Friday, 11 April 2014

Thoughts for startups (no. 5)

There's a fairy tale, made famous by being included in a Brothers Grimm collection, called The Brave Little Tailor. A very, very short version goes like this:

There was a little tailor and the flies are bothering him. He strikes out and kills 7 with one blow. Impressed with himself he makes a belt inscribed with this achievement

"killed 7 with one blow"

He encounters a giant who, assuming the claim on the belt means men, challenges him to a competition of strength. The giant squeezes a drop or two of water from a stone; the tailor squeezes a rock (a cheese) and gets more drops of whey; the giant throws a rock a long distance, the tailor throws a rock (a bird) which disappears into the distance, etc..

Various other things happen and eventually he beats some giants who are terrorising a kingdom and gets half the kingdom in return.

The appearance of a great achievement becomes a great achievement, once the tailor is given a chance. But right at the beginning it all depends on him presenting his achievements to date in the best possible light. Let's call this his traction...

Saturday, 28 December 2013

Awesome is as awesome does

There's a thing going around that the number of companies that receive investment doesn't alter the number that go on to be "awesome companies". To quote:

“The tech industry creates roughly 10 awesome companies per year... independent many companies are funded"
 Mike Maples, Floodgate Fund

Putting aside that this is a very Silicon Valley-centric viewpoint, it seems there's some confusion between the term "awesome companies" and "companies that create awesome returns within the VC fund lifecycle". They are not the same. A truly awesome company is an IBM, a Unilever, a Honda, a Beretta; companies that stand the test of time, continue to evolve and grow by adapting their products to meet changing times and changing customer demands.

The global tech industry almost certainly can and does produce more than 10 awesome companies a year. Some of those will not be VC funded (which means you're unlikely to hear of them because they won't be riding the hype wagon), some will be funded by funds that are not playing the short term (10 years is short term, it's barely one economic cycle; Beretta was founded in 1526), and some will take no more than a solid seed investment round or two to become serious businesses.

Clearly we are limiting the definition of awesome here to that of great monetary value, which leaves aside awesome tech companies like Mozilla and Wikimedia, but even so it is not important  for "awesomeness" to have become a billion dollar business in less than 10 years; this only matters to people who have invested at valuations upward of $50m and whose investment fund is time limited.

A seed round that values a company at a few million needs only to reach a valuation of $50m in a reasonable time (a) to have made a serious, awesome, return for its investors and (b) where that company has achieved growth while being profitable (rather than following growth strategies of the "seek users at all costs" variety), then the investors could be taking annual dividends equivalent to their original investment value.

Which is, surely, truly awesome.

A version of this post originally appeared as an answer on Quora

Saturday, 23 November 2013

Thoughts for startups (no. 4)

Maybe this is more one for the investment community than startups as such, but here goes.

The problem with elections as a way of choosing who should lead is that eventually those who get elected will be skilled in the art of getting elected and little else

That is loosely what Plato argues in The Republic - that those skilled in the art of persuasion are best at persuading others to vote for them, and hence that becomes the key skill for those who want to be elected. The skills that would make someone valuable as a political leader post election are irrelevant, because that is not how they are selected.

There is the same risk with this focus on selecting which startups to learn more about based on a 3 minute (or shorter!) pitch. It is hard to say anything really informative in 3 minutes, and hard to select what of all the things you could say about your disruptive startup[1] you will include. The best pitches will be delivered by those who have become good at pitching, good at choosing which things to say and good at saying them in a way that gets people's attention. The startups that deliver the best pitches become the startups the investors talk to.

But being good at pitching is not the same as having a good idea, being good at solutions, being good at people and project management, being good at building a business; so the selection criteria is wrong. Using this as a filter means investors can't expect to get to talk to the great startups, the next Google; they should expect to get "like Facebook, but for people who drive red cars" and other non-disruptors, with a team that don't have the right skills mix to deliver a high performance company, but can pitch better than a professional standup comic delivers one-liners. And then don't complain that the "quality of startups" that are coming through the filter is poor; fix your filtering process.

I don't know what a good filter looks like. The accelerators could be, but they too are limiting their entry based on pitches, as well as other very limiting criteria (age range and geographic location, for example, for any of the residential ones). But for sure 3 minute pitches are only a convenient, time efficient filter; they are not a good filter.

[1] Obviously it's far easier to choose what to say if you have a non-disruptive startup, but those are not the ones that make the big returns, are they?

Tuesday, 29 October 2013

Thoughts for startups (no. 3)

I have observed, throughout life, that a man may do an immense deal of good, if he does not care who gets the credit for it.
Father Strickland, an English Jesuit around 1863 

Another one of those sayings that's appeared in numerous forms, but Strickland appears to be the originator. When applied to startups, businesses or organisations in general, it's most useful thought of in relation to "if not me, who", "just do it" and "do as you would be done by". 

Don't spend time thinking about how to get credit for doing whatever is it that needs doing, nor resenting a lack of credit after the fact. There's other things to worry about, hopefully others are worrying about and resolving them while you're fixing this one.

All that matters is it needs to be done, so get it done.

Monday, 30 September 2013

When is a startup not a startup?

Startup news: Zoopla wins "Most promising European tech startup of 2013".

A startup? Zoopla? It's been launched for nearly 6 years. Turns over something north of £30m, spent millions on acquisitions, been through a merger, employs 100s of people, and has £10m cash in the bank.

A "start" up? It's a bit like "New town" Linford, which is now the best part of a 1000 years old. Surely there's a point at which a startup stops starting up and becomes a company, some combination of factors, a line in the sand, that means you've passed the startup phase.

A length of time in the market place; should that not be relevant to the definition of a startup? Or is it only after a long time (by company standards), e.g. 10+ years? Google is 15, Facebook is only 8. Can't call them startups, surely?

Does how big your company has become not have a bearing on your status as a startup? Revenue, numbers of employees, something? The UK average company turnover isn't much over £500k. Ignoring one person companies, the average company employs 15 people. So exceeding the average by more than an order of magnitude doesn't disqualify you from being a startup?

Nothing about the stages you've been through? Acquiring other companies, going through a merger - these seem like the actions of an established company, not a startup. But maybe that's not included in the measure either.

Ahh, wait. Is the only thing that disqualifies a company from being a startup an exit event? So the company has to be acquired or go through an IPO. Which would suggest that the concept of a startup is being defined by the interests of the investment community rather than, say, anyone else.

Given the passion that drives people that start up a business, that's a bit sad, isn't it?

Sunday, 8 September 2013

The beginning of the end of free

Or rather the end of you, the user, as the main product of Internet companies. So I'm not talking about the end of the various freemium business models, where you can get some limited version of a product for free and pay for upgraded functionality, but the end of free to use products where revenue is generated from selling advertising streams targeted at the users of those products.

This business model has been the go to approach for many Internet startups and basically goes like this:

"we'll do this cool thing, preferably that encourages people who see/use it to share it with others"

"have to figure out how to keep a low cost of operation because we won't charge people to use it"

"we'll keep doing this thing, adding some new features once in a while to keep people interested, preferably new features that encourage people to share the thing with others"

"and like when we've got x number of users, we'll start selling ads, and the companies buying advertising will love us because we'll have so much data we'll be able to target people really effectively"

The problem has always been that this model doesn't scale, that it's just not sustainable as the go to business model, however much its dominance in the space makes it seem otherwise.

There's a number of reasons why I say free to use doesn't scale, and one of those is literally scale. The first to market with this business model could sell advertising based on smaller numbers. When they said "1 million users" 10+ years ago, it sounded a lot. But now 1 million users, unless it's a really great demographic (either high spending or very niche), is hardly worth mentioning. Facebook have topped 1 billion.

But 1 million active users costs a lot of money to service - so to reach a user count that sounds attractive enough to get big ticket ad buys requires significant ongoing expenditure and therefore ever bigger rounds of investment. And all the time you have to acquire ever more users to even sound like you'll make the investors a decent return - let alone actually make them that return.

Another challenge is the increased number of "need to be viral" players - it just makes for a lot of noise in people's inboxes and social feeds, generating social virii antibodies in the general population, weakening the viral potential. To overcome this requires marketing expenditure (traditionally a no go area for tech startups) and therefore increased cost to achieve a growth rate that is still slower than that of the pioneers.

Increasing concerns over online privacy are also curtailing some of the potential for online marketing, reducing its attraction for those controlling ad buys.

But an even more pressing reason is that people are starting to expect a lot from these services that they pay nothing for, and in particular right now expecting considerable ongoing expenditure to ensure users, particularly younger users, do not experience abuse or other unpleasantness via those services. Now, for the established players such expenditure is relatively easy to fold into the bottom line. But for those still trying to enter the market and reach that scale where ad payback is greater than expenditure it just raises the bar yet further.

Is the cost bar now too high for new startups who want to adopt free-to-use as their business model? Probably not. But it's definitely getting there.

Monday, 5 August 2013

Thoughts for startups (no. 2)

Though this is really a follow-on from no.1 (isn't that always the way with thoughts?) we'll let it standalone.

"it ain't what you don't know that gets you into trouble, it's what you know for sure that just ain't so"


"I once was lost but now am found,
Was blind, but now I see."

The latter is from the lyrics of Amazing Grace, written by the reformed slave ship captain turned abolitionist John Newton and published in 1779.

The former is peculiarly self referential, as most state it is a quotation of Samuel Clemens (possibly writing as Mark Twain). But research has failed to find any such line in his writings nor any contemporaries attributing the quote to him. Now that's irony, Alanis...

But regardless of origin, the point made stands. If you make strategic decisions based on your belief that something is so when it isn't, you'll make bad to disastrous decisions - but if you make decisions that accept uncertainty, bad decisions will be less likely.

But John Newton's lyric brings other concerns. The implication is that previously there was held a misplaced certainty; this error has been uncovered and the truth is now known. But what if the truth now known is not entirely the truth, the whole truth and nothing but the truth? What if, though different to the previous truth, it is equally incorrect?

Operating on the basis of uncertainty is a more sensible approach to strategy. It doesn't preclude the use of research, just an acceptance that research at best determines what has been, and never what will be and that truth is so very often relative. The future is certainly uncertain, and if you take that into account when making planning around your startup you'll tend to have better outcomes.