an HBR article:

[Regular meditators have a] bigger anterior cingulate cortex (ACC), a structure located deep inside the forehead, behind the brain’s frontal lobe. The ACC is associated with self-regulation, meaning the ability to purposefully direct attention and behavior, suppress inappropriate knee-jerk responses, and switch strategies flexibly. … [and] demonstrate superior performance on tests of self-regulation, resisting distractions and making correct answers more often than non-meditators. They also show more activity in the ACC than non-meditators. In addition to self-regulation, the ACC is associated with learning from past experience to support optimal decision-making. Scientists point out that the ACC may be particularly important in the face of uncertain and fast-changing conditions.

Adapting well to fast-changing conditions is key for entrepreneurs, and increasingly for everyone as change happens faster and faster. That’s big.

The second brain region we want to highlight is the hippocampus, a region that showed increased amounts of gray matter in the brains of our 2011 mindfulness program participants. … a set of inner structures associated with emotion and memory. It is covered in receptors for the stress hormone cortisol, and studies have shown that it can be damaged by chronic stress, contributing to a harmful spiral in the body. Indeed, people with stress-related disorders like depresssion and PTSD tend to have a smaller hippocampus. All of this points to the importance of this brain area in resilience—another key skill in the current high-demand business world.

Resilience is also essential for entrepreneurs. One founder of a successful company said to me earlier this year that his emotional lows are as intense as his emotional highs, but they last much longer! The ability to bounce back is an essential trait.

The HBR article concludes by saying “Mindfulness should no longer be considered a “nice-to-have” for executives. It’s a “must-have”:  a way to keep our brains healthy”. I agree, and like to make an analogy with exercise. Fifty years ago very few people took regular exercise and the science linking exercise to health and happiness was poorly understood. Nowadays everybody understands the link and a large proportion of society puts significant time and effort into keeping fit. Meditation today is where exercise was fifty years ago.

Investors shouldn’t finance races to the bottom

By | Venture Capital | 3 Comments

I just read Albert Wenger’s post about profit destroying innovation and am left wondering if we are entering a period where startups are tearing down incumbents but won’t become sustainable companies in their own right. We have become very efficient at creating super fast growth companies with low or non-existent potential profitability from their existing revenue models. These are often marketplaces with 0% take (i.e. they don’t charge for listings or purchases) or SaaS companies giving away features that competitors charge for in the hope of charging for something else later.

As Bill Gurley wrote recently:

it is materially easier to take a company to substantial revenue if you generously relax the constraint of profitability. Customers will love you for giving away more value than you charge

The dangerous dynamic we should be avoiding is financing businesses to substantial revenues that won’t eventually generate significant profits. That’s happening increasingly often as late stage investors pay up handsomely for high growth businesses without clear/credible strategies for reaching positive cash flow. These un-profitable startups undermine the profitability across entire markets in a way that may not be recoverable. Albert Wenger’s said the same thing differently when he wrote the benefits of innovation are accruing to customers rather than providers. When that happens it is investors who foot the bill.

Design is critical: Value proposition is paramount

By | Startup general interest, Venture Capital | 2 Comments

I’ve just read an interesting post on Venturebeat lamenting the fact that investors get carried away with design and user experience:

If the user experience seems to be great, often investors will conclude the founders have found product-market fit and the basic unit economics become less relevant. The path to profitability in most cases becomes: You’ll get profitable if you’re big enough.

The better alternative they say is to build something people want:

In 2014, we went through Y Combinator, whose mantra famously is “Build Something People Want” not“Build Nice Things, People May Want Them.” This is certainly something we take to heart.

At the end of the day this final conclusion is the right one. It is more important to build something people want than to build something that looks nice. Going further, what every company actually needs is a strong value proposition, where:

Value (to the customer) = Benefits – Cost

That’s an equation out of strategy textbooks from the 1990s, but it is entirely relevant to startups. Not only do you have to build something that people will want (i.e. it has benefits) you have to do so at cost that is acceptable to the customer and allows you to make a profit.

Design and user experience have grown more important in recent years because the benefits of convenience and joy in using a product are increasingly used as competitive weapons, but it is important to remember that without a strong primary benefit convenience means nothing and there is no joy.

In practice startups should focus first on building a product that resonates emotionally with customers. That product will have a strong primary benefit (e.g. quotes from four lawyers within 24 hours from our portfolio company Lexoo) and just enough design to make it usable by early adopters. If investors are over-indexing on design it is likely because ‘just enough design’ is becoming more and more as higher standards of design are becoming more pervasive generally.

 

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