Nic Brisbourne's view from London on technology and startups

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.

 

Optimism – another cognitive bias you want to have

By | Startup general interest | No Comments

Cognitive biases are unconscious forces that affect our decision making, most of them negatively. Confirmation bias – the tendency to seek out information which confirms what we already believe is one of the most insidious, and sunk cost bias – the tendency to overvalue things in which we’ve invested is another common failing.

However, there are a few cognitive biases that correlate with success. Back in 2013 I wrote about four of them, of which personal exceptionalism, the macro-sense that you are at the top of your cohort is perhaps the most important.

And then today my friend and colleague Richard Hughes-Jones tweeted about another: optimism.

Optimists are normally cheerful and happy, and therefore popular, they are resilient in adapting to failures and hardships, their chances of clinical depression are reduced, their immune system is stronger, they take better care of their health, they feel healthier than others and are in fact likely to live longer.

From Kahneman.

So if we want to be successful we should cultivate a sense of optimism, and of personal exceptionalism. That said, we mustn’t go too far and end up naive or arrogant. The key with positive cognitive biases is to be aware of the bias and keep it in check, but without thinking about it enough to undermine its power.

Evaluating the prospects for life changing inventions

By | Startup general interest, Uncategorized | One Comment

This morning Chris Dixon posted The typical path of life changing inventions:

  1. I’ve never heard of it.
  2. I’ve heard of it but don’t understand it.
  3. I understand it, but I don’t see how it’s useful.
  4. I see how it could be fun for rich people, but not me.
  5. I use it, but it’s just a toy.
  6. It’s becoming more useful for me.
  7. I use it all the time.
  8. I could not imagine life without it.
  9. Seriously, people lived without it?
  10. It’s too powerful and needs to be regulated

That’s pretty accurate, but with the exception of 10. maybe not that surprising. It reminds me of the Mahatma Ghandi quote “first they ignore you, then they ridicule you, then they fight you, and then you win”, but extended and ported to a different context.

However, most would be life-changing inventions don’t make it all the way to number 10 and the interesting thing for future gazers, including VCs, is assessing how far a product will get. That requires an understanding of customers, use cases, ecosystems, cost trajectories and distribution, and it’s definitely not sufficient to think that if a product is at one stage it will progress to the next. For example, most products that people know about but don’t understand it (i.e. at stage 2) whither and die, and to know that any given product is different requires a hypothesis about how people will come to understand it and see how it’s useful.

Key elements of a brand

By | Startup general interest, Uncategorized, Venture Capital | No Comments

Brand is on my mind this morning. Mat Braddy, formerly CMO of Just Eat and now founder of Rock Pamper Scissors gave a great talk on building challenger brands at our FP Live last night and this morning I read OpenView’s brilliant teardown of how they re-invented their brand.

OpenView are one of my favourite venture capital funds, largely because they are one a small number of VCs globally pioneering a similar model to Forward Partners. Like us they have a bigger team than most other VCs so they can offer a better service to their portfolio companies, and, critically, they have chosen to be very focused so they can build expertise and offer better support. They are focused on expansion stage SaaS companies in the US. We are focused on idea and seed stage ecommerce and marketplace companies in the UK.

I don’t only like them because they think similarly to us, I also love their insight, rigour and clarity of thought, which shines through in the way they went about rebuilding their brand and the way they tell the story.

For me, these are the key insights from last night’s talk and the OpenView process.

  • Strong brands are built from the inside out – they begin with great products and cultures
  • Brands can’t be externally crafted and then applied, they must be truly aligned with what the company does and how it does it
  • The goal of a brand is to articulate the company story in a clear, focused and consistent way
  • A brand is both what the company stands for (mission, vision, values) and how the company is presented (messaging and visual identity)
  • The brand should be informed by both inside and outside perspectives – employees, customers and partners (not just the exec team)
  • The brand can lead and shape how people think about the company, but it needs to be congruent with existing perceptions
  • The best companies present consistent, but different brands to customers/partners, employees, and maybe investors
  • Above all, authenticity is the goal

Just Eat is a great case study for all this. In his talk last night Mat described how they made sure their brand was aligned to the core values of the product (convenience, simplicity), the culture of the company (fun and mischievous), and how they developed it with an inclusive process. Because they were a challenger they wanted to be controversial and that took them to the tagline “Don’t cook, Just Eat”, with the positioning that take-away is better than cooking. His advice to other challengers is to adopt something similarly controversial and then really commit. Just Eat pushed their commitment to the tagline and mischievous positioning as far as forming the Don’t Cook political party and putting forward a candidate in the Corby by-election (check out the jet-pack…).

OpenView followed a similar process but they’re a VC in the serious business of helping companies succeed, so they took a more serious tone. Their tagline is now “Powering Expansion”, which neatly captures what they do for the Series A and B companies they back.

What is vertically integrated ecommerce and when is it appropriate?

By | Ecommerce | No Comments

Andy Dunn, the founder of Bonobos and one of the most thoughtful writers I know on ecommerce, penned a good piece yesterday entitled Digitally Native Vertical Brands. He was talking about what most of us describe as vertically integrated ecommerce, and gave the following definition:

  1. The primary means of interacting, transacting, and story-telling to consumers is via the web.
  2. It’s a brand, and that brand is vertical. The name of the brand is on both the physical product and on the website.
  3. The DNVB [vertically integrated ecommerce company] is usually maniacally focused on customer experience and on customer intimacy. The experience tends to be three-part bundle of physical product, web/mobile experience, and customer service that collectively become the brand in the consumer’s imagination.

He had a fourth point which added that there’s usually an offline extension to the brand. I agree that’s usually true, but isn’t a necessary condition.

He went on to say that vertically integrated ecommerce makes sense:

where there is some differentiation in the core physical product made possible by the DNVB nature of the model (and this is the key thing entrepreneurs get wrong in starting DNVBs the world doesn’t need)

For me this is key. If the product is the same as available via other channels then the only basis for differentiation is distribution and that’s unlikely to be enough for a startup to achieve success. Personalisation is a common way for vertically integrated ecommerce companies to differentiate their physical product (e.g. our partner company Lost My Name) and carrying a wider range of SKUs than will work in physical retail is another (e.g. our partner company Spoke).

The alternative model of multi-brand ecommerce makes sense when products are commoditised (e.g. Amazon) or when selection and choice are problematic (e.g. our partner companies Thread and Live Better With).

Andy says we are “in the first decade of a multi-century trend” towards vertically integrated ecommerce. I think we he’s right in that we will see more and more of it as new technologies open up new possibilities for customisation. Lost My Name, for example, because possible in 2013 after HP released a printer that could cheaply print high quality bound books with a production run of one. However, there’s an implication in Andy’s post that multi-brand ecommerce is on the way out. I’m not sure that’s true. Over the last three years Forward Partners has invested in both types of ecommerce business and I don’t expect that to change in the next three years.

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