It’s pretty well recognised now that a strong company culture helps bring success to a business, but what’s new is that a company’s culture is starting to matter to consumers. Moreover, whilst shareholders may judge a company’s culture on how much it contributes to good execution, customers judge it on ethical grounds.
Hence, for the second year running Amazon Anonymous are running a boycott Amazon campaign this Christmas which they claim has so far diverted £1.3m of spend (many of my north London neighbours will be pleased…) and a range of people are urging us to boycott Uber. I think we will see more and more of this sort of thing. People are increasingly concerned that the companies they shop with match their values. This plays out positively for companies with a strong ethical profile and negatively for those with unpopular practices.
Interestingly, some of the elements of company culture which have historically been great for shareholder value are the ones that are now undermining brands. Taking the examples above, Amazon’s famously frugal culture has landed them in trouble for low wages and Uber’s all out aggression has led them to many actions that most people view as unacceptable, most recently threatening journalists with smear campaigns.
I think we are heading towards a better world where unsavoury behaviour is tolerated less, but it is also a more complicated world for managers.
Sherry Coutu’s much anticipated Scale Up Report has now been released with the clear argument that job creation comes from fast growing companies, or ‘scale-ups’ rather than all startups, and hence that’s where we should focus our policies. The report goes on to make a set of practical recommendations for government to help the UK’s scale-ups and hence improve job creation and GVA. The Scale Up Report’s recommendations are designed to produce better data so scale-ups and the effectiveness of scale-up policies can be tracked, to reallocate resources from start-ups generally to scale-ups specifically, and to make individuals, including a Minister, responsible for increasing the number of scale-ups we have in the UK.
I’m interested in the impact that a venture capital fund like Forward Partners can have on job creation and GVA. On page 106 of the report there’s a table showing the number of scale-ups by region. This year there are 8,923 scale-ups in the UK, with 2,264 of those based in London. Thames Valley Berkshire is the next biggest region with 562 scale-ups. (Scale-ups are defined as companies with 20% growth p.a. in turnover or employees for three years and with more than 10 employees at the start of the period.
Like many venture funds Forward Partners has a target portfolio of around 30 companies which we will invest in over a three year period. If all of our partner companies were to become scale-ups that would be 0.3% of the UK total and 1.3% of the London total. Research cited in the report predicts that scale-ups will create 238,000 new jobs over three years and contribute £38bn to GVA. If we have invested in 0.3% of the scale-ups then we will have had a hand in the creation of 714 jobs and £114m of GVA (which curiously enough isn’t far away from the amount we project our share of our partner companies will be worth).
That’s a nice target to aim at and a result that would make us proud.
Snapchat just launched their Snapcash service in the US which you to send money to friends by sending them a message (details here in Techcrunch). Many entrepreneurs have gone after the P2P payments market, but no-one has so far succeeded. I think Snapcash might be different for the following reasons:
- It piggy-backs on a large existing network
- It is simple to use – just start a message with a dollar sign
- It’s free
The service is based on Square and requires the sender and receiver to enter their debit card info, which makes it a small step from here to being able to pay retailers as well as consumers. As well as increasing engagement with their users the benefit it Snapchat is that it will have real names for participating users, useful for ad targeting.
I wonder if Facebook will do something similar to Snapcash with Whatsapp.
The ever excellent CBInsights just released new data on the time between rounds. As you can see from the chart above year to date in 2014 the median time between seed and Series A has been 349 days and that’s been reasonably consistent over the last couple of years. If the median time is just under a year then in the spirit of planning for the worst and hoping for the best this data suggests that reckoning on making your seed round last 12-18 months is the way to go.
Thinking about our portfolio and other companies I have seen recently in the UK I would estimate that over here the median time from Seed to Series A is slightly longer than this, maybe just over a year. That would make sense given that the volume of capital in the market is lower and the competition between investors is less intense. (The good news is that the a number of new funds have come to market recently, including Google Ventures and Mosaic Ventures.)
For UK companies then, I would advise reckoning on 12 months as a minimum. Some companies do better than that, but that takes luck and it isn’t wise to plan on being lucky.
All that said, within reason more runway is better and if you can get extra cash at an acceptable dilution it’s usually worth doing. Important caveat: if you do raise a large seed round don’t ramp the burn too much before you’ve found a repeatable business model.
On a side note, in a bubble times between rounds usually drops, but we’re not seeing that in the chart above, or in times between later rounds.
I’m at the excellent Hacking Happiness conference in London today and there it’s clearer to me now than ever that we are at the start of a trend towards an increased focus on happiness. So far that has mostly manifested itself in purpose driven companies that are fulfilling places to work. I think that’s amazing, and that we will see more of it, but I wonder if we will also start to see an explicit focus on happiness – for individuals, but especially at companies, and maybe even for whole countries (here’s a good Ted talk on that subject).
To that end we have just started measuring happiness at Forward Partners using a tool called Moodmap.
If you read around different writers say that different things make people happy, but the things that come up most are:
- strong relationships – friends and family
- meaningful work
- positive thinking
- being thankful
I will be thinking and writing more about this topic. There may even be some investment opportunities.
Reading this tweet from Paul Graham I immediately thought that this is great advice for multiple situations, not just YC interviews. Job interviews are one such other situation. Negotiations are another – knowing you will succeed whatever the outcome gives you the power to walk away.
Knowing you will succeed takes a special kind of confidence. That starts with self belief, which an entrepreneur needs in spades. I wrote a while back about the cognitive biases that an entrepreneur need, and personal exceptionalism is top of the list, you should believe that you are the top of your cohort and that your work is snowflake special. You know you will succeed because you know you are good enough to find a way. I’m not sure if you can cultivate this kind of confidence.
But self-confidence isn’t enough on its own. You also need a good plan. It might not be possible to do anything about your levels of self confidence, but you can make sure you have a good plan. The first thing you need is a good idea. That isn’t the same as the best idea you’ve had so far. It should be something that you have a great feeling about. Then you need to test it thoroughly. Look at it from every angle. One way we help entrepreneurs do that is to list out all the assumptions that are made and then examine each for reasonableness. Another good way is to talk to as many people as possible and listen carefully to any criticisms they have. Listen, process, and then figure out whether they are right. Don’t fall into the habit of dismissing a commonly heard objection. If you hear it a lot, think about it a lot.
By way of an example, here at Forward Partners the most common criticism of our business is that our returns won’t be good (enough) because we spend much more money than conventional VCs supporting our partner companies. The argument runs that we would be better off using that money to invest in a larger number of companies. Our belief is that the tools and services we offer make it a little easier for companies to achieve success which brings two important advantages. Firstly it gives us an edge in winning deals and secondly that our partner companies will do better as a result. We take the critique seriously and have modelled out how much that edge in winning deals needs to be worth and how much more success our companies need to achieve. The assumptions look reasonable and we continue to test them against reality as we do more deals and gather more data points.
Combining a good plan which has been thoroughly stress tested with a high level of self confidence puts you in a good place, but there’s one final ingredient you need before you know you will succeed, and that’s a back up plan. If you are founding a company there will be huge unknowns and associated risks. If you’ve done your planning well you will have confidence that they are all manageable, but you need to know that you will prevail even if you get unlucky. In our case we ran the analysis to see what happens if the extra money we spend supporting our partner companies makes no difference, and the conclusion is that the returns to investors will still be ok. Not where we hope to end up, but still ok.
I love this tweet! It sums up the opportunity for new product and service development beautifully. Here at Forward Partners we often talk about backing companies building amazing products and brands that people will love, and when we’re talking with companies we always ask how they know customers will think their products are amazing. Good answers show an understanding of how people will use their products and how they think about the alternatives. In particular they show an understanding of the emotions surrounding their product category. A product is amazing when it evokes emotion.
The example above says that it’s better to ‘design a better way for people to enjoy flowers in the home’ than to ‘design a new vase’. Firstly I like the tightness of the definition – it’s not just a vase, it’s a vase for flowers, in the home. It’s better to start with an amazing product in a smaller market and then grow the market than start with an average product for a huge market and try to improve the product. Secondly, the purpose is clear – it’s to increase enjoyment. When you frame the problem in this way the importance of understanding how people currently enjoy flowers in the home become clear. If the challenge is described as ‘design a new vase’ then it’s too easy to focus on aesthetics and ignore the use cases. Too many product designers make this mistake, which is why our homes are filled with products we don’t use. It doesn’t have to be that way.
Singles Day has just started in China. It’s a day where single people celebrate, and was selected because of the number of ‘1s’ in the date – it’s 11/11. It’s also the largest online shopping day in China and the news this morning is that Alibaba racked up $1bn of sales in the first 17mins 58s, and $2bn in the first hour.
In comparison, sales for the whole of Cyber Monday in the US last year were $2.3bn.
Back to Alibaba – $1bn of sales in 18mins is just phenomenal. Very few companies ever get to do that in a year. For further comparison, Amazon did $20bn in the three months to September 3o.
And, investors love Alibaba. The company went public in September in the largest ever tech company IPO and the share price has risen 28% since then giving the company a market cap of $296bn. That compares with Amazon’s market cap of $141bn and Google’s of $375bn. The business was founded in 1999.
At heart this is mostly a story about the size of China, but it also talks to the power of the internet as a platform for building large scale enterprises.
There’s a new report out on the impact of high growth small businesses on the UK economy. Last week I wrote about some new research showing that nearly all job creation in the US comes from young companies and concluded by saying it would be great to see some similar research in the UK. And now we have some already. With this publication and the upcoming Scale Up report I hope it will be very clear that high growth startups are the engine of growth for employment and the UK economy more generally.
That’s important for two reasons. Firstly we should all feel good about the work we are doing within the startup ecosystem – the work we do is the difference between growth and stagnation, and secondly it will encourage government to continue and extend their support for our work, particularly with policies to improve access to finance and the depth of the talent pool. The Startup Manifesto is a good read if you want to bone up on what government should do for startups here in the UK.
The research was conducted by Centre for Economics and Business Research and commissioned by Octopus Investments (thank you) and took the form of a survey of 400 high growth small businesses (defined as companies with £1-20m turnover and 20% growth per year over three years). There are 30,000 businesses like this in total in the UK. The key findings are that high growth small businesses:
- generated 256,000 new jobs 2012-13, which was 68% of the total. That’s huge, particularly given that theses companies only accounted for 3.4% of the economy, and
- accounted for 36% of the increase in GVA in 2013. GVA, or Gross Value Add, is a measure of economic output similar to GDP.
As with the American study, note that the growth comes from small high growth companies, not all small companies.
What would be interesting to see now is a breakdown of which companies within the 30,000 high growth small businesses in the UK are responsible for most of the employment growth. Just as we have learned that if growth is our objective we should focus our support on the portion of small businesses which are growing fast, it may be that we can make a further refinement to a particular industry or sector.
When the train of history hits a curve, the intellectuals fall off
Vinod Khosla wrote an article yesterday about the coming impact of artificial intelligence. In the final paragraph he uses the above quote from Karl Marx (one of my favourite philosophers) to make the point that history might not be a good guide for what’s going to happen next.
Let me explain.
Automation from artificial intelligence and robotics puts up to 40% of developed world jobs at risk over the next couple of decades. When large numbers of jobs have been wiped out in the past new jobs have been created to take their place. The transition might have been painful, but it happened without too much disruption.
This time round it might be different. History might not be a good guide because for the first time the old jobs might disappear much more quickly than new jobs can be created. Or, and this is worse, for the first time robots and computers might become better than people at whole classes of jobs and the jobs may never come back. That’s the scenario that Khosla raises.
Another thing that’s new is that we live in a global economy. Capital and people are mobile now, particularly wealthy people. As a result, national taxation systems are no longer effectively able to redistribute wealth.
Unless we do something I think we are looking at a future of high unemployment and increasing wealth inequality. At the very least that’s a plausible scenario, and it will be dangerously unstable.
As Khosla says, we may well need a new type of capitalism.