Nic Brisbourne's view from London on technology and startups

Apple is now like Alphabet and Microsoft – it’s core product is ex growth

By | Apple | No Comments

The wires this morning were full of stories about Apple’s Q2 results. iPhone unit sales were down 16% on the year ago quarter and there is widespread speculation that the growth might be over. We talked about it a bit in the office earlier on and whilst a few of us think the iPhone 7 might have something cool about it that could revive growth none of us think there’s much further for the iPhone to go. It’s already been improved through nine versions since 2007 and there simply isn’t much left to do.

iPad and Mac computer sales were also down and there’s little reason to hope for a return to growth in either of those two product lines.

Alphabet and especially Microsoft, the world’s second and third most valuable companies have been in this position for a while. They have responded by pushing into whole new areas to generate revenue growth, but with patchy success. Microsoft had massive hits with the Xbox and enterprise software, but missed with Bing, MSN, and mobile. Google has a similar record with Android and Google Apps counting as big hits, but repeated misses on social. Meanwhile both companies have newer projects aplenty.

Facebook, the world’s sixth most valuable company has arguably moved into a similar position recently and is making big bets like Oculus and Whatsapp (although the latter is arguably an extension of its core business).

Historically Apple hasn’t made many big acquisitions, which is why the world was surprised when they bought Beats for $3bn. Going forward I expect their M&A strategy to become more like the other tech giants, because without bold plays their revenues and profits will decline and their share price will suffer. Badly.

If I had to guess I would say many of these acquisitions will fall into their ‘services’ category, which is Apple’s one area of growth right now. It’s where Beats sits and cross selling services to their loyal customer base is a very obvious thing to do.

Knowing your customer is key to conversion rate optimisation

By | Startup general interest, Uncategorized | No Comments

Conversion rate optimisation is a hot topic these days. Google Trends identifies it as an official “breakout” term meaning searches for that phrase are up over 5,000% over the last few years.

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We’re looking at an arms race here. Most of these people searching will be improving their conversion rates which will enable them to pay more for traffic and still hit their customer acquisition cost targets, and unless you match them you will find it hard to compete.

The chart above comes from an article I was reading this morning with nine principles for conversion rate optimisation. They are principles you can use before you have enough traffic to run meaningful AB tests.

  • Speed – Amazon estimates that for every 100ms increase in page load time there’s a 1% decrease in sales, and more generally page load times over 2-3s leads to massive customer drop off.
  • Singularity/Simplicity – pages with only one goal and no clutter convert much better. A Whirlpool email campaign improved clickthrough by 42% when they reduced the number of calls to action from four to one.
  • Clarity – meet your audience’s expectations with a plain language statement of how the customer benefits from the call to action and clear design
  • Identification – know your audience’s aspirations, lifestyles and opinions and reflect them in your design and copy
  • Attention – sites have eight seconds to grab a user’s attention. Headlines are the most useful tool and should generally be less than 20 words.
  • Desire (a subset of attention) – show the user what’s in it for them. Likeability, social proof, hero images and customer logos are good tools.
  • Fear (a subset of attention) – show the user what they lose by not taking the call to action, particularly effective when the pain of the customer problem has been made clear. Urgency (order in 40mins to get delivery by Wednesday) and scarcity (only 5 left in stock) fall into this category.
  • Trust – people trust sites that look good, show customer service contact details, and have customer testimonials. They make their minds up on trust in 50 milli-seconds.

The eagle eyed amongst you might have noticed there are only eight items on the list, that’s because I combined a couple. There’s much more detail and lots of good examples in the original post, which is well worth a full read.

 

Six of these eight tips (singularity, clarity, identification, attention, desire and fear) require that you know your customer, yet a remarkable number of founders start building their products and sites without developing that understanding. Your intuition probably isn’t good enough. What’s more remarkable still is that every entrepreneur we talk to knows that understanding their customer is important and most of them have done some superficial research, but only a minority have a deep enough understanding to make the calls that will give them the conversion they need to kickstart their business. That’s one of the reasons many businesses founder just after launch.

The tools to get the understanding are available to everyone so there’s no excuse. All it takes is well some well structured customer interviews.

Questioning WeChat as a model for conversational commerce

By | Startup general interest | No Comments

WeChat is often held up as an example of where conversational commerce could work here in the west. It’s a messaging app with huge numbers of users, many many of whom interact with services and buy things without the inconvenience of leaving the app. Ergo Messenger, SnapChat, Whatsapp, Telegram, Kik, etc. etc. could do the same and cue a tonne of excitement about how that might happen.

I live in London in the UK so I can’t use WeChat, but I’ve just read a post by Dan Grover, a man who does. More than that he’s a product manager on the platform. Not only does he have intimate knowledge of WeChat he’s also schooled in understanding how customers behave and why.

His conclusion is that WeChat evolved into the all-singing, all-dancing behemoth it is today not because there’s a natural evolution from messaging to conversational commerce, but because they had lots of users and they exploited that strength to move into commerce and other adjacent spaces. Moreover, most of the services on WeChat work by firing up a card inside the app which functions like an app or mini-web page – in these examples the commerce simply isn’t conversational.

As Dan sees it (and he was there watching) WeChat was mostly successful in capturing the commerce opportunity because of  “enhancements [to the app] made running counter or orthogonal to the idea of conversational UI”.

If you want more of this go and read his post. It’s a long one, but the examples of how WeChat works and how conversational commerces is being developed in the west will really ram the point home.

I don’t like writing negative posts and I’ve written a couple now that are down on the bot/conversational commerce opportunity but I wanted to summarise and capture this info about WeChat for posterity.

As an aside, it’s terribly easy to see success in a different country and incorrectly assume it can be copied. It’s an easy mistake to make because the intoxicating success is highly visible, but it’s hard to find out the detail of how it was delivered – that’s why posts like Dan’s are so important. However, building a deep understanding of the customer is the best way to avoid building a duff copy-cat, and has the added bonus of being the best way to start a company more generally.

The danger of over-funding and herd investing

By | Venture Capital | No Comments

I’ve just found time to read Bill Gurley’s On The Road To Recap. I won’t add to the volume of good posts saying that he’s right to point out that the unicorn financing market is entering a dangerous period where all manner of pressures and biases will cause people to behave badly and mistakenly put off adjusting to the new reality in late stage funding.

Instead I’m going to highlight his warning about what happens when markets get over-funded:

Loose capital allows the less qualified to participate in each market. This less qualified player brings more reckless execution which drags even the best entrepreneur onto an especially sloppy playing field. This threatens returns for all involved.

In 2014-2015 the unicorn market was over-funded, sparking intense competition, high burn rates, and as we are starting to see now, ultimately damaging returns.

This is a movie we’ve seen many times before, although it is usually an industry sector that gets over-funded rather than a stage of investing.

I first noticed it in late 2000 when the fund I was working for was invested in one of six high profile and highly funded enterprise portal businesses. It seems crazy now to think that software for enterprises to build intranets (remember them) was such a big deal, but we all piled into these companies giving acquirers multiple options to acquire similar businesses and driving M&A valuations down for everyone. I think one of the companies made it to IPO but even they struggled when IBM and other large tech players bought their competitors.

Other examples include mobile games, DVD rentals, and cloud storage. It’s likely to happen in bots and AR/VR next.

The most commonly repeated pattern is for VCs to over-invest in sectors that are obviously going to be big. It’s most egregious when there’s a long period of elapsed time between when it’s obvious a market will be big and the market actually takes off. Most everything that moved from the internet to mobile looked like this, and was hard to make money from as a result.

The lesson here is to not invest in the obvious stuff, either by investing before it’s obvious (but remember that being too early is as bad as being too late) or by giving it a miss altogether. Instead it’s better to look for less popular areas that you understand well, that are growing, and where the fundamentals are strong. That takes the courage to be different and the confidence to hold your nerve, but if you’re short in these areas maybe investing isn’t the best career for you anyway.

Short term clarity vs long term upside

By | Startup general interest, Uncategorized | No Comments

We’re all happy in the Forward Partners office this morning because one of our partner companies has just sent an update showing they’ve been growing at 30% per week for the last fourteen weeks. That’s quite some growth and I couldn’t be happier for the team there. It’s well deserved.

But it got me thinking about the trade off between short term clarity and long term upside in seed stage investing. Every business that’s successful raising venture capital has a plan that gets them to a massive exit, or at least that’s the way it should be. That plan will show short term activities that generate value and significant revenues in the out years. The interesting thing is that all the plans I can think of are noticeably stronger at one end or the other. Either there’s a lot of clarity about the short term plan but the upside story is hazy, or it’s clear that if they nail it the upside is huge, but there’s uncertainty about how to achieve success in the first six to twelve months.

To be clear all this is a matter of degree. Good companies that get funded have good answers to the short term and long term questions, they just don’t have excellent answers to both. Not when they’re at the seed stage.

Deep tech investments (think Palantir) tend to be stronger on the long term than the short term, whereas ecommerce and marketplace businesses (think Amazon or ebay) are generally stronger on the short term. People are successful investing on either side of this trade off, but in our seed stage experience companies with relatively more clarity on the short term have better chances of success. They are more likely to generate momentum in the short term which gives them the platform to raise more money so they have time to develop clarity on the big picture. Conversely I’ve seen too many companies with amazing upside stories fail because they didn’t make enough progress after their seed round. Momentum is everything.

All of this is part of the reason Forward Partners focuses on transactional businesses in fashion, healthcare, travel, fintech and so on. We’re invest very early and these types of companies are able to quickly generate momentum and get the proof points they need to raise their next round of finance, as we’re seeing with our partner who’s growing at 30% per week.

Hyphen-tech – a trend that bodes well for London and New York

By | London, Startup general interest | No Comments

I just came across the concept of ‘hyphen-tcch‘:

the numerous sub-sections of startups that align themselves with various industries: fintech, fashiontech, mediatech, and so forth

I think this is the big opportunity right now that much of the pure play internet opportunities are behind and explains why many of Forward Partners’ investments are pushing the internet out into the four corners of the commerce. Recent examples include Appear Here (property), Thread (fashion), Zopa (finance), Live Better With (health) and Patch (homewares). In all these cases the founders have to work closely with existing players in their industries making ‘hyphen-tech’ a good name.

London and New York are good places to build these businesses because we combine strong startup ecosystems with world leading financial services, fashion, media and so on.

The gearbox moment – when your startup clicks into gear

By | Startup general interest | No Comments

When I saw this Tweet earlier today I thought ‘yes – I know that feeling’. It’s amazing when a team has all the elements of a business working beautifully together. You can see their pride and their confidence and of course the results flow.

My next thought was about how can we all get our companies to that moment more quickly. The following four step guide is a mechanistic perspective on building a business that glosses over all the emotional context and sweat and tears that go into startups, but I hope it will help people get to that gearbox moment a little quicker.

Step One

Start selling something and growing. If you’re strategy is to build an audience first and monetise later then start building your audience, but for the transaction focused businesses we invest in, step one is most definitely to start selling.

Step two

Identify your growth engine. This definition of growth engines from our Head of Marketing Tom MacThomas is the best I’ve seen:

A growth engine is a set of activities that you can systematically undertake to drive growth. This could be as simple as running an AdWords campaign or blogging and sharing your content. Typically though, these are more complex constructs made up of lots of moving parts. Lots of parts usually means that the engine can be iterated on and optimised well by tackling each part at a time.

Read Tom’s Path Forward article on the subject for an in depth explanation of growth engines.

Step 3

Model the business in a spreadsheet. Spreadsheets force you to make the relationships between the elements of your business explicit and to put values on key variables (cost of traffic, conversion rates, average order values, margins, repeat customer rates). These are like the ratios between the gears in an engine – when they are in harmony the engine purrs, but when they’re not the engine falls apart…

Step 4

Get all the variables to reasonable levels. The engine is now purring, and you have your gearbox moment.

From here on in it’s about fine tuning and rapid growth. Until something breaks and you have to start again….

Startup compensation: flat salaries and equity/options work best

By | Startup general interest | No Comments

Earlier in my career I was a proponent of incentivising management teams with a quarterly bonus structure based on hitting KPIs that would be established at the start of each quarter. We had some success with this system, most notably at Zeus Technology, which was a good exit for my old firm Draper Esprit, but these days I recommend flat salaries with upside coming from options or founder shares. Here’s why:

  • Quarterly goal setting is still best practice (now called OKRs) but linking them to compensation creates a misalignment of objectives – the startup wants big goals, the employee wants achievable goals so he can get his bonus
  • Linking targets to compensation encourages gaming  and sometimes unethical behaviour. (This is also a danger if missing targets is perceived to damage reputation or chances of progression. Employees should be held accountable for effort and doing the right thing but not punished for failed experiments.)
  • It’s tough to define short term measures that will lead to long term success, particularly at a fast changing startup, so flexibility is important, however, It’s hard to change someone’s targets half way through a quarter when it’s linked to a bonus.

On the softer side, an increasing number of studies show that fixating on performance impinges on creativity and can weaken intrinsic motivation – and in startups you need creativity and intrinsic motivation in spades. Otherwise life gets very difficult.

The only exceptions to this flat salary rule are routine work which requires no creativity and sales where commission structures remain the best way to motivate a team.

With those caveats the best structures are flat salaries and a share of the equity. The share of equity only pays out a small percentage of the time and is far in the future which makes it imperfect as an incentive, but it is great for aligning everyone around building value and for creating a shared sense of ownership.

Finally, for those of you thinking ‘that’s all very well, but how do you motivate people without bonuses’ consider whether you are better off hiring people who are intrinsically rather than extrinsically.

Hat tip to Gail McManus of PER, a recruitment firm for private equity professionals. She stimulated this post by emailing me a link to an LBS article: Why CEO pay should be 100% fixed.

 

The decline in venture is bottoming out

By | Venture Capital | No Comments

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Reading the tea leaves to predict where the venture capital market is heading seems to be everyone’s favourite hobby at the moment, and I’m no exception. Last week we had data from tech.eu which showed that venture investment in Europe is roughly flat quarter on quarter (excluding Spotify’s $1bn raise). Now we have Mattermark and PWC data on Q1 in the US and, surprisingly, the picture there is similar. As you can see from the chart above there was a precipitous decline from Q3 to Q4, but the rot stopped in Q1. Moreover, we are still at a high level of investment when compared with any period except the last couple of years and the 1998-2000 bubble.

It will be very interesting to see where this goes next quarter. I’ve been saying that I think the underlying growth in venture and startup activity here in Europe will balance out the correction and my best guess is that investment levels for the next few quarters will be roughly flat on where they are today at €3.5-4bn, but that I expected the US to keep falling. Now I’m wondering if I should revise my expectations upwards.

The other interesting thing to emerge is that investment in the Bay Area is falling faster than everywhere else – Q1 2016 is 20% down on Q1 2015. The capital overhang is greater in the Valley than anywhere else whilst at the same time it’s getting easier to start and finance your business in multiple other places (including London) so I would expect this trend to continue. That would be good news for startup ecosystems all around the world.

Define your target customers narrowly

By | Forward Partners, Startup general interest | 3 Comments

I just read an interesting article about a startup called Silver Concierge that took Steve Blank’s entrepreneurship course in Stanford. The whole thing is well worth a read, but the killer section for me was “Startup Lesson #1: Know your customers — and why they need your product”.

Silver Concierge didn’t make it through the customer dev process. They discovered that there wasn’t enough demand for what they were offering and that the area where they did find demand (taxi service for older people) they couldn’t build a profitable business. However, whilst that might be a great testament to the power of customer development and their most important learning it wasn’t the thing they found out. They also discovered the power of narrowly defining their target market.

The team started out targeting ‘seniors’ but found out that segment was too broad with the result that they didn’t learn anything from their initial customer interviews. In their words:

Successful companies solve acute needs — and acute needs don’t exist independently from living, breathing human beings. “Seniors” is not a meaningful customer segment. “Female older adults with limited mobility living alone at home” is. As we learned first-hand, everything about our business followed from our customer segment; as such, it was critical to deeply understand who our customer was and what they cared about before trying to do anything else.

When I think through our companies the most successful ones have a well understood and well defined target customer. A good target customer base has the following characteristics:

  • They are easy to visualise and create personas
  • They have homogenous needs (with respect to your product)
  • You can market to them effectively

Many of the best companies start extremely narrow and then expand from there. Our most recent investment Patch is a good example. They are building an online garden centre chasing the £4bn spend in that market across the UK, but the first target customers are house-proud Londoners with balconies. Moreover, their initial marketing campaign will target a group of 3,000 flats with balconies in Stratford. These target customers are young professional couples, want plants for similarly sized spaces and we can reach them with fliers.

Over time Patch will extend to small terrace gardens, then larger suburban gardens and then huge rural gardens.

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