Xobni - a follow up Tuesday, April 22, 2008

Little did I realise that a commentary on my experiences of a web-app like Xobni could prompt such personal insults. Evidently to express a contrary opinion on the usefulness of an application or add-in is to commit heresy to some folks.

The sad thing is that these more "enlightened" folks elected not to highlight what they found invaluable about the add-in, but respond with comments such as "your photo sucks" - a fault of my face, rather than the photographer I think.

Yet one other theme is reflected in the anonymous comment left via meebo which I've copied below

meeboguest251865: UK venture capital sucks. Your attitude re xobni is exactly why some of us relocate.

Ok, so this one has me confused - I don't find an add-in useful and this is taken to be reflective of UK venture capital? I confess that this isn't a venture I would have put money into for various reasons, not that the opportunity arose. That the venture is apparently valued by Microsoft at over $20m does indeed come as a surprise to me but if one did a quick survey round the investor community on any application/venture you are guaranteed to find a variety of views expressed. Hence, I'm sure you would have found investors in the UK who would have spotted opportunities for it and thus backed Xobni at the time.

Different investors have their own "sweet spots", regardless of country. I acknowledge that geographic factors may play a part in influencing attitudes/sentiment towards making an investment, but investors are not homogeneous in any location. Hence, I'm sure there will be plenty of entrepreneurs in Silicon Valley who can recount their own rejection stories.

If you've got compelling applications/ventures I remain convinced you can find funding in the UK. Meantime, will someone please educate me on the compelling features of Xobni that I evidently missed.

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Sex & the Investor - revisited Wednesday, March 19, 2008

I'd forgotten about the presentation I did below at Barcamp London Feb 06 until I got a email today telling me someone had marked it as a favourite on Slideshare.com. So, when I checked the site I was thrilled to see that it had now been viewed over 8900 times [thanks Mom]. Reviewing it for the first time in a long while, I was still happy with the content and believe it's still relevant to entrepreneurs seeking funding.

Hope you agree.

SlideShare | View | Upload your own

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You say "Show me the money", but how much is enough Monday, July 16, 2007

Will Price covers a recently popular theme in this post regarding the optimum amount of money to raise. Whilst many contend you should raise as much as you can, those with a marketing bent advise that it's better to show a path of increasing valuation in each round.

But how much is typically raised in the various rounds?

Will refers to Fewnwick's recent report on trends in venture capital which reported that the median valuations for A-D rounds were $5m, $12m, $23.5m, and $41.71m respectively.

Patterns and data suggest that for software companies an $8-10m "A" post appears to maximize the probability of a healthy B round.

What you can't ignore though is being ready with a sensible answer to the question - "So how do you plan to use this funding?".

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How to drive investors away fast Thursday, June 21, 2007

Just like telling your new date that you were late because you had to go to the STD clinic, there are somethings entrepreneurs say that turn off investors.

Sean Wise has a good article here, highlighting five such phrases and why they throw up "red flags".

1. We have no competition
2. Our financial projections are (and/or valuation is) conservative
3. We know more about (software / search / media) than (Microsoft / Google / Fox )
4. This will be our last round of funding
5. If we only get 1% of the market, then we will all be rich

My favourite passage from the piece is

This is what bugs uber-investor and investment media guru, Kevin O'Leary:

"The thing that pisses me off most about pitches is when the entrepreneur values his pre-revenue startup at $10M. I mean, I've seen this movie before and I know how the movie is going to end. They get my money, and I get worthless stock."

Hear this almost everyday.

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Hallelujah - investment sense for startups Wednesday, May 16, 2007

When I read this post by Will Schroter, I almost wanted to print it out and hand it out to Open Coffee attendees.

Extract:

Here are 3 things investors are not looking to write a check for:

Ideas - Investors aren't going to write a check to you just because you have an idea. Millions of people have ideas and most of them are bad. What makes a good idea is not it's novelty, it's the ability to actually run with it and make it successful in the marketplace.

Founder's Salary - Investors won't pay for you to get a full-time market-rich salary while testing out a new idea. You're not going to keep your $200k salary by having an investor foot the bill. Think $50k, best case, and a regular withdrawal from your home equity line of credit.

Back Debt - So you've racked up $100,000 in personal debt while you were building the business. How about getting that money back when the big investment comes? Forget about it. Investors don't want to invest in your debt. Kiss that money g'bye and hope the money you raised turns into a jackpot to pay it back.

The general rule of thumb is that investors want to invest in the growth of a business, not the expense of an idea.

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Should you issue debt instead of equity for seed financing

Venture Hacks has an article suggesting entrepreneurs should issue convertible debt instead of equity when doing seed financing.

Extracts
- Why is debt a great alternative to equity in a seed round? Convenience, suitability, control, cost, and speed.

- With convertible debt, the lender and your company both expect to convert the debt into equity when you close the Series A.

Interesting article and you should check out the discussion in the comments which included the following suggestion

If lenders are concerned about giving up a security (equity) interest in the assets of the company, consider securing it with founder’s shares instead (company has relatively few assets).

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We don't fund a "one man band" Sunday, May 13, 2007

Unlike a record company, investors don't ordinarily fund one man bands. There's many reasons for this, including the dislike of key man reliance i.e. if the founder gets bored and walks then your investment is screwed. However, it also raises questions about why the owner hasn't been able to persuade anyone else to join them in the endeavour - can't they persuade anyone of the merits of the idea or is the founder unable to work with others? Neither are great for an investor. It's also alleged that no one is good at everything and even if that's not true, can they really do everything simultaneously without compromising on quality?

Someone I met at last week's ContentMixer event at the Savoy in London suggested to me that entrepreneurship is a lonely affair - well, investors prefer it not to be. As they say on "Who wants to be a millionaire", would you like to phone a friend?

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Is that regular or large infrastructure to go? Sunday, April 29, 2007

At lunch last week, I was chatting with a "techie" about whether one should spend money upfront on building an infrastructure that scales or whether it should simply be designed to be capable of scaling.

It's a debate of keen interest to an investor. The latter should be cheaper and hence offers the appeal of keeping the bet size down until the venture is demonstrating success, at which point, no one will refuse money to scale up. You also get the impression that hardware should be capable of being added easily (famous last words).

However, who can predict when the infrastructure will be required i.e. foretelling the timing of success with sufficient certainty that the infrastructure upgrade will begin in time. The big fear, of course, is missing the "wave" of popularity and actually generating negative sentiment when "customers" find the service isn't working because it's overstretched.

Artificial peaks are the worst though - an example of which is the "Techcrunch bounce", that Mike Arrington acknowledges. In this situation, there is a sudden surge of interest in the site following a blog post or launch piece, which then fades away before a "normal" level of traffic is established. The challenge is whether to build an infrastructure capable of dealing with this only for it to be redundant for some time thereafter.

Many argue you should invest upfront. After all, disk spaces and servers are relatively cheap these days. Yet does that include full resilience from the outset such that the likelihood data loss or service outages is minimised/eliminated. After all, depending on the website offering, losing your customer's data or being temporarily unavailable may wipe out your business on reputation grounds alone eg calendar service, online document storage.

I'm not sure there is a right answer but I know that good design is essential. Peter Van Dijck's has a useful post linking to 10 presentations from some of the large websites on their scaling efforts which offer some fascinating insights. Essential reading for all sites builders.

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Open Coffee - gonna make you a star Thursday, April 26, 2007

The week I go away on hols, the TV crews roll up at Open Coffee in London to report on the success of the internet albeit under the headline "Dot Com Boom or Bust".

Channel 4 News carried a report which you can see here which included a brief interview with Saul Klein who founded Open Coffee, which has now spread to 22 other cities worldwide.

Included in the report was the CEO of Moveme.com who claimed that after attending "one of these" events on the Thursday he had received £1m in funding by the Monday. As it happens, they got their funding from Robin Klein (Saul's Dad) and others sometime before Open Coffee launched, so a distortion of the truth somewhat. However, today is the first Open Coffee since the TV report went out, so I rather suspect that the attendance numbers are going to be considerably up on usual (which is 100+) with claims like that having been reported.

Could be scary to be an investor today!

Other amusing thing is that the event has become so well attended that the Esprit store in which Starbucks is located, has asked that the event be moved elsewhere following complaints from their customers. Seems that the footfall resulting from the event actually wasn't buying anything from the store!

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Ringside Startup - Let's hope there's an early KO Thursday, March 29, 2007

Is Ringside Startup anything other than a media/publicity stunt and can budding entrepreneurs really learn much from it?

The idea behind it is that the founder, who is understood to be a former Techcrunch journalist, is attempting to raise $20k to fund a new business, and will get advice from a series of investors/entrepreneurs on key issues, all of which will be transparently reported on a blog.

Issue 1: The business idea has yet to be chosen, albeit there is a paragraph outline on a handful of ideas, yet the key objective so far is to raise the money. Hmmm. Cart and horse inversion problem in my view. I concede that this is exactly how VC funds work, namely raise a fund and then identify companies to invest in, but that's not what this project is reportedly about.

Issue 2: Do I receive equity for a financial contribution? Errr, no but you do get free publicity on the blog and your wise words can be seen by all, as your advice is posted in the comments section of the blog (if I have correctly understood the process).

Issue 3: The motivation of the founder seems to be around the media opportunity than actually creating and running a business, which generates actual value. At least the MillionDollarHomePage project was naked in its' desire to raise a ton of cash for nothing.

After 3 days or so, the venture has only raised a few hundred dollars, much to the evident dismay of the founder, who is already lowering his(?) aspirations to $10k and looking for a Plan B. Yet, anyone involving in raising funding would appreciate it is often a slow process - giving up after a few days is not really in tune with the audience experience that the site is reportedly going to educate. Heck, if the site had raised $20k in a few days that would have been very worrying especially with no business to speak of. It might have re-enforced the bubble view.

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The realistic entrepreneur's guide to venture capital Monday, March 19, 2007

Seth Godin makes some interesting observations about seeking and taking funding.

Here are a bunch of conditions that you ought to take seriously before you invest the time and the energy to track down outside money for your great idea:

1. Investors like to invest in categories they've already invested in. If your business is so new that it's never been tested before, or is in a category VCs hate, think twice.
2. Investors want you to sell out. As soon as possible. For as much as possible. They have no desire to own part of your company forever.
3. Investors want to invest in a project that's tested. If you can't make it work in the 'small', why do you think it'll work when it's big?
4. Being a little better than the market leader is worthless.
5. Investors don't want you to use their money to cover your losses. They want you to build an asset (a patent, an audience, channel relationships) that's actually worth something.
6.Investors want someone to run your company who has successfully run a company before.
7.Investors want to be able to come to one of your board meetings and still make it home in time for dinner.
8.VCs like curves more than they like cliffs.
9.There are actually very very few business problems that can be solved with money.
10. You will probably have to replace many of your employees if you raise money from someone.
11.VCs understand that being the best in the world (#1) is the place with the biggest rewards, so it's unlikely they will settle for any performance (even a profitable one) that puts you in second or third place.
12.VCs are very smart and very connected, but they're smart enough to know that their connections and their insights can't fix a broken business.
13. Investors are very focused on the company, not you. They're not interested in having you take out your original investment or paying you a large salary as profits go up.
14.Business plans are bogus. The act of writing one is critical, but no one is going to read more than three pages of what you write before they make a decision.
15.The companies that VCs most want to invest in are the companies that don't need their investment to survive.

I don't agree with 10. 14 is mostly true. 6 is a preference just because it should reduce the number of mistakes likely to be made due to inexperience. As for 7, that would be lovely.

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Speed date a VC Friday, March 16, 2007

This is an excellent idea

Company founders spent six minutes with each VC - three to pitch them and three for feedback - as part of EntrepreneurshipWeek USA, a first-time national effort sponsored by hundreds of organizations to encourage entrepreneurialism in the United States.

I was chatting on skype to Sam Sethi (vecosys and formerly techcrunch uk) tonight and commenting that this is exactly what we need in the UK. Having been to the first three Open Coffee meetups, 80% of the entrepreneurs I meet are looking for funding. You may not be surprised by this, but Open Coffee was seemingly set up just as a place for entrepreneurs to hang out with each other rather than being either a networking event or a chance for "talent to meet money". Unfortunately the format of the event means that the Investors are indistinguishable in the scrum of this very popular event and aren't "famous" faces that every entrepreneur would recognise.

I had mistakenly believed that Imperial College Entrepreneurs would implement something like this when it was set up, but sadly not as yet.

Personally, I'd be very happy to participate in such an event.

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The numbers behind web apps laid bare Wednesday, March 14, 2007

Read/Write Web has a write up on a seminar at SWSX entitled "Barenaked App: The Figures Behind the Top Web Apps", which looked at 5 web applications and what it took to build and release those products.

...the focus was very much around the financial costs to build and deploy these web applications (as opposed to elements like lines of code or revenue). It also touched on what it costs in monthly maintenance. Here is an overview of the data they shared:

One other interesting thing shared was that FreshBooks cost $430k total to build and maintain, until they reached break even ($140k of those expenses went to marketing).

The entire set of slides are online at www.carsonified.com/sxsw.pdf


The challenge with comparing these numbers that it several cases the cost associated to development is reported as zero - in these the instances the founders had coded the site and so attributed no value to their time. Clearly had a "salary" foregone number been included, these numbers would be more comparable. Nonetheless, it provides a useful reminder that the entry costs have dropped considerably, but also that the story doesn't end there and more investment is invariably required to grow the venture.

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Lessons learnt during Y Combinator process Monday, March 12, 2007

Harjeet Taggar of Boso (stands for buy or sell online) describes the lessons they learnt as a startup going through the Y Combinator "trial by investor". Interesting read, albeit it's not an unfamiliar message.

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The odds are against Microsoft or Google buying you Friday, March 09, 2007

Don Dodge who is a Microsoft employee in a recent post, commented that:

"Microsoft acquired 14 companies in 2005 and another 19 companies in 2006. At Microsoft we try to find the best startups early in the game and acquire them for reasonable prices. The average acquisition price was around $30M. There were some that were significantly more than that, but on average we try to stay in our sweet spot."

If you suggest that Microsoft, Google, Yahoo, Ebay or Amazon are going to be your exit route when talking to a VC, you are very likely to get a weary sigh as your credibility gets its' coat. It is very rare for this to occur and rarer that an obscene price is paid. Consequently, I'd advise you to try to think up something more original.

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10 Stupid Mistakes Made by the Newly Self-Employed Thursday, March 08, 2007

Steve Pavlina has an interesting post entitled "10 Stupid Mistakes Made by the Newly Self-Employed". Don't agree with all of it but one important point is worth re-enforcing

1. Selling to the wrong people.

I've talked about this before - you can waste much time chasing down the "wrong" sales prospects i.e. people who will never buy for whatever reason.

But as important is Steve's point on "partners":

Just because someone is interested in doing business with you doesn’t mean you should accept. In my first year in business, I probably said yes to at least 50% of the people who approached me with a potential business relationship. I wasted a lot of time pursuing deals that were too much of a stretch to begin with. I accepted lunch invitations from random business people who just wanted to “see if there’s a way we could do something together.” Virtually none of them made me a dime. If you think a meeting is pointless, it probably is. Don’t network with random people just because you think you’re supposed to network. Today I accept such invitations less than 1/10 as often. If an offer doesn’t excite me right away, I usually decline or ignore it. Most relationships simply aren’t worth pursuing. Learn to say no to the weak opportunities so you have the capacity to say yes to the golden opportunities.

It's very easy to fill you day with meetings. You need to consider each one to say is it likely that this meeting will advance my business. Sure, serendipity can play a part and I set aside time for these at events like OpenCoffee. However, if you want to "explore", do it in a phone/skype call which is far more efficient or better yet agree to meet up at something like OpenCoffee so that you can do a 10-15 min to open a discussion - if there's potential emerging then proceed, if not then drop it fast but always on good terms.

Perversely, if you look at VC stats, then as an industry we have to do 10 business reviews for every one investment. That appears to be a lot of unproductive meetings in hindsight, albeit I confess that I normally learn something from everyone of them, even if it just relates to fine tuning my filter.

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Introduction to Venture Capital

This is a helpful introduction to venture capital for those unfamiliar.

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The mob is baying for Private Equity blood

As "testament" to its' listening credentials especially when it's from their core financial supporters, not to mention sniffing a tax raising opportunity, Ed Balls, the Economic Secretary to the UK Treasury, has announced a review into the tax treatment applied to private equity funds, a move which could add billions to Government coffers, at a time when corporate tax revenues are falling.

It is to investigate the growing use of so-called "shareholder loans" in highly leveraged structures normally put in place by private equity funds. In essence, Private Equity Funds usually invest only a small amount as direct equity in a company (5% or so of the total finance), with the vast majority provided as debt. The financing cost of the debt incurred by the company is tax deductible, unlike dividend payments.

Whilst the structures are complex, in essence a Private Equity fund will direct 95% of the total investment as equity in offshore Special Purpose Vehicle ("SPV") and this will then recycled back as debt to the company. The interest payments made will be reduce the companies profits and hence their corporate tax bill in the UK, but the interest income earned by the SPV will not be taxed in the UK - a tax efficiency which is a key reason for the fall in corporation tax revenues.

The political play here is simple. By announcing this review, Balls throws the Trade Unions something they can claim as a victory in their crusade against "evil" Private Equity.

For the Private Equity industry it may kick the whole issue into the "long grass" for many months by which time the Trade Unions may have found a new victim for their rants. However, this is more likely to be a deferral of the matter rather than an end, since the tax take opportunity will be too juicy for the Government to ignore, particularly as it will be perceived as a victimless tax i.e. no votes lost.

However, if these loans are taxed differently, then private equity returns will fall and the attraction of moving offshore increased. Moreover, the beneficiaries of private equity investments such as pension funds will once again be clobbered, having already seen the Labour Government plunder £100bn from pension funds on changing the treatment of dividend tax credits in 1997 - an ironic situation given that the Trade Unions also bemoan the perilous state of pension funds and the impact on their members.

Balls has apparently confirmed that there are no plans to change the principle of the tax-deductibility of interest, as this is something open to all investors, not simply private equity.

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A Saucy Entrepreneurial Winner Wednesday, March 07, 2007

The BBC series Dragons Den is an entertainment programme rather than an educational show - it's not the experience that most entrepreneurs will go through when meet investors. Many of the entrepreneurs on the show make it on by virtue of the producers believing that it will produce good TV to put an awful idea/business/entrepreneur in front of investors that are pumped up to be extreme bullies.

I have watched a number of episode, all of which are available online, afte r friends recommended it (believing it to be what I do). Occasionally a few good ideas creep through but very few get funding.

One recent episode I saw featured a rastafarian chef, Levi Roots, seeking funding for his business selling west indian themed spiced sauces. His pitch was tacky - he sang a ditty! He wanted £50k for 20%. Instead he got £50k for 40% following a joint investment from Peter Jones and Richard Farley.

Well, it was announced today (not long after the show was televised) that he has landed Sainsbury's as an account who will sell the sauce at 607 stores in the UK. Presently, it's unclear whether it was the investors involvement or simply from being on the TV show that made the difference though, bearing in mind that it's possible that a Sainsbury's plc buyer may simply have decided to trial it following the free publicity that the show generated for the product.

End of the day, Levi probably doesn't care and as for his investors, well sometimes money simply attracts more money!

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Is owning 51% important? Sunday, March 04, 2007

VC Confidential advances that entrepreneurs shouldn't get hung up on having 51% in this post as there are more important issues to be concerned with in the early stages of a business.

One of the greatest misperceptions in the early stage entrepreneurial world is that control revolves around maintaining greater than 51% ownership in a firm.

It certainly is the case that this tends to be the thing that entrepreneurs are most passionate about in any funding discussion. And it's understandable if you hold the view that "control" is the most important thing, rather than doing the right deal with the best people to create the greatest capital value down the line.

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