The coffee shops of Mayfair

On Behvaioural Economics, Creative Disruption, start-ups and VCs (phew!)

Thanks for all your comments on my recent post on Techcrunch.  Great to be part of this conversation.

Have had a few questions on the references I made. 

The first is Predictably Irrational from Dan Ariely. 

Recommended to me by DVC.

The Second is Technological Revolutions by Carlotta Perez recommended to me by my friend and fellow investor Nic Brisbourne.

And of Course the wonderful Mr Spolsky (though we differ when it comes to his views on venture captial) laughs in the video at Clotaire Rapaille. His  book I am reliably informed, is worth reading the introduction. And maybe a few of the highlighted passages.  I have not read it myself.

There's also a lot of facinating conversation right now about innovation and how we all as entrepreneurs, VCs and managers should be pushing forward.  Jason at 37 Signals makes a strong point for turning young innvoative comapnies into world beaters.  I suspect he's wrong about the VCs forcing an early sale (our economics focus us on building big businesses), but directionally he's right. Original post is here.

Someone worth reading on this is Umair Haque and his current riff on "awesomeness". Verbose, thoughtful, insightful and usually right. Haque is someone who has read a lot of Joseph Schumpeter, who in turn influences Perez, which sort of brings us full circle.

But maybe not full-full-circle.  Maybe Mr Schumpter was not the origionator at all. Jason quotes Thomas Jefferson as an early advoate of Creative Disruption!

“Periodic revolution, ‘at least once every 20 years,’ was ‘a medicine necessary for the sound health of government.’”

Advertisers still value old-fashioned reach more than targeted advertising

The idea
"Advertisers used to want reach but now it’s targeting".  The story goes something like this:
In the world of television dominated inventory, advertisers paid highest prices for ad space that brought reach. This is changing. Now with the advent of the web, the story goes, they now place top value on specific audiences based on demographics, profile, timing, engagement etc.

This is rubbish.

Whilst targeting is a nice idea, our research shows it is NOT VALUED today by advertisers. It might one day but it will take a long time. 

Evidence

You want proof?  The best example we had from research was the interview with the agency who tells its publishers to stop talking about their niches because they are still too small to make much economic sense. I quote;
“Publishers shouldn’t worry about targeting right now.  I mean, if you offer advertisers too much targeting that you’ll do all that work just to generate 30 impressions. You’d get far more cash by just offering them the cash”

There is, of course, a terrific irony here that it is the agencies who try to differentiate themselves on their sophisticated ad servers for segmenting and tracking audiences.

What does this mean for entrepreneurs & management teams?

If you are running a niche site, and you believe that one day an advertiser brand will pay more for 11 targeted eyeballs than 1000 un-targeted ones then you need to work out when. 

If you are offering sophisticated targeting tools, you’re in a great position, just calling the timing for mass adoption is tough.

Meanwhile there are a few opportunities for entrepreneurs:

1) Aggregation networks.  There are opportunities today for entrepreneurs rolling up a series of niche publishers.  A critical mass of either owned or syndicated web properties means you can offer advertisers both reach and targeting.  This is the business model of Glam.com, FM publishing; two great businesses.

2) Alternatively an entrepreneur might believe that the value lies with the guys selling the picks and shovels, allowing other people to create aggregation networks.  This is people like Adify.

3)  Common cookie space advertising is another way of solving the problem of low value ascribed to niches.  This is essentially where an advertiser will build a criteria of people that they want to target.  They then create an openID of the characteristics that they want to target and if a publisher can exactly match this request with their audience database they can get a match.
This is still a nacent part of the market but one that really excites me.  Like a dunnhumby for multiple retailers. 

If you have or know any other businesses operating in this sector I’d love to find out more.

Entrepreneurs against the abolition of taper relief

I don't want to use this blog for politics (believe me, if you get me started, I'm not likely to stop).

However.

If you want to see the entrepreneurial climate in the UK continue to thrive, please sign up to this this Facebook group.

What's it all about?

In the recent pre-budget report, the labour government has decided to scrap business-asset taper relief. This is bonkers. Why?

If you are an entrepreneur and you sell your company you currently pay 10% on the capital gain.  The new rules will see this roughly double.

Various British governments from both parties have tried a series of initiatives to encourage entrepreneurialism, recognizing that it is a core driver of growth. Some have been failures (Uni Challenge funds, VCTs) but others have been successful, namely the taper relief (tax benefits for entrepreneurs), EIS scheme (tax benefits for angels) and EMI scheme (tax benefits for employees).

What are they thinking?  That they need do no more for British entrepreneurs?  Well sure we're doing pretty well compared to 10 years ago, but we've still got a long way to go.

Please do sign up.

The Ebay Skype write down is bad news for venture capital

Since ebay admitted that, really, they messed up with Skype, there is an amusing opportunity for the vcs who passed on investing into Skype 3 years ago due its lack of revenue model to say "I told you so".  It would not be the first time that the vc community thinks its a lot smarter than the listed markets.

But why does the Skype write down worry me? Surely, I hear people say, the vcs shouldn't care. They got in and out and made some good money.

This is quite wrong.

The point is that we will all need to sell a number companies into listed web companies.

We want their acquisitions to make them money so they come back to us for more.

The FT does a good job of comparing the terrible Skype acquisition with the wonderful myspace acquisition which has made lots of money from Newscorp.

A pity they can't all be like Newscorp.

I also think Nic is missing the point.  it's not what you can auction them up to in the short term, it what value these businesses create over the longer term.

I REALLY REALLY hope that CBS eventually turns a terrific profit line from Last.FM .  And I really hope, not that Facebook sells for $10bn but that Facebook creates real value. Real revenues and real profits for an acquiror or for retail investors at IPO.  Without real value being created, over the longer term VCs will be on shaky ground.

The Post-Google VC

I have been spending some time with some great entrepreneurs across Europe as part of the FOWA Road Trip and yesterday in Copenhagen was no exception.

In particular it was great spending some time with Nikolaj Nyholm and Nicolaj Reffstrup.

Nikolaj Nyholm made one comment to an entrepreneur which really resonated with me.  To paraphrase:

“You need to raise money from a post-Google VC.  An investor who has lead a company in the last 5 years since Google has been so dominant.”

At one level this is another contribution to the discussion of what makes a great VC (I will leave that one to Fred et al.)

It is, however, of far more significance for entrepreneurs with a web app or offering.

Working for Reevoo and Glasses Direct, both very different businesses, taught me the significance of distribution, and the dominance of Google.  Some examples:

You need first rate SEO?  That will be >£100k p/a for a 19 year old whiz kid.  Someone who will be impossible to manage but can transform your business with organic traffic.

You need to bolster traffic in certain niches?  That’ll be a potentially bottomless pit of adword spending.  (Particularly true if you’re late to a competitive market: look at the differential in adword spend between gocompare, moneysupermarket and confused)

That’s not to mention the possibility of Google using some of their warchest of come after your particular market.

Many entrepreneurs are so focussing on building such a great offering that they also assume virality of distribution is inherent or inevitable.  Unfortunately its not that easy, and Nikolaj is dead right to warn that getting help from people who “get it” is crucial.

Calling Copenhagen: Entrepreneurs & Angels

Are you based in Copenhagen and doing something cool on the web? If so come on down to the FOWA Road Trip tomorrow at The Dubliner .  Ryan Carson has put together some cracking evenings to date each with a whole bunch of great people. It’s sort of like Open Coffee but with beer, more entrepreneurs, more angels and local VCs (apart from us ).

If you wanna have a word or meet up before hand.  Ping me.

Why you probably don’t need venture capital

VCs are looking for freaks.  Wierdos.  We long to see mutants: companies that are not normal.

VCs are looking for category definers.  Companies that return five or ten times their investment.  This is weird. It is not normal to build a company that will grow from zero to $1bn in four years.  Yet, it can happen and this is the potential that most investors look for.

Saul Klein has been saying some excellent stuff recently from about how it IS possible to build billion dollar companies in Europe.  The presentation  he gave at Nextweb was a great motivational rallying call to us all.

European entrepreneurs should be going after the massive opportunities. 

But I want to remind entrepreneurs that its also OK to not raise VC.  There are loads and load and loads of great businesses that shouldn’t touch the VC world.  These companies can still make the founders rich.  Just probably not as rich as the founders of Skype.  Nor have the rewards of Last.fm at such a young age.

What are the reasons not to raise VC.  Why not?
·    VC is the most expensive money you can get.  This is a fact.  The cost of debt is lower than the cost of equity and venture carries the highest risk premium of all.  This means that you have to give up BIG CHUNKS of your company. (Nic has recently written on how important it is to get right the amount you raise at the first round.  My point is, however you do it, it's expensive). 
·    You can’t get big enough. Remember that VCs need 5 – 10 times their investment.  Ask yourself; can your web app really be worth $500mn? 

Ryan Carson is a great guy to talk to or read blog post on this.  Some time back, he analysed his DropSend business and realised that he could make a great business out of it.  It would make him money year on year.  Just it wasn’t going to take over the world.  He wouldn't need to riase external finace. Consequently his focus on building a brilliant web app and profitable business has made him very successful.

I chatted to him about this recently and he said his personal metric was 100 million dollars.  Unless he has a business that can sell for more than a yard of US, there’s no way to justify the dilution.

He also pointed out it’s a personality thing.  From some entrepreneurs there is great pride in keeping it small. It’s also a question of risk.  If you have the risk profile to keep betting the farm on three cherries you are right for VC (explanation).

So you should only really be looking to raise VC if
·    You need the brand, network and advice of a marquee investor
·    The market opportunity is massive.  Ridiculous. Whitespace.
·    You can’t do it off cashflow or debt.

For these companies, VC is a wonderful option because rather than having to re-mortgage the house and invest, what Fred Wilson calls “divorce equity, lack of sleep equity, gaining 15 lbs equity”  you can take someone else’s cash and risk that.  VCs can also offer loads of additional help in terms of sage advice (what not to do!) introductions and network.  Lots of our portfolio businesses also enjoy the additional credibility of having a marquee investor to show off about: it helps to gain credibility with certain partners.

If you still think you raise VC that’s great.  Drop me a line.

Why we love seedcamp

I am back to work this Monday and have a stack of seedcamp applications to process.

I think there are two particularly exciting things about Seedcamp:

1) Ecosystem

Seedcamp is a terrific opportunity for some young and bright entrepreneurs to spend a week meeting the most incredible set of people.(This speech and this link gives a flavor on the board, but I understand Saul will soon be revealing some incredible mentors flying in).

The power of a network is fascinating.  Some people seem to think that it’s an end in itself.  I don’t agree. 

A network is not a set of business cards.  A network is not someone you’ve met once at a rabid networking do.

The best people I know, I have worked with.  Working in their company, with their board, negotiating a deal on the same side or the opposite side of the table. Sharing my opinion and experience.  Having it shouted down, debating and sometimes being listened to ;)

What is wonderful is that the successful seedcampers will get to meet a cracking set of people and engage with them. Hearing their opinions and experiences inside successful businesses.  Strongly disagreeing, debating and sometimes agreeing;  The closest thing to actually working with them.

2) Thinking big

Seedcamp gives entrepreneurs the opportunity and a very supportive environment to think big. 

I am a strong believer that the “go big or go home” mentality is absolute rubbish. Entrepreneurs should not feel obliged to manically strive to create businesses that change the world.  Its just not the right path for some people, some business models or some risk profiles.

However, if you don’t consider how you can build your idea into a billion dollar business at the start, its very hard to turn it into one halfway through. If you don’t “just go for it” when you’re young, it’ll be much harder when you have a mortgage and a nice car to drive to a comfy job at a business park in Bracknell.

That’s why I’m excited about seedcamp.

European Venture Capital: What have we learned?

Now that I am no longer an advisor (albeit still on gardening leave) I can look back with some detachment on the whole process of raising capital or selling your company.  I want to do two posts: what does the VC market looks like today, and to answer the question, what is it with advisors anyway?

The market today:

Over the last 8 years I have been privileged to work with some incredibly talented management teams and entrepreneurs.  Through-out each process I have sat through some meetings with remarkably astute, insightful and experienced VCs and corporate acquirers and also some incredibly rude and clueless investors.   (I have also met a similarly diverse range of entrepreneurs!)

Let me focus on VC: I will cover M&A in another post.

I think that the European VC scene is a notably better place and that  THNGS ARE GETTING BETTER ALL THE TIME. 

• The ecosystem for entrepreneurs is getting better: from uni spin-out hubs & clubs to booze fuelled dinner table debates.
• The quality and segmentation of investors is getting better; from international success-stories like Index to small, ultra focussed funds like Eden Ventures. 
• The DIALOGUE is getting better; I doff my cap to initiatives like open coffee club which fosters mutual understanding. I believe VC –entrepreneur relationships are far less adversarial and far more informed than they were 8 years ago. (Fred has a nice angle on this too)

It is this last point that raises the question: what is the point of advisors? Let me explain. In the bay area there are no corporate finance houses running Series A B or C rounds.  This is done in-house, by an NED or maybe by the lawyer. European VCs ask me: why do European entrepreneurs need people like First Capital?  I will turn to that in the next post.

European Ventue Capital valuations: Value or growth investing?

Venture Capital valuations are a thorny issue.

In an earlier post I pointed out an investor’s comment about European entrepreneurs being relatively unsophisticated when it came to getting a good valuation.

Once again I was interested to hear another recent outburst from a large well respected Euroepean early stage VC. His word were “we‘ve made 9 pre revenue investments over the last 24 months. They are high quality companies and we’ve had no competition on any of those deals.  Early stage VC is still cheap.”

I thought that VC was all about growth.  Have I missed the point? 

Maybe the thing that makes venture capital an attractive asset class is that it operates in the greyest part of the market.  Not grey because it is underhand or corrupt.  But grey because it is inefficient: because entry valuations CAN be cheap. Because it is easier to follow a path of value investing rather than growth investing.

Well maybe for some investors.  But did Index Ventures get into Skype cheap?  No. Did SEP get into CSR on the cheap? No.

Did Accel, Benchmark or Atlas get into Icera on the cheap?  No. Amadeus?  Certainly not.

Of course it would be stupid for any investor to pay too much.  If Index only had got 1% of Skype then it would have made no dent whatsoever in their IRR.  But bragging how cheaply you can into deals?  Not sure it helps any of us.

NB. Just after I wrote this I went for drinks with a bunch of investors.  One partner at a tier one and half fund told me that he is delighted with competitive deals and efficient market: he is confident that his firm can differentiate themselves as sufficiently value add to not have to pay top whack. And I didn’t even prompt him!