The coffee shops of Mayfair

When will be able to use cpa for buying cars?

How do we solve the offline purchase problem?

The Adtech conference a couple of weeks ago was pervaded by two smells. One was the sniff of a slowly decaying traditional advertising world, the other was the smell of adolescent exuberance from a bunch of precocious but brilliant teenagers.

Because of this the conference was brilliant.

What has stuck with me is the cleavage between traditional advertising and new generation performance marketing.

The problem with traditional advertising is that performance metrics are woolly. That’s not to say it doesn’t work.  We still see TV adverts for soap powder because of course there is a correlation between offline ad spend and revenue.

What the traditional admen didn't want to address was what will happen when web offers the same reach as tv. They seemed to retort that ideas like a monkey playing the drums will save offline advertising. I am not so sure.

At one level this is an online offline debate, but on another level this is product centric.

You can sell some products, like cameras online, and so using performance metrics like cpas is easy.

But what sort of performance ads can you use if you're Cadburys or Pringles?

How can you prove an online ad makes more people buy chocolate? Its hard.

Its not just FMCG. For example, what about cars? You can have an incredibly compelling piece of advertising that makes someone more likely to buy a BMW.
But they are going to buy it in a dealer.

Why should it matter that offline ads are hard to measure?

When you can’t measure the effectivness of an ad it should worry admen. Advertisers can get measurement elsewhere. They will go elsewhere.

It also worries small publisher sites; what if you have created a niche car blog with the perfect environment to persuade people to buy cars? You can't currently get the 5% lead-gen fee. But by god that’d be nice.

As an investor I am fascinated by this broken piece of the chain. How do you solve the problem? Vouchers? More sophisticated lead gen intermediaries?

I'm looking forward to entrepreneurs telling me.

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.

Crossing the Chasm?

We are announcing today my new role with Advent Ventures.

I have joined at an exciting time at Advent with a terrific new portfolio,  new people and we are fully switched to investment mode.

To start with I am focussing on new investments into digital media.  What this means is that we are looking for very early OR relatively mature businesses doing online media, ecommerce, mobile apps, gaming. 

Having been “out of the market” for the last 8 weeks, I’m looking forward to catching up again with Europe’s best entrepreneurs and management teams, and as ever it’s be great to hear from entrepreneurs and blog readers for private conversations.

I am incredibly excited about not only Advent (have a look at Moveme, Echovox, Fizzback ) but also the way that the market is developing for tech entrepreneurs.  As I’ve previously written I think that the European ecosystem, investor-base and dialogue is improving rapidly which gives a great environment for VCs and entrepreneurs to build great companies.

Drop me a mail.

Incidentally, I took some time out between First Capital and Advent to do some work with Mint Digital .  Mint launched their Bloombox  about a year ago. It is a bit like a white-label youtube & myspace but Mint excel at enabling big brands to actually develop something with credibility that that the kids love & use.  In the last year their customer wins include BBC, MTV, and two other major brands who I wish could reveal.

Things are cooking on gas at Mint as they are doing more and more proprietary  stuff.  I’ll blog more when I can.

* Note.  I Couldn’t bring myself to call this “my new gig”.  Does this mark me down as distinctly WebOne?

Advisors: can’t live without `em

At the end of the last post I posed the question: why do European entrepreneurs need people like First Capital?

Let me open with a couple of recent quotes from VCs over drinks:

"My view on entrepreneurs using corporate finance advisor’s skills is comparable to me selling my house.  I didn’t want to become an expert in conveyancing and mortgage mechanisms but I had to develop some of these skill. It’s a necessary evil.  The same is true for an entrepreneur who wants to raise finance; they have to develop the necessary skills to talk to VCs.

Another one was:

“How hard can it be?!  What does it say to me if an entrepreneur can’t work their networks to get to me and then generate a little competitive tension by running a decent process?

I have to disagree.  I have worked with large numbers of excellent entrepreneurs.  My first point is that if a company is using an advisor then it tells an investor a lot about an entrepreneur:

1) None of the quality entrepreneurs I know want to become an expert in raising capital. They are happy to know their ratchet from their double dip but they want someone else to put it all in context.

2) None of the entrepreneurs I know want to spend enormous swathes of time raising capital. They want to spend time on their companies: development, A-B Testing, business development,  sales, collecting cash: whatever. Happy to talk to investors, but lets keep it in perspective.

3) None of the entrepreneurs I know want to talk to just one investor. They know it’s a good market.  They know the best companies get multiple offers.  They want the CHOICE.

4) What most entrepreneurs DO want, is great investors.  They do want the brand, the strategic input, the operational advice, the workshops and the conferences, the exit planning, the introductions and the profile building that comes with great investors. 

A decent corporate finance advisor gives an entrepreneur these things.

Of course, an investor will still have to work out if they want to invest, and my experience was that the reputation of the advisor still has a big impact on how much resource the VC is prepared to expose to the company.

However, I have still not answered why advisors are so dominant in Europe.

I think there is both a theoretical and anecdotal reason.

1) Theoretically European management teams need more help.  Let me give you an example from a VC;  Amadeus Capital have long believed that European VCs themselves need to employ associates rather than adopt the top-heavy General-Partner only structure that we see more in the US.  This is because they believe the average European technology company is less mature and has less aggregate management experience. VCs employ associates to give additional support the portfolio companies. 

Maybe advisors fulfil a similar function.

However, I prefer the second explanation.

2) Anecdotally, the standard of advisors (just like the VC market it serves) is getting better and better.  First Capital has an overarching focus on quality of analysis, rigorousness of thought and focus on specific technology markets that is rare.  The scale and depth of analysis that goes on before a recommendation is made, is phenomenal.  I understand from many non-execs, investors and execs that no-one else offered this standard of service before we started First Capital.

Admittedly there are still some remnants of the cring-worthy old guard are still around. However I am proud that since we started First Capital, the quality of competitors is increasing (GP Bullhound was a name that came up). 

I see quality advisors as a valuable and important part of the ecosystem.  Maybe I'll be changing my view of advisors over thenext few months.  I'll keep you posted...

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!