Nic Brisbourne's view from London on technology and startups

Pitch investors at the right level of abstraction

By | Startup general interest, Venice Project | No Comments

I’ve just read the a truly excellent guide to fundraising from First Round Capital. It’s a long read, but packed full of goodness and I highly recommend reading the whole article.

I’m going to pick out and expand on one point – it’s critical that founders pitch investors at the right level of abstraction. The two common mistakes are:

  • Pitching too much in the weeds, leaving investors unexcited about the big picture
  • Pitching at too high a level, preventing investors from really feeling the opportunity – you’re looking to create a visceral connection

As First Round put it:

The fundraising founder has to operate at the right oxygen level between the soil and the stratosphere. Not in the trenches, but not in rarified air.

Founders who are pitching too much in the weeds focus too much on operations, short term progress, and the mechanics of the business. If investors are worried about market size or exit potential, or if they are simply looking bored, you may be making this mistake.

Conversely, founders who are pitching at too high a level talk too much about market trends (often using poorly defined buzzwords) and don’t properly connect their story with their business. If investors are asking lots of questions about what you actually do or struggle to understand your story, then think about whether you are making this mistake.

The best pitches paint a picture of the future which is easy to understand and grounded in reality. Then they describe the path that will get them there, starting from where they are today.

Top 100 venture VC investments each year average $100-150m gain

By | Uncategorized, Venture Capital | One Comment

Screen Shot 2016-05-31 at 15.12.06

This chart is from a Cambridge Associates research report into where VCs make their returns. Cambridge Associates is a service provider to the Limited Partners that invest in venture capital funds that’s known for the quality of its research.

The conclusion of the report is that returns in venture capital are distributed across a larger number of companies and across a wider number of venture capital funds than is widely believed. Their advice to LPs is to catch these distributed returns by investing in emerging managers outside of traditional US venture heartlands. That’s good news for newish funds in the UK.

I reproduced this chart because it shows what a great VC investment looks like. Looking at 2011 and 2012 the top 100 investments created c$10-15bn in value. That means the average top 100 investment created $100-150m in value. One way of creating $100-150m is to invest early, take a lot of risk to get a meaningful stake and hope to get a massive multiple on a small investment. That’s the Forward Partners way. The other way of creating $100-150m is to invest more money a bit later on when the required multiple will be smaller, but the exit value will be higher. Running the maths early stage investors with healthy stakes can get into the top 100 with exits at half the level Series A investors require and maybe 10% of what very late stage investors require.

One of the things I like about the early stage investing we do is that there are many many more $300-500m exits than $1bn+ exits, so we are swimming in a pool with more targets. Another good thing is that if we’re lucky some of our $400m companies will hold out for bigger exits and will end up at $1bn or more, which will drive the returns even higher.

I’m going to finish with a caveat. The dangerous thing for early stage investors is dilution by later stage investors. That’s why smaller funds and angels have a preference for capital efficient companies. In the maths above I’ve assumed that everyone follows their money to protect their stake. That can be challenging for very small funds, although is getting easier with the rise of AngelList special purpose vehicles.

If you’re not always improving you’re going backwards

By | Startup general interest | No Comments

On Tuesday morning I went to see legendary VC Sir Mike Moritz give a talk to launch his new book Leading – thank you Felix for inviting me. Sir Mike has spent time with lots of very successful business leaders over the years and has recently been asking himself what separates those who’s companies stay at the top of their field for multiple decades and those who’s success is more fleeting.

One thing stood out for him above all other factors.

Leaders of companies with enduring success have a relentless thirst for continual improvement. They are restless and never satisfied.

He said modern day tech company leaders Jeff Bezos, Larry Page and Mark Zuckerberg have this quality in spades. Older leaders he name checked included Bill Gates, Steve Jobs and Rupert Murdoch. I’m currently reading a biography of Elon Musk, and he has this attitude too.

Sir Mike also said that Sir Alex Ferguson has a drive to make things better all the time, and that’s what kept him on top at Manchester United for 28 years (Leading tells its story through the story of Sir Alex’s success).

My initial reaction to the idea that continuous improvement begets enduring success was ‘makes sense, companies need to reinvent themselves if they want to stay on top for multiple decades and continuous improvement will do that for you’, but that underplays the importance of the point. An insatiable desire for everything to be the best it can be is key to getting to the top, not just to staying there.

Moreover, as the world changes faster and faster any other attitude is doomed to failure. A solution that’s perfect for today won’t stay perfect for very long, so unless you want to be usurped by someone who finds the solution that’s perfect for tomorrow, you’d better be continuously improving.

In the early days of a startup nothing is perfect, and oftentimes most everything is far from it. Customers might love the core product functionality, but there’s constant firefighting behind the scenes to keep everything working, make more sales, hire more people, raise more money etc. etc. Once again, relentless continuous improvement is the best route to success. Even when things are working really well the best founders aren’t happy – they’re asking themselves questions like ‘how can I grow faster?’, ‘how can I be more profitable?’ and ‘how can I make my customers love us more?’.

This may not need saying, but whilst a relentless desire for continuous improvement is a winning attitude, it is not sufficient on it’s own. It needs to be accompanied by strong leadership skills more generally. Some founders kill their companies by pushing them too hard. That almost happened to Elon Musk’s first two businesses.

Not being tricked by overconfidence

By | Startup general interest | One Comment

It seems that lots of people in my network are reading Thinking Fast and Slow by Kahneman at the moment, at least I guess that’s why I keep hearing snippets of his wisdom. The latest is from BrainPickings:

The confidence people have in their beliefs is not a measure of the quality of evidence [but] of the coherence of the story that the mind has managed to construct.

Wow.

Confidence is divorced from evidence.

 

That is a big deal for founders and investors in startups who have to convince themselves to found or invest in companies when there’s little evidence as to whether it’s a good idea or not. We look for trends and patterns amongst the few data points we have at our disposal and form strong views about where the future is going, and then put big money or time behind it. If Kahneman is right, and I suspect he is, then the strength of our conviction is more down to our ability to spin (or swallow) a story than the underlying facts.

The funny thing is that many of the most successful founders and investors simply have great judgement. They look at small amounts of data and make the right calls. They know how to test and evaluate their gut instincts and not fall foul of what I might call the ‘narrative fallacy’.

There are two tricks I use to test my theories and try to keep the quality of my decision making high. Sometimes I do these on my own, other times I involve my partners and colleagues.

  1. I try to have a clear explanation for all of my beliefs. When I’m sitting alone thinking about an investment I often ask myself ‘why do I believe XX?’. When we are discussing deals as a team I always try to explain why I’m thinking something rather than simply assert its truth.
  2. I systematically looks for reasons why I might be wrong. When we are coming close to deciding we want to do a deal we sometimes brainstorm ways the company might fail. That’s a powerful technique for companies that are unusual in any way (companies that aren’t unusual only fail in the usual ways, and we don’t need a special process to catch those).

Underpinning all this is a readiness to admit mistakes and change my mind. I like to have strong convictions, weakly held.

 

Major demographic shift – more people are living with their parent

By | Startup general interest | No Comments

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When I was studying social science in the 1990s one of the major trends was more and more people living alone. Academics were extrapolating trends and predicting 30%+ of us would be living alone in the future. They were picturing millions of unhappy people living in tiny apartments with insufficient social contact going quietly mad.

Fortunately that hasn’t happened.

As you can see from the third graph along in picture above (data from Pew Research) the number of 18-34 year olds living alone has been constant for a few years at 14-16%.

Note: This data is for US 18-34 years olds only, but I would be surprised if the trends aren’t the same for all ages and also in the UK.

Instead of living alone many more people are staying with their parents (first graph above). I’m sure that creates challenges of its own, but social isolation is at least less of an issue.

I think this data gives insight into social and retail trends. If you are living alone or with parents you are are:

  • More likely to spend time on social media
  • More likely to use dating sites
  • More likely to value experiences
  • More likely to spend money on fashion and other goods which define and display a sense of self

These have all been big growth areas over the last decade.

Going forward it will be interesting to think about how new opportunities and markets play into the trend of more people living with their parents.

Extremely rapid early growth opens the path to venture capital

By | Venture Capital | 2 Comments

“Venture capital is only appropriate for the small percentage of businesses that want to go loss making to grow very fast.” is a sentence I say a lot. As Jeff Bussgang notes in his recent post Growth vs. Profitability and Venture Returns and Fred Wilson has noted before him successful venture funds have a small handful of big winners, and the only way for a company to become a big winner in the 7-10 year lifetime of most funds is to grow really fast – which isn’t for everyone.

Jeff puts some numbers around ‘really fast growth’ in his post, showing that if a company does $1m revenues and then grows at 100% per year for six years straight then it might sell for circa $400m and generate a 10x for investors.

His analysis is spot on, and most investors would be happy if they ended up with a $400m exit with the level of investment he assumes, but in practice they are targeting much bigger exits. Usually $1bn+. In our experience that means they are looking for revenue growth in the early years of 3-4x pa. Moreover, the best companies grow much faster than that. As we know, growth off a small base is easier than growth of a larger base, but when companies have revenues around the $1m level then 5-6x growth is where it gets really exciting for most investors. When revenues reach $10m that drops to 3x growth.

The thing we focus on more at Forward Partners is how fast companies have to grow in their first year in order to get on the venture path in the first place.

Running the maths it becomes clear very quickly that the short answer is ‘very fast’, although it’s sensitive to the size of the opening month, as you can see in the table below.

Screen Shot 2016-05-23 at 12.20.46

For the majority of the commerce and marketplace startups that we work with getting as high as $15k revenues in the first month is tough, so most are looking at average monthly growth rates of 40-50%+ to get to a £1m run rate in twelve months. The way they get there is usually a couple of months of 100%+ growth and then slowing to 20-30% monthly growth.

We pick these numbers (£1m+ run rate and 20-30% month on month growth) because they are benchmarks used by investors. That said, it’s critical to remember that many other variables go into investor decisions and it’s very possible to raise with much lower figures, or to fail to raise with higher revenues and growth if there are other mitigating factors. It will just be harder. There’s more detail in this Path Forward post about Series A benchmarks.

Google closed, Facebook and Microsoft open?

By | Startup general interest | No Comments

Historically Google has been a pro open web company. Open ecosystems were deep in their DNA and critical to their business model of making money from  search. Facebook, on the other hand, has been accused of trying to partition the web and keep everything within its own domain, and Microsoft has long been aggressive in leveraging it’s Windows Platform to try and own adjacent markets.

With their bot strategies they seem to be going the other way. This is from Venturebeat:

when you’re using the Google Assistant, the interaction is nearly always with Google — when you tell it to buy movie tickets, for example, you’re not talking to a Fandango bot. In fact, there are no other bots to speak of here …. With Facebook Messenger and Microsoft’s Skype, people will be able to interact with a whole lot of bots. There are already Messenger bots for 1-800-Flowers and online retail Spring, and there are Skype bots for Westin Hotels & Resorts and Domino’s Pizza.

Related to this I’ve noticed that Google is serving more and more solutions within its search results page. I was able to book a flight to Nice straight from a Chrome search on my Nexus5X last week. Previously Google courted an open ecosystem of companies and ranked the best ones highest. Now they rank themselves.

I guess it’s good to see that everyone is flexible…

Google is pushing towards a post app world

By | Google | One Comment

Apps take us away from the web and away from search, and as such are a big problem for Google. Worse still, Apple customers are searching direct from the OS using Spotlight, threatening Google’s monopoly on search.

No surprise then that Google announced to services at I/O that usher in a post-app world.

The first was Android Instant Apps which allows you to use native apps almost instantaneously by clicking on a link from the browser. Apps are modularised into small components that can download and launch as fast as a web page and save the user the hassle of remembering whether they have an app installed or not, installing, and then maybe deleting. Despite being a superficially native experience Instant Apps are all about bringing users back to the browser, where Google makes its money.

It may just be that native apps were a point in time solution that will peak in the second half of this decade. To believe that you have to believe that as mobile networks get faster a non-downloaded modular app approach could offer a better user experience. That’s the way we increasingly work on the desktop where our networks are more stable, so it’s not impossible.

The second announcement was Google Home, their equivalent of the Amazon Echo, which takes us to a world where we interact with our services independent of device using voice, i.e. we just speak our wishes and they are picked up and acted upon. Most all the details about how that will work remain unclear, but given that it’s device independent native apps can only be less important.

What does all this mean for startups? I think three things:

  1. The distinction between the web and native apps will start to blur which will make building an app less of a big thing. That will be great for many startups thinking about mobile who currently face an ‘invest big or do nothing’ decision re mobile. Instant Apps will give them a way to experiment more cheaply.
  2. Multi-device voice operated services will require new user flows to work well and the startups who figure that out first will be able to get big quickly. One requirement will be little cues that give users feedback on how well the Google Home/Amazon Echo is understanding their requests or getting on with processing a task.
  3. Once these voice operated platforms are up and running with lots of services new startups will find it hard to get discovered. Nobody is going to listen to long lists of options so new companies will either have to be promoted by partners or sign up customers on a phone or computer first – both tough options.

Extreme poverty a thing of the past for most people

By | Startup general interest | No Comments

Yesterday I wrote about the benefits of being optimistic. That’s often hard in today’s world where the media bias to reporting bad news gives us the impression that the world is going to pot. ISIS, Middle East collapse, wealth inequality, and the refugee crisis have loomed large in recent years.

However, bad as those things are, and much as I wish they would improve, the overall headline is that the world is improving fast for most people. That’s a long term trend and we can be optimistic it will continue.

One of the main axis of improvement is the rapid decline in the percentage of people living in extreme poverty which has dropped from 44% to 13% over thirty one years from 1981 to 2012. Bravo.

 

Fundraising tips for companies that have to work it

By | Venture Capital | 3 Comments

Some companies find fundraising easy. That’s usually because of work they’ve done at some point in the past (truly amazing growth, serial entrepreneur, some other magic) but when it comes to the actual fundraising process they’re courted by multiple investors and raising cash is quick and easy.

We have a few of those companies in our portfolio (and hope to have a lot more), but we also have companies that have to work much harder. Many of them still succeed in raising great rounds (we’ve got two like this closing imminently), but they find fundraising time consuming and laborious. One of our founders recently said that he wished we had prepared him better. This post is the result of the thought process that followed.

A couple of weeks ago I published our dealflow stats for the first four weeks of the year. The headline conclusion was that we had 24 first meetings for every deal that we did and I drew from that to advise CEOs to plan on having a similar number of meetings if they want to have a good chance of closing a round. For us the 47 first meetings led to 8 second meetings and two investments.

There was a bit of pushback from some quarters asking how typical these numbers are, but I’ve been doing some more asking around since, and for companies that have to work hard at their fundraising process it’s prudent to expect similar ratios.

If your startup is likely to have to ‘work it’ I’ve come to the conclusion that the best practice fundraising preparation has the following steps:

  1. Decide on your target investor group
  2. Build a list of names
  3. Start building relationships and qualifying for interest
  4. Ask for a first meeting

If you are raising money from VCs and don’t have prior relationships then I would target having a long enough list of names at step 2 that you will get 20-30 “yes’s” when you ask for a meeting in step 4. If you are targeting VCs and angels then you should make sure you have enough angels in the pipeline to close the round if none of the VCs come through.

All of this is a lot of work and in an ideal world would start well before the 3-6 months you should allow to close the round once the fundraising starts in earnest. If you have existing relationships which allow you to straight in at step 4 (or even further through the process) then you can proportionally skip the earlier steps. E.g. if you have two relationships which you know will get you a first meeting and two strong relationships where it is more like coming straight in at a second meeting (e.g. the investors have previously expressed strong interest in investing) then you can work it back and see how many new relationships you need. If the stronger relationships are each equivalent to five first meetings (we see that approx 20% of first meets convert to second meetings) and you get enough new names in the pipeline to get 13 first meetings then you will be in good shape with the equivalent of 25 first meetings in total (13 new, two existing first meeting relationships and two existing second meeting relationships that between them are equivalent to ten first meeting relationships).

If you follow this process you will be sending lots of emails over a few months and will have to be on top of remembering what you’ve said to who and following up efficiently. If you are diligent you can manage the process in a spreadsheet (which is what most entrepreneurs do), but a CRM system can be a big help, particularly if you use one on the sales side of your business and don’t have to pay for an extra license to use it for fundraising. We use Prosperworks. If you don’t get organised with a system you will drop balls and make an already difficult process more challenging.

You might be wondering how many names you need on your list at step 2 to get to 20-30 meetings at step 4. Unfortunately there’s too much variation between companies for me to give you a helpful answer. It depends on how hot your startup/sector is, how much progress you’ve made, how well you tell your story, and the investing climate more generally. You should just start gathering names and testing their interest in your company.

Not many CEOs follow a process as disciplined as this. As noted, it takes a lot of time and before fundraising gets pressing most founders have other priorities. If you do prepare thoroughly then you have minimised the role of luck, and the less well prepared you are the greater your chances of delay and/or failure.

There are of course a host of other things that impact the success of fundraising processes, most importantly the strength of the underlying business, but also including short term momentum, the quality of the deck and the quality of the pitch. These all need to be worked on in parallel with the process above, but my point here is to highlight the volume of networking and connection making necessary to go from a cold start to a well prepared fundraising process. Then with a bit of luck the well prepared fundraising process is as quick as the easy fundraising processes enjoyed by startups lucky enough to have found that bit of magic.

 

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