The Great Startup Famine of 2015

Starting (if you’ll excuse the pun) with bad weather in the Spring of 1315, universal crop failures struck Europe creating what became know as The Great Famine. It lasted through 1316 and well into 1317 from Russia and Great Britain all the way down to Southern Italy.

Angels Bootcamp has just announced that it is to train over 1,000 new angel investors by 2015 starting this June in Berlin. We should all cheer the announcement of Angels Bootcamp, which aims to do what it says on the tin:

AngelsBootcamp is targeted at executives, entrepreneurs and finance professionals who have money in the bank to put into tech startups but who lack the knowledge about exactly what an angel investor should do.” (as TNW reports)

But Berlin, we have a problem.

While I heartily support anything which will accelerate Europe’s entrepreneurs (especially if it helps consolidate London’s position as Europe’s leading tech startup hub) where is the money going to come from so that all these newly invested startups can continue after their first $250,000 or $500,000 of investment?

It’s a metaphorical stretch, but there’s no point encouraging people to start a large family, if they won’t be able to feed themselves!

Europe and even London, Europe’s foremost tech cluster, already has a funding gap for adolescent startups. In actual fact, so does New York’s tech cluster.

“New York and London have more than 70 percent less risk capital available than Silicon Valley for Startups in the early, Pre-Product pre-Market Fit” Stages of the Startup Lifecycle.”  Startup Genome Report

And moreover even at the end of the rainbow, in the home of funding-food and plenty Silicon Valley, startups are experiencing an issue with follow on funding. Check out the graphs below, tracking the number of seed deals versus Series-A for U.S. startups: (courtesy Techcrunch, read the full article here)

 Capturegraph Capturevc2

“The “crunch” is perceived because of the boom in seed funding, which has brought a greater quantity of startups to the table looking for Series A funding…” (from the article Mining The Crunch)

Europe must find a way not to end up with a worse funding famine that of Silicon Valley now, which is that hundreds of startups funded by Xoogler’s and X-Facebooker’s are going bust -or becoming startup zombies- because they are either not worthy of further funding or because the market cannot sustain so many startups.

At a macro level, many of the much larger funds – the grandfathers of the tech VC in the U.S. and Europe – don’t perceive a problem. Possibly because they invest later stage and have extremely large funds (so are somewhat detached from the mass of earlier stage startups) or perhaps because those famous names get the very top pick of deals.

I was lucky enough to get Felda Hardymon from BVP on my panel at the recent Innotech Summit, along with Steve Schlenker from DN, plus others from Silicon Valley and L.A. to discuss this very topic (we even managed to co-opt Boris Johnson, the Mayor of London).

Boris gets to grips with a transatlantic Google Hangout

Boris gets to grips with a transatlantic Google Hangout

Perhaps not surprisingly (given that Felda has been at BVP since 1981 a full 16 years before I did my first startup) I agreed with almost every word Felda said. All of which was extremely insightful except that there isn’t a funding gap for startups in Europe.

There’s not a lack of capital for sure, but capital which people are prepared to risk at that critical, very high risk, very early stage of the startup life cycle? For sure there’s a dearth.

Perhaps the Series-A problem is that the whole approach to funding at that stage of a startups lifecycle needs to change, as one or two people I spoke to afterwards suggested.

After all, seed funding and angel funding has evolved immensely even in the last 5 years. But until that mid-stage funding environment does change, or until we teach our startups how to make a whole lot of revenue very very early on, it means that we need to educate our new European Angels not to make un-fundworthy investment decisions(!).

At the same time as a community we must find ways to open up the $1m to $4m investment bracket to more startups, by lobbying those with capital and the government for favourable incentives, alongside championing the value of technology startups both to society as a whole and as a vehicle for investment.

Venture investment (realistically, Series-A and above) create jobs. Fact. As crusades go, that's a good a reason as any. (Read Nic Brisbournes full post)

Venture investment (realistically, Series-A and above) create jobs. Fact. As crusades go, that’s a good a reason as any. (Read Nic Brisbournes full post on his excellent blog, which is where I stole this graph from)

In summary, Angel Bootcamp will go head and I wish it every success, but something needs to happen in the Series A world too, and there is much less chatter about solutions for this, or even talk of the problem, unless of course you’re a Founder trying to raise a Series-A round in Europe, and then you talk of nothing else..!

Europe did not fully recover until 1322 from the Great Famine of 1315, and while medieval starvation on a grotesque scale is more a human tragedy than any future mass deadpooling of startups, however severe, we should ask what can be done to ensure the tens of thousands of potential European jobs and startup Founder’s dreams, are not wasted away for lack of follow-on funding or Series A.

While supply and demand and market forces are one answer, I’m not sure a pure Friedman-esque approach to this growing problem is the only solution we should rely on.

Co-CEO’s: The Bubonic Plague of the Board Room

..or Why I Believe co-CEO’s Are A Bad Idea.

Not so long ago I was invited to take a CEO position at an 18 month old start-up. There was a small team of seven, only three full time. The business guy in the team was one of the part timers and had also invested some money, but chosen to retain his existing position at a large corporate with a full time job and salary.

The two initial meetings, with one of the Founders who was the real day to day engine behind the business, went well. She was eager to bring in a CEO, part time or full time, to help put in a solid strategy – including raising money – and to hire new team members and ensure milestones were being hit, financials kept up to date, people managed etc; all the usual jobs of any CEO.

But when it came to negotiating terms the other part-time co-Founder I mentioned sprung on me a two character prefix to my title which meant I walked away from the deal. He wanted to add “co” to my CEO title. I was pretty surprised as he’d said previously he was happy bringing in an external person to be CEO and run the business.

There are a raft of reasons why I believe having co-CEO’s in your start-up is a thoroughly dreadful idea. Even if you’re both co-Founders of the business.  Reason number one is because it doesn’t work.

At least with a pantomime horse the front is in charge (unless the back disagrees of course). Enough said.

At least with a pantomime horse the front is in charge (unless the back disagrees of course). Enough said.

Quite simply co-CEO arrangements in my experience don’t work, or don’t work as well a different structure. This conclusion is both from being in situations myself where CEO responsibilities were split between two people (even if the actual official title wasn’t) and also from seeing some others trying to run their company’s this way. Having Co-CEO’s creates its own set of problems, outside of the challenges inherent in being a CEO.

Here are some of the problems (and please feel free to add your own in the comments!):

  • Someone has to have the final decision, because people do not always agree.
  • Legally, someone must be responsible to report to the board of directors
  • Someone must “own” the over-arching business strategy and the milestones on it.
  • Logistically, if you have co-CEOs, in reality for both people to be equally well informed they must both attend every meeting which might impact any significant business decision a CEO might make OR one co-CEO must relay and discuss all this with the other co-CEO, to convince them it’s a good idea and bring them up to speed
  • If you have co-CEOs the team do not know who their boss really is
  • If you have co-CEOs there is always the risk of the team or the board or investors playing the CEO’s off against each other
  • If you can’t sort out with your team and co-founder who is going to be CEO and what that means, how on earth are you going to sort out other problems
  • If one personal isn’t responsible, it’s not really fair to measure them entirely for not performing the role
  • There’s a danger you can both re-enforce your own errors of judgement, making those miscalculations or oversights further entrenched
  • Measuring performance becomes harder. If CEO responsibilities are split, or the CEO isn’t driving forward the things they should be, someone needs to call it out. Another co-founder, a Board Director, shareholder, the team. That’s harder with co-CEO’s and there is one less person who could be devil’s advocate.
  • If makes it harder for both people to perform well. If two people are sharing the co-CEO spot (even as a shadow CEO rather than named title) then it’s all too easy for things to end up dropped on the floor, between the two people – who most like are both very well meaning souls who want success for the company as much as anyone.
  • And my personal favourite, if you have co-CEOs it simply looks stupid. Investors and the outside world will probably think “why not just get one competent person to be CEO, rather than two who individually are not?”

Indecision, confusion, mixed messages and an increase in communication workload are the last things you want in a start-up or any business, and I feel co-CEOship encourages just that.

In summary, avoid being a co-CEO or working in a start-up which has them. And don’t take my word for it just look how well it worked for Blackberry.

What Is Most Important To A VC When Investing?

What weight to different factors have in a Venture Capitalists decision to invest in your start-up company?

New research suggests the following:

30.4% – Potential Return

27% – Founders’ Experience

26.4% – Market Readiness

6.6% – Regulatory Exposure

6.4% – Social Connection with Founders

3.2% – Lead investor

…best get networking perhaps; but the potential return is still the most important, so practice your sales skills at the same time.

Above all? Make sure you’re going for a big market and have your numbers in a row to prove the zillions you’re going to make out of it.

Ironically, other data demonstrates pretty clearly that VC’s should not invest in Founders who have had a successful exit before. In fact statistically, they are less likely to provide the investor a return, than someone who has not had a big exit before.

 

The Life and Death of Colonel Blimp

This is a blog post about Rummble, a tech start-up which the author founded. Written further to an article published in The Kernel 0 subsequent to an employment tribunal for unfair dismissal 1. The author instigated the tribunal claim against Rummble, his own company, after being removed involuntarily as CEO in December 2010. 

Discussing problematic times in a business publicly is a balance between remaining professional while ensuring the information which is in the public domain is accurate and / or has the appropriate background for people to draw sensible conclusions. Some may consider me publishing any thing at all inappropriate, an opinion which I understand but I also feel the events 2 years ago were unusual circumstances and the decision to write this -very long- blog post was not taken lightly. I have until now, stayed publicly silent on the topic.

Often people choose a cautious route, making no comment or issuing an appropriately inert corporate response. Since leaving Rummble, the author has remained quiet publicly on the topic. But with more information in the public domain regarding events, the author finds himself more in agreement with the Duke of Wellington

The Kernel article outlines the life of Rummble after it’s marriage to M8 Capital until the authors departure. This blog post provides some background and mitigating circumstances (on behalf of all involved) to the events mentioned in The Kernel’s article, while also responding to Steve Karmeinsky’s (aka Steve Kennedy’s) comments made on that article, which the author feels lack context 2 [Since posting this blog Steve has removed the comments].

Everything is better with two m’s

For the uninitiated, from late 2006 to late 2010, I created and ran a product and service called “Rummble” which enabled you walk out of the door and within 30 seconds show you recommended places nearby that you’ll love, via your mobile.

The technology arguably delivered better, more accurate and more personalised recommendations for places than most other services, using very little base data. It also solved the cold-start problem which many of these services suffer from.

In geeky terms, it was a mobile location based personalised recommendation engine, deployed across web, iPhone, Android, WAP, mobile web, Windows Phone and even (gulp) Vodafone 360.

Clarifications

Before this blog was written and posted, I offered the team at Rummble Labs to issue a joint press statement after the publishing of The Kernels article, an offer which was ignored.  I felt therefore this was my only right to reply. It’s certainly not an attempt to dodge blame for the financial difficulties Rummble got in to in 2009 (and perhaps instead of determinedly pushing on I should have just given up and shut up shop rather than roll the dice further) but it hopefully does provide insight into what can happen when things break down. Had I read this post back then I might have made different decisions, hopefully it inform others.

Two addendum’s to the content of the Kernel’s article.

Firstly Clive Cox was my long-time employed CTO not my Co-Founder (I believe this has been corrected in the article after I responded on Twitter).

For better or worse I founded Rummble on my own and as most lone Founders, took the ultimate burden of responsibility. As some commentators rightly point out, I was thus culpable for the destiny of Rummble, including ceding control of the business. Brownie points perhaps, for stating the obvious ;)

Secondly, while it’s true Alex Housley and I had some tough times during a challenging period for the company, on the whole we got on well. He recognised the potential of what Rummble could be. After all this is why at the end of 2009 he sold his company, Total Hotspots, to me and why I chose to buy it.

It is though also true (as reported in The Kernel) that latterly I was frustrated with his performance. Nonetheless, it is a difficult job to create success with limited resources. Were it easy, most start-ups would not fail and more people would want to work in this challenging environment. Thus, I kept him employed during this trying period for three reasons:

  1. I felt we could still find a role that worked for he, Rummble and I.
  2. He did add a level of value to the business and was a trusted, reliable colleague. Hiring new people is disruptive, never easy, often expensive and finding truly entrepreneurial committed people to employ in London is pretty difficult. Alex ticked those boxes.
  3. I felt a greater responsibility toward him than the average employee because firing him would have been not entirely dissimilar to the experience I had a few weeks later (i.e. being removed from my own company, Rummble, involuntarily. A vexing experience). I had bought his start-up and his being fired from Rummble would have meant him being separated from his own start-up, which had been incorporated into Rummble less than twelve months earlier.

Humans Are Selfish

The disappointment to me is not that Alex remains with Rummble Labs or indeed had aspirations to do so, but the way in which he ensured his position there.

Dacher Keltner of the University of California wrote in this paper that “In my seminars I ask my undergraduates to complete the following clause: ‘Human nature is…’ with as many ideas as they can. Typically about 70% of their responses refer to some form of selfishness, competition, or aggression.”

He goes on to write:

Learning theory made famous by BF Skinner starts from the assumption that the organism moves towards self-serving rewards and away from punishments. Within evolutionary psychology all human traits ultimately benefit selfish genes. In economics, it is axiomatic that humans are rational pursuers of self-interest.

I generally subscribe to this, which is why we have wars, the boom and bust of the stock market and bank bailouts. This said, humans are also capable of love, generosity and great demonstrations of compassion (the paper goes on to discuss this).

I consider myself to be pretty cynical and generally view people with – if not suspicion – then a healthy scepticism. It was with surprise then when my mother told me a few months ago that “You were incredibly trusting as a young child, far too much so. I used to worry about it.”

This perhaps explains why I subscribe to an admittedly somewhat woolly concept of certain reasonable conduct between start-up Founding entrepreneurs, when doing business together.

While Alex was not my Co-Founder at Rummble, as a Founder of his own start-up I expected honesty and loyalty from him, things which I felt were grossly lacking when Alex  opportunistically slid in to my role leading the renamed “Rummble Labs”.

Alex registered “Rummble Labs” as a domain name even before my consultation period (during my dismissal as CEO) had completed. He did not mention the fact to me and what he did say told a different story to that which was, with hindsight, actually going on. While M8 Capital probably told him, quite accurately, that the writing was on the wall for me, breaking rank in this manner very much enabled their strategy.

A bit of alternate manoeuvring might have meant a more constructive conclusion to events for everyone (as I discuss in a few moments).

In short I trusted him as a right hand man to have deeper knowledge of the business in order to accelerate our progress, but as most people do, he ultimately prioritised his own career ahead of other considerations.

Disloyal?

As an employer, one should never be surprised by someone prioritising their own progress. As you grow your start-up, devolving deeper responsibility becomes a necessity. I observe that some  Founders in smaller start-ups find this transition difficult, especially if they have been bootstrapping for some time. But it is a leap one has to make emotionally or one’s company doesn’t grow.

You need instead to protect your Founder position in other ways, rather than attempting to remain safe by controlling knowledge or responsibility.

In a word, a good CEO should almost be trying to hire himself out of a job.

Other members of the team from 2010 also stayed on at Rummble Labs but I naturally bear no ill-will towards them.  They were also employees. This was their career and their job, their security; not their responsibility.

The lesson here then is are you expecting someone to behave like a friend, or an employee of your business? Early stage start-ups with very small teams can get this confused.

Namby Pamby

While to many from the cut-throat school of business thinking, my talk of loyalty and respect might  sound naïve, I’d actually argue in Rummbles case, that everyone (Alex, Rummble Labs, M8 Capital and myself) would have benefited from a more candid (albeit challenging) conversation about their genuine plans for Rummble and their own intensions, selfish or otherwise.

This is after all, business. One should strive to be practical and particularly as M8 Capital had majority control, they risked little by doing this. In fact they – and Rummble Labs – only had to gain.

Investment

Steve Kennedy makes some comments below The Kernel’s post which are roughly accurate, but do not address why Rummble was in such financial difficulties to start with, at the end of 2009.

As CEO I must of course ultimately carry the can, but life is rarely that straightforward and to suggest it was only my decisions which precipitated problems, I think is both a simplification and somewhat disingenuous.

Steve neglects, for example, to mention that a small investment vehicle Highgate Associates had been due to invest £300,000 ($470k) for a 10% shareholding as early as October 2009 (the M8 Capital investment closed, after lengthy DD and contractual wrangling, in April 2010).

Highgate Associates, then a group of three angel investors (to my knowledge with limited experience angel investing in technology start-ups) spent a few days on-site in the Rummble office performing due diligence with intention to invest.

They were given access to all accounts including our list of creditors, which for a small start-up with no significant revenue I concede totalled a significant figure. But not one which was unrecoverable per-se, if investment was found. Many tech start-ups of course fail abruptly without having reached profit or break-even, by failing to reach the next investment milestone.

To cut a long story short, HMRC (the UK tax authority) had as Steve suggests, been threating legal action because we had a backlog of dues. This was communicated to Highgate Associates. However, we had also received agreement from HMRC for a rest bite in order to close angel funding (quite unusual for HMRC as it happens) and this was to be executed at the winding up hearing some weeks later.

False Start

With Highgate Associates in full knowledge of the company’s financial position, contract signing vacillated until a few days before Christmas, at which point I received an email from Highgate asking for more than the original equity agreed. They sighted the reason as being the risk of investing £300,000 ($470k) in a company with over £100,000 ($150k) of liabilities.

I responded to this at length explaining why I felt this was an unreasonable, in summary because:

  • they had been in full knowledge of the facts since DD weeks previously (something which Highgate Associates dispute)
  • and we had had confirmed that RBS would provide a SFLG scheme loan of £250,000 ($390k) if we closed the said funding, negating the risk

Despite my frustration, myself and Rummble’s board proposed a compromise stating that Highgate could have the increased equity if the loan was not closed, but they would not receive this if the loan came to fruition.

This was a logical resolution to our mind, based upon Highgate’s stated position that it was the reduced cash flow runway, due to Rummbles debts, which worried them. In actual fact for this position I had some sympathy, if not the manner of communication.

An email came back stating that if I did not accept the contract as they proposed almost immediately, Highgate would attempt to have the company wound up (i.e. to apply to the courts to have a company liquidated because it owes money it cannot pay).

This revealed Highgate Associates as using first a tactic (our weak financial position) in my personal opinion to improve the deal, then a threat (of winding up) to force us to accept the deal.

Their claim was (and probably still is) that we had not been clear with the situation surrounding HMRC. I dispute this, as does Rummble’s Chairman from that period John Paterson. An experienced businessman whose reaction to their conduct I won’t repeat verbatim here because it’s before the 9pm watershed. Consequently, neither of us found favour with Highgate’s approach.

Someone else who was close to the deal at the time described the negotiating investor from Highgate as having, in his personal opinion “an anger management issue” and that they felt the deal had failed because in their opinion Highgate’s negotiator was “… unable to respond to a logical argument calmly, subsequently distorting facts and issuing commercial threats”.

Six of one, half dozen of the other

As with most things there are two sides to every story.

In my view, generally in life one’s opinion of peoples actions are based upon:

  • one’s own previous experiences (e.g. as investor or entrepreneur)
  • one’s own bias (friendship, association or vested interest)
  • and one’s cultural empathy (religious, moral point of view or belief system)

..which coalesce to create an expectation which is then fulfilled or not.

An opinion of right or wrong is consequently formed.

Whoever was right and wrong – and I of course have my own opinions – any investment made under such circumstances in an early stage business is setting itself up to fail, if both parties are at each other’s throats before it closes.

Egos are big and the pressures are high. Accordingly, negotiations for VC investment can be tough (read: they usually are). The VC have their Limited Partner(s) and sometimes their own, money at stake and for many deals (except perhaps the top 1% where VCs are clamouring to get in the investment round) sometimes one might be mistaken for thinking their almost doing the entrepreneur a favour. The more likely truth is they see risk all around.

Entrepreneurs only see their vision which the obstinate VC is  failing to fulling grasp and can’t for the life of them understand why they don’t just right them a cheque because  clearly the next big thing is “e-Hummblr” the LBS IM VOIP AR chat client….

When a deal is done the entrepreneur can feel they are being asked to chop off the arms (and possibly legs) of their child and then assign custody of it to a monster.

I jest but you get my point. Founders and VCs start aligned but negotiations if not VERY carefully managed on both sides can cause a lot of damage. Aggressively threatening the other party is never going to work out well for anyone (as we’ll read later).

I’m not saying don’t be tough in negotiation. Actually I’m a subscriber to the idea that you not only have a right to be tough in negotiation but a duty to be so, for your shareholders, perhaps also your seed or angel investors (to get a good valuation) and your customers.

What is key is having built a stable and trustworthy enough relationship (dare I say even, friendship) with these people beforehand, so as to treat the other person with respect. Later stage and growth deals are different, but a first institutional round is more akin to a marriage than a business deal, that is why some early stage VCs fresh from a career in Private Equity or the corporate world don’t easily flourish when switching to the emotive world of bootstrapping tech start-ups.

But none of this is an excuse to leave your moral compass at the door when you leave your home and your loving family, to go to the office.

Many seem not to adhere to this thinking, or perhaps never had a working compass to start with. As a human being I am certainly entirely imperfect, but I hope I make at least an equitable attempt at playing fair in life including while doing business.

You’ve now at the official half way point of this ridiculously long post. Yey.

What happened next?

With my company out of money and a spirited investor trying to sue Rummble, including us personally as Directors for costs (a silly idea given in my view given it was an investment negotiation which went awry) I still had to go out and raise not insignificant money from a large angel or a VC.

With a shit storm circling this was not an insignificant challenge. Raising Venture Capital investment for consumer facing products which are pre-revenue is painful enough (read: almost impossible) in Europe anyway, let alone with your start-up smelling like a cow shed.

Steve also mentions that at this point I had to secure emergency loans from two shareholders to keep the lights on. This is also true.

Anyone who has run a start-up or two (I’m on my sixth now) will probably have been there or somewhere similar, at some point (i.e. if not asking shareholders for cash then begging at the bank, or negotiating with the wife to re-mortgage the house). Even Richard Branson had to do this, for Virgin Atlantic, a few years after it started.

If you’re highly successful without ever reaching panic point financially, more power to you.

In fact I still have personal guarantees for these loans despite leaving the company operationally, because Rummble’s executive team after I left have at the time of writing, been unwilling to release me from that liability. I actually never invisaged ever being removed entirely from the company, so it didn’t seem a particularly grave issue at the time. Entrepreneurs do have a terrible tendency to be unreasonably optimistic; but then perhaps it’s a requirement in order to stay sane.

The reason for mentioning this? Never, ever take on personal guarantees on behalf of your start-up (something I have advised many times against doing, but then chose on this occasion to ignore my own advice).

A Few Good Men

So, next up I had to go and appear at the HMRC winding up hearing, regards our owed PAYE (company employee taxes).

The lawyer for HMRC stood up as the only creditor in the room (all our others creditors/suppliers were being fully supportive) and said he believed that Rummble should be given time to pay and the winding up petition thus removed. This was granted by the judge, but seconds later Mr Andrew Muir from Highate Associates (who was at the back of the room) piped up that the company also owed him money.  This was not true, at least not for him to have the right to petition for Rummbles winding up.

Mr Muir from Highgate Associates had offered to provide the company £20,000 ($30k) of the £300,000 ($470k) in advance of closing the then pending investment, in order to help cash flow (this was before he demanded the extra equity). But the terms of the loan were that it was due to be repaid only on an equity investment event of more than £20,000 ($30k). This event had not yet happened, so the loan was not due, so he was not a valid creditor for the purposes of a winding up petition.

Rummble’s Barrister to my horror, did nothing. This was a grave error. As a direct consequence the Judge allocated lead petition to Mr Muir, because the Judge was not instructed otherwise.

I was now quite frustrated. Thankfully at the very least the Judge still gave us some weeks before the petition was to be served.

Sadly it then took further precious time for our lawyers (not the lawyers of my current start-up I hasten to clarify) to come up with the solution, which was to issue a Strike Out of the winding up petition on the grounds that it was not valid. Had this occurred (which I was all in favour of serving to deal with someone who I now viewed as a bully) the petitioner would have been liable for all costs.

Unsurprisingly perhaps, at this threat Mr Muir backed down, opting to – wisely for him – take his chances of negotiating a settlement from a future investor thus getting all his money back and possibly more, while avoiding the risk of costs. Ultimately, this is what indeed happened with him receiving an extra £6,000 ($9k) to go away quietly, much to my consternation, when we closed Series A.

M8 Capital comes to the rescue

Via an introduction from Joe Neale, I met with the M8 Capital team a few times in Q1 2010; indeed I had done once before Christmas if my memory serves me correctly.

They seemed enthusiastic for Rummble’s vision and I was particularly impressed with Joe Kim, who was articulate and clearly experienced in business.

I will give some credit to Joe Kim at that time for having conviction enough to consider investing in Rummble and consequently engaging in negotiations, despite the swirling problems, in order to get us off the proverbial sand bank which as a crew we had navigated our ship on to (albeit with the additional misdirection of some metaphorical pirates).

I think as a brand new early-stage VC firm (Rummble turned out to be their first investment) which had limited experience dealing with scrappy, dirty start-ups, the Principles (at that time having had virtually no hands-on experience either investing in or running such companies) struggled to understand some of the decisions that had been made, in reality simply to keep the start-up afloat. The banking crash in 2008 caused nearly all angel investment in the UK to disappear for a period of time and this had taken it’s toll on Rummble’s attempts to maintain momentum. So the bootstrapping corner-cutting-to-survive nature of Rummble at that stage I feel came as a bit of shock to them (although I’d argue that on balance, we still had many more processes, checks and balances in place than a lot of similarly sized and funded start-ups!)

As an aside, this lack of hands-on experience at some VC’s within start-ups can cause problems for the VC/Founder relationship as I discuss at length here, and it seems to be a particularly acute problem in Europe.

But the important part of this story is that after explaining my experience with the previous potential investors and then M8 Capital doing their due diligence, they agreed in principle to invest £750,000 ($1.1m) for ~22% of the company.

This was fantastic news. Finally something seemed to be going Rummbles way.

This was precisely the size of investment which a consumer orientated company of Rummble’s stage needed. Critically, with this deal the Rummble team and I would have retained control of the business but also had the runway to truly deliver on an improvement to our User Experience (which was indeed needed) building on the top of a platform which was, without question in my view, more advanced than any of its peers.

So the deal moved forward – although not without difficulty. But again, anyone who has done a venture investment will tell you that those which sail smoothly into a new day, without hitting some choppy waters along the way, are few and far between.

The Life and Death of Colonel Blimp

Within weeks I then lost majority control of my start-up, because I was honest.

That probably sounds ridiculous so needs some explanation. A minority shareholder, John Rand (who had been doing part time work in return for later post-funding pay) had also been doing Rummbles book keeping to save Rummble costs. Just before I signed the personal warranties (which had me vouch for the accuracy of our accounts/books as part of the investment) I did a final and thorough re-checking of all the accounts and in the process identified circa £20,000 ($30k) of additional creditors (debt) which was not on the balance sheet which had two weeks earlier been sent to M8 Capital.

Having confirmed the mistake I sent M8 Capital a new balance sheet, to replace the previous one of two weeks earlier, but included notes detailing very precisely the reason for the changes.

Their response was decisive. In a meeting a few days later they said they could not do the original deal. My understanding was they felt the financial management of the company was so poor that they would only be able to do an equity investment (rather than the convertible loan we’d agreed) and that it would require them taking 75%, instead of 22%.

Note to Founders: don’t cut corners on accountants, it could cost you an investment deal, or your company.

Now at this point, with hindsight I should have either:

  1. Wound the company up and raised money to buy it out. This I did not do as I felt  an obligation to suppliers and shareholders. Mr Muir also still lurked at the sidelines and would I believe have done his best to disrupt that process. The risks seemed too high.
  2. Stuck to my guns, offering M8 Capital 49% and financial oversight, but no absolute control. This would have been worth pursuing, but could simply have resulted in a the investor walking away.

Had I not sent the new balance sheet, the original deal would have likely been signed. But having dug up the mistake, it would have been dishonest to sign the warranties, knowing the balance sheet included a mistake.

But then viewed in the shadow of investment banks frudulent trading, Enron and the flakey reversal into shell companies on the AIM, one can’t help wonder who is being the fool? In reality £20,000 ($30k) of extra creditors on a £750,000 ($1.1m) investment would not have been material to the future of the business post deal, and it would still have left Rummble (after paying all creditors) around £500,000 (~$800k) of working capital. In all likelihood the difference would have been lost in the greater scheme of things.

So, a white lie would have meant the 22% deal would then have been done. That’s unless it was a ruse all along up to this point, as a negotiation strategy. Before you say I’m crazy, it’s not entirely implausible. In psychological parlance it’s known as “the low ball”. If this was the case (and I’d like to think it was not) it would be from my point of view a pretty dirty trick. But from an investors POV, perhaps it is simply a justifiable negotiating tactic. It’s far from illegal and the point of a negotiation is presumably, to come out with the best deal you can for your side?

At the meeting when I was told it was 75% or nothing, Joe Kim indicated that he did not want any longer to do the deal but that his colleague Shiraz Jiwa, did.

Shiraz Jiwa’s background is in distress capital and all the shenanigans of that world. Later, he said words to the effect that he couldn’t believe I had previously negotiated so hard when the company was in such a bad condition. That would suggest to me the change of heart was not a ruse, but simply the last straw for them as investors, struggling to comprehend a struggling start-up, and the balance sheet change could have genuinely triggered some innate reaction to either control everything (utilising this fortunate opportunity to justify taking control of the business) or to walk away from what may have seemed, particularly in their corporate eyes, a can of worms.

Draw your own conclusions.

I negotiated the deal down to 52% from 75% and signed, handing control of Rummble to M8 Capital as the new majority shareholder.

The negotiations during this period were fraught with problems and bad feeling grew on both sides.

At one point M8 Capital even suggested I should pay a $15,000 legal bill which came in from our lawyers during the DD saying that it wasn’t there before. Well, obviously not as it had only just been sent to the company by our laywers. The idea I should pay a company invoice personally seemed rash at best, even if M8 were fed-up with the poor financial condition of the company. What happened to working together to solve problems?

Both sides probably should have walked away.

Post Investment

From a business perspective it was a shrewd move by M8 Capital to gain a controlling stake in a company with great technology. Unfortunately the deal left such bad feelings on both sides, making working together difficult from day one; the relationship since has only ever worsened

M8 Capital took 3 board seats on a 5 person board, with John Paterson (my previous Chairman) and myself. This seemed excessive for a small business, but even practically,  other than votes (when M8 had majority control anyway via ownership) it meant there was little sector experience as none of the 3 M8 Capital directors had any in my space nor with early stage start-ups. Joe Kim would have provided all the business experience required (and made all the decisions for M8 Capital anyway). In short the board was dysfunctional and did not add real value to the business.

The Kernel’s article prints in much detail about what happened next, but I recognise Rummble’s consumer product had a UI which needed serious improvement … and the initial M8 investment allowed us to begin that process.

Iterating on the number of platforms we had already deployed across, even today takes time (that’s why the likes of Instagram stuck with just one: the iPhone). And sadly  subsequent events ensured Rummble version 2 never quite saw the light of day.

It would have been ready for a January 2011 launch and with the aid of Ribot.co.uk (with whom by November 2010 we’d developed an exciting, unique and incredibly simple 3-touch user interface) the whole team was confident of great things to come.

In parallel to this, we had also executed on all the suggestions M8 had made, including a viral Facebook app (which Zuck awarded first prize to on his visit to London in 2010) and a local business platform for retailers and venues, amongst many other things.

Our user engagement levels progressively improved during the 10 months post M8’s original investment, on track with my predictions and adhering closely to our agreed cash flow and burn.

The rest is much as The Kernel reports. In December 2010 Rummble was renamed Rummble Labs. Quite a good name as it happens (it just would have been nice to have been asked about it, as technically I was still CEO when it was chosen). And on January 6th 2011 I was officially no longer CEO of Rummble, after five very tough but mostly enjoyable years.

Rummble Today

With a superb accountancy firm at the helm of Rummble’s accounting since I appointed them in April 2010, balance sheet gremlins are long gone.

Rummble Labs continues to be a business with exceptional IP and today has a B2B product which is a leader in its market.

At the time of writing (3rd July 2012) I remain on the Board and have contributed where I can with business development. Alex Housley and I speak for business reasons, but we are not friends.

The trust network technology is in use by a number of large clients on a commercial basis, increasing the quality of their user’s experience and – most importantly – the revenue from their on-line assets. In the pipeline testing Rummble Labs’ technology are some of the biggest names of the modern Internet.

Rummble Labs then, continues to grow and I expect it to eventually exit thanks largely to the technology which I co-invented (which has continued to be improved upon since I left at the end of 2010) and the hard working development team which has got it this far.

Also the very concept itself (of highly personalised content) even as a business to business API, is finally no longer grossly early to market (you can read more about my views on timing in a marketplace here).

If you have a website which needs to deliver the right data to the right person at the right time, or a  silo of data which needs clever personalisation, Rummble Labs is certainly the place to go.

In Summary

This level of detail about a company’s fund raising is seldom widely discussed until the company has died (at which point few people care) or unless it is re-imagined by third parties (journalists, writers and bloggers), or when looking back at the events from a distance (Microsoft and Apple are the extreme examples of this, with hundreds of books and films published).

The truth is that many start-ups which on the outside look healthy or stable, are often either desperate for cash or have serious problems of another nature, if not with their investors then perhaps their product or service.

Board squabbles are more the norm than the exception and arguably so is the Founder being removed as CEO of their own company, either because:

  1. the company is growing so fast that he is no longer the right person to do the job and is better being “Founder/CPO/something else” or
  2. because the company is failing and shareholders/board/team (or all three) loose confidence.

Lessons Learned

One of the mistakes with Rummble was trying to do so much, especially with a mobile app and a comprehensive web presence. Keeping it simple on mobile today is very important, but in actual fact, keeping it simple as a start-up en general is important, full stop.

Rummbles strategy may have been fine if we’d had a longer commitment (the user growth and engagement curve was after-all going up and to the right) but I also feel M8 Capital didn’t truly understand the challenges and resources associated with building a cross-platform mass-consumer play. Any significant investor must understand the challenges of doing what your start-up does.

As CEO I of course made mistakes also; probably not being ruthless enough in culling projects, nor taking a far more radical approach to try and re-position Rummble’s relationship with M8 Capital, for the benefit of all parties when it was immediately clear things weren’t working. But without control, that is extremely difficult.

My humble advice to Founders of early stage start-ups

is that which you’ll probably read many places else and which some I’m sure will say is obvious:

  1. really make sure you get to know your investors to make sure there is alignment of vision and critically, also of culture. Do whatever it takes but try and understand what makes your potential VC partner tick: go kite-surfing together, go to CASUAL dinners, go drinking. Whatever works. They need to understand and trust you too.
  2. don’t let go control of your company (easy to say, sometimes hard to avoid). In a Series B or C you can expect not to have majority control, but early on you risk everything in the hands of someone else, both your business and your position. In my first few start-ups I didn’t break this rule. For Rummble I did and the results were less than ideal. Before you do it, assume a worse case scenario and then work backward and ask yourself how that compares to alternate choices which don’t involve you ceding control. If you do give up control, haggle hard for serious safeguards and if the investors won’t compromise, you have to ask yourself why? Are they investing in you and the company or just the company? With an early stage start-up that’s an important question to know the answer to. They won’t agree to anything on trust, they’ll want it on paper signed. So should you.

My humble advice to VC’s and investors

  1. is the same as (1) for Founders above. Know your Founders well (of course) but more importantly if it’s an early stage investment, don’t invest in anyone you don’t want over to your house for dinner. If you do, IMHO in the long run it won’t help your fund and certainly doesn’t help the entrepreneur.
  2. a determined Founder is probably the single most valuable part of an early stage business and they could still disproportionately contribute to its success even if he or she ends up not running it. If things become difficult, give a Founder some credit for their ability to be pragmatic and work toward a compromise, because they are also business people even if their outlook and approach is fundamentally different to your own. Finally, if you have never started something from scratch, given birth to the idea and built it up to a point where it could just possibly become the next big thing, consider how you would feel if someone came in and took away one of your children (if you have any) and never returned them. Because ridiculous or otherwise, that’s probably how emotionally attached entrepreneurs can be to their company (especially if it’s their first) because it’s the only way they can be irrational enough to choose tech entrepreneurship as a career to start with.

Here endeth the lesson. And that’s officially the longest blog post I’ve ever written.

Footnotes

Disclosure: The author has contributed x3 articles to The Kernel as an Entrepreneurship columnist at the time of writing this post, on an unpaid basis. The author has no control over other copy or editorial, the author is not consulted on what or when anything is published, there is no commercial relationship and nor was the article about M8 Capital and Rummble at the behest of the author of this blog post.
1 The tribunal case was thrown out after the Respondent (Rummble) claimed that the author was not an employee of Rummble for more than 11 months (despite having founded the company). The key legal take away is twofold: that Employment in UK law is currently defined by a need for their to be a Master Servant relationship between the company and the employee. The employee must serve the company. If you are in control of the company, how can you also serve it? There are exceptions to this and it is an area of grey. The second key legal point is that if the employment contract is signed less than 12 months before the employee leaves, it is the responsibility of the claimant to prove he is an employee. If it is over 12 months service, it is the responsibility of the Respondent (employer) to prove the individual is NOT an employee. As I arbitrarily signed an employment contract before the Series A, the date by chance was February 6th. I was forced out formally on January 6th. I was one month short, despite having continued in the same role for over 5 years; the paper trail did not demonstrate this fact thus the Judge had to conclude the tribunal did not have jurisdiction over the case.
2 Steve Kennedys loan to Rummble was converted into low ranking shares at the behest of the new owners in order to close the 2010 investment, although in addition today I still guarantee the loan on behalf of the company at 15% apr
3  as I recall, any imbalance in dilution in any potential deal with LikeCube was only to appropriately incentivise the management team of both companies. In addition M8 Capital would have no longer had a controlling interest, releasing the management and Founding team to pursue a strategy they felt best for the new entity
The title of this post derives from the 1943 film comedy-drama of the same name, whose title is taken from the satirical Colonel Blimp comic strip by David Low, but the story of the film itself is original. The film today is regarded as a masterpiece of British cinema. It tracks the antagonist who struggles with the new dynamics of modern warfare which do not respect any previous code of honour or behaviour amongst fighting men, whether real or imagined. In other words, in warfare there are no rules.
published Without Prejudice.

Investors & Entrepreneurs: Breakdowns in Communication

This post was originally published at The Kernel, an excellent deep-dive blog on the start-up scene. Think The Economist for technology.

Not being able to make it to a meeting for lack of cash in your pocket – not enough even for the bus – is a level of financial and emotional trauma that most people in business never experience. Well, good for them.

In the two decades since my first forays into entrepreneurship, aged 14 with an Atari ST fanzine, followed by an ill-fated satirical magazine called TIT (think Viz meets Private Eye), I’ve found myself entirely brassic more than once.

A desire for financial security is not a good character trait in those wanting to be entrepreneurs. Consequently, perhaps, most people have not chosen to create and run a start-up. By “create a start-up” I mean having an idea and starting from scratch, on your own, with no capital.

Most institutional technology investors have never run a start-up. That lack of experience at the coal-face of business is the root cause of many a problem between company founders and their investors. This is my subject this month.

GHOST FUNDS

Financial acumen should surely be a given for venture capitalists, although writing this sentence feels peculiar when tech venture is today one of the worst performing asset classes in Europe. Europe’s venture capital firms are being spurned by their limited partners, and most are unable to raise new funds. Many European firms have disappeared from the market, or are running as ghosts of their former selves.

Looking at the numbers, European IPOs from venture investments yield returns similar to the US, but European trade exits for tech start-ups underperform compared to our transatlantic cousins. The reasons are complex. A 2008 reportattributed the overall performance gap between Europe and North America to a segment of “poorly performing companies”, but this generalisation gives few tangible clues.

The first thing is to recognise that even in the birthplace of venture capital, the United States, all is not perfect if you pull back the curtain. CNN Money summed up the US venture industry last year by saying: “It’s no longer a market of four tiers; it is the rarefied best and then the rest”.

But while early stage investment in Europe for tech start-ups is more plentiful than it ever has been, by most metrics the Old World lags behind the US, in both scale and success. In short, European tech venture performance continues to be a source of embarrassment.

Sadly, I can’t offer you a silver bullet. I’m no expert on the intricacies of the finance and investment industry. But let’s focus on the things that a VC can control. How can we help tip the European tech investment needle in the right direction? Ignoring a founder’s usual bark of wanting fairer deal terms, greater capital deployment and higher valuations, the most obvious target is a greater focus and understanding of what Sequoia calls “human capital”.

Many European tech investors lag behind the best of the US venture community in recognising how valuable a dedicated start-up founder can be, even if that individual might not be the perfect chief executive when a company scales.

This disdain for the entrepreneur can extend to an under-incentivisation of the start-up team as well (though that too can be the fault of the founder). Not many European start-ups have option pools of 20 per cent or over, but that is pretty normal in California.

One UK VC I worked with persuaded all non-execs and employees to sign away the rights to their options at investment, promising to re-instate them from a new pool. Unsurprisingly, none of the options ever re-appeared. Such behaviour is not only unethical, but naive in terms of motivating staff and creating good karma between investors and the senior management team. It does little for your reputation and deal-flow either.

It is true, of course, that the fabled West Coast has plenty of horror stories about “evil” or incompetent investors too, which leaves one counselling first time start-up entrepreneurs to view their new-found VC friends with suspicion from day one. Hardly ideal.

Maybe I’m now the one being naive, but this is not the most expedient way to create the next billion dollar start-up. Let’s face it: it is the few which feed the many in the venture capital model.

One big reason a chasm can form between founders and their investment overlords is practical: like the tragically blinkered army commanders of World War One, VCs often seem to carry arrogance and a sense of entitlement into the board room, consequently making poor strategic decisions, or, equally inappropriately, insisting on bad operational ones. Thankfully it just costs thousands of pounds, instead of thousands of lives.

Too many VCs I meet lack experience and wisdom forged in the trenches of the business battlefield. It is not surprising, then, that the experience of not having enough money for the bus would be an anathema to most venture firm associates, principals or partners.

It is also unrealistic to expect them to understand the pressures entailed in running a tech start-up or being a small business owner. Many VCs have not even run a team or a led a department in their (often all-too-brief) previous careers, let alone convinced a flock of disciples to follow them into the abyss and create something from nothing by starting their own business.

OUTSIDE THE COMFORT ZONE

Worse still, a career in banking, trading, consulting, distress capital or another process-driven corporate environment, with their clear hierarchical ladders and ample support infrastructure, often seems to give the VC misplaced sense of superiority.

“Success” in the financial sector is not to be derided, but the nitty-gritty of having to do everything yourself, on a shoe string, in a team of just two or three, with no money, while trying to persuade often intransigent investors to give you money, is a unique stress which is life-swallowing and not something you can understand from reading about.

And most people from a corporate environment simply don’t get it.

There are exceptions. Some of those exceptions are people I am happy to count as friends and respected acquaintances. These are people who understand, from real-world experience, what it takes to nurture a product or service from birth through difficult puberty to proud maturity – or premature death.

These people are the future of the European venture industry and if you are looking for money, I’d recommend seeking out this rare breed.

But the problems inherent to the European VC-entrepreneur relationship remain threefold. First, VCs often don’t even realise that their understanding of a technology or market is lacking.

Second, the entrepreneur-VC conversation is often at odds when it comes to aspects of managing the business or comprehending operational challenges.

Third, the worth of a founder in a start-up is often underestimated, causing at best ill-feeling and declining motivation, or, at worst, if the founder is removed, a large opportunity cost for the business and ultimately the fund itself.

Most entrepreneurs are pragmatic enough to recognise their failings, and will take on board sensible business suggestions, which are backed up with tangible facts or defensible experience. It is, after all, part of the start-up mantra to iterate, to discover what works. That, by definition, requires an acceptance of failure and the need for improvement.

As we’ve established, the problem is many VCs neither have this experience nor this working philosophy. Yet often they lecture start-ups on what their product should look like, or meddle too deeply in the operations of the business.

EMOTIONAL ATTACHMENTS

A shiny new VC associate once said to me “You entrepreneurs are all so emotional.” It was not meant as a compliment.

You have little choice but to operate somewhat emotionally when you are a start-up entrepreneur. Where would the endless energy to persevere come from otherwise? If you made decisions entirely logically, you would pack up immediately and do something with a greater statistical chance of success.

And this statement suggests not just thinly-disguised contempt, but demonstrates perfectly a lack of empathy and understanding about what it takes to run a start-up company. For this VC, as for many, his is simply a job. A secure, well-paid step upward on the career ladder.

This ignorance is the same reason TV shows like “Back To The Floor” and “Boss Undercover” make such good television: the chief executive often has no comprehension of the day-to-day challenges facing his or her workers, the people who actually make things happen.

Morgan Stanley and McKinsey have the resources and departmental staff to support whatever you need to do to perform your role. In contrast, as a founder, you are the organisation: you are the department for everything.

On the bright side, having left a venture firm to create their own start-up, more than one VC has told me: “I had no idea how incredibly hard this is … it is 100 times harder than I imagined.”

If they ever return to the venture world, those students of experience will, I’m sure, be infinitely more successful than other investors who have no practical grasp of start-up challenges.

An experienced European VC said to me: “I think it is impossible for a venture guy who invests early not to have real operating experience. Even if it’s two years working for someone else’s start-up (most great VCs weren’t phenomenal company builders) you need to know the struggle it is to build something.

“I also think people need to know what it takes to grow something large, it’s a whole set of new lessons in scaling that again you just have to live through. This you can partially pick up from the board perspective but you need real experience to give you good perspective. I think guys in the US get this. Guys in Europe don’t. If you just count up the number of [VC] partners in the US who have operating experience you’ll see it.”

A lack of hands on, real-world experience is the biggest problem facing VCs and tech entrepreneurs, especially in Europe.

VETTING YOUR BACKERS

As an entrepreneur, what can you do? Well choose those VCs who have the hands-on business experience. And get drunk with them before you sign the deal. No, seriously. You’re getting married. You’d never marry a girl or guy you’d not got wasted with, would you?

Find out what makes them tick, what they’ve done in their lives. What have they learned in business? How have they failed? Discuss other start-ups, especially ones which have gone through difficult times. Discuss how they would handle a divorce.

My unnamed European VC says “Venture people are financiers, so we have to think and act like investors, meaning financial capital. But we’re also company builders, which makes a good 50-75% of our job about people … it’s a tough thing to understand if you’re not used to dealing with it.”

Do the following exercise: take the top 20 firms in the US. Look at the partners’ bios. Look at how many:

  • started a company
  • worked at a start-up
  • were execs of a start-up (VP or higher)
  • sold or took a start-up public
  • worked at a tech co
  • were execs of a tech co (VP or higher)
  • hold engineering degrees
  • have MBAs
  • worked in banking
  • worked in consulting

Then repeat that process with the top seven firms in Europe. The whole exercise should take you less than an hour. The resulting disparity is shocking.

If you are limited partner, you can help the European tech ecosystem (and your own return), you should only give your money to a fund if the team is entrepreneur-heavy.

Because, unlike regular businesses, start-ups are defined by a set of unknowns. They are not straightforward enterprises. It is usually a messy, pivoting, imperfect machine, run by one or more impassioned individuals who have sacrificed a regular life for the promised land of thenextbigthing.com.

But there could be a significant improvement for the success rate of European tech funds, and the start-ups they invest in, if venture firms simply hired more people with real, tangible hands-on experience, rather than the the cookie-cutter, MBA-toting ex-finance guys they favour.

Just look at career politicians for another example of what happens when people make decisions about things they have no real-world experience of.

Entrepreneurship: Timing Is Everything

First published in The Kernel last December, I share my biggest lesson so far: that in business, timing is everything.

No, none of these people are me.

Published article here: http://www.kernelmag.com/comment/column/196/timing-is-everything/  copy below.

 

One of the most famous British philosophers of our age said, “to realise the unimportance of time is the gate to wisdom.”

Clearly, Bertrand Russell had never started his own business, let alone a tech start-up. Russell died a full twenty years before the invention of the web, so we’ll forgive this infelicity – but while his protestation may be helpful as a bon mot about sagacity and wisdom, time is an all-too-often overlooked variable when it comes to starting a business, particularly in the technology industry.

Take a stroll through the graveyard of good ideas, and there are plenty of high profile disappointments to muse over. I’ve had my fair share, with too-early-to-market failures featuring particularly strongly. They were smaller and less glamorous than those of popular culture, but when you have, metaphorically, given birth to a child it is painful to lose it, whether it’s made the cover ofVogue or not.

My first was Cambridge Virtual City, a localised web portal. In the late 1990s, I registered CambridgeVirtualCity.co.uk – and 150 more around the UK – with visions of a network of websites where you could work with local businesses, find information and more. But selling web advertising to businesses back then was not straightforward. “So you want us to advertise, locally, on the Internet. But isn’t the internet global?” Queue long pause. “Well, we don’t really understand the point, but you seem like a nice chap so you can build us a company website if you like?”

My failure to secure sufficient advertising revenue was as much to do with my inconsistent sales strategy and undue focus on product development as it was market timing, but the sales cycle was certainly bogged down by an education process for potential customers – something which, as a one-man enterprise, I didn’t have sufficient resources to get caught up in.

Being first to market, I learned, is rarely best. Thankfully, the virtual cities idea pivoted into a successful website development business, which I sold in 2001. I was undeterred by my experience launching products way too early. You might say it was to become my calling card. (All the more ironic for someone who at school once received a prize for being the most consistently late student, ever.)

Playtxt was my fourth start-up. It was a mobile location-based social network. Literally dreamed up in a pub, The Fort St George on Midsummer Common in Cambridge, it was pretty cool for its time. Text in your location by SMS and Playtxt would text back telling you where your friends were. You could message other people, share your location and share photos. Again, however, it was an anachronism. This was 2002, and we were unable to convince any of the infamous Cambridge Angels it was worthy of investment. “I just don’t believe any one is ever going to use a mobile phone for that sort of thing!” one of them told us.

And so we stumbled onward, hand to mouth, until 2004, when, from across the Pond, Dodgeball appeared. The first child of Dennis Crowley, better known now for Foursquare, Dodgeball had a New York swagger the American press eagerly lapped up. A new acronym was born, and I discovered that I was running a “MoSoSo” company, standing for Mobile Social Software. In fact, it was LoMoSoSo, Location-based Mobile Social Software. Thankfully, this awful abbreviation expired about the same time as both Playtxt and Dodgeball, shortly after 2005. Dodgeball was bought by Google. Playtxt was not.

* * *

Inside Google, Dodgeball starved and died. The lesson from this experience, alongside a growing suspicion that doing direct-to-consumer technology innovation in Europe was for martyrs, was that both services were way too early to market.

Ten years on, developing services for smartphones is still a painful, pricey experience and there is still no critical mass of people using location services for social interaction.

In fact, developing for today’s smartphones is like the first dot com days, only instead of different, incompatible web browsers, we have different, incompatible mobiles.

If you have made it this far, then most of your friends probably do have a smartphone, but – and this may come as a shock – most normal people still do not: smartphone penetration in the UK and North America is around 35 per cent of the population, depending on whose statistics you believe. When Facebook started in 2004, internet access was at 55 per cent of the US population. By the time they opened up the service beyond college students in 2008, over 84 per cent of the US population had internet access.

MySpace, Friendster and, before them, Black Planet, had tried to create lasting online social networks. Timing is not the only thing that killed them – Friendster, for example, had repeated scaling and engineering issues – but timing was certainly a big factor.

In 2002, I spent half my time at Playtxt explaining to friends, investors and potential users what the hell a “social network” even was. We were, of course, using the wrong words: the curse of knowledge had struck, and we failed to communicate our ideas in sufficiently simple or compelling language.

Luckily, there is now plenty of research into poor timing and better communication.

A great starting point when doing anything innovative is grasping Geoffrey Moore’s chasm; or rather, learning to leap over it. He splits your initial target market into enthusiasts and visionaries, after which the chasm needs to be jumped to reach early adopters, pragmatists, the conservative majority and finally the laggards. Many products or services never make it over the chasm, because they are simply much too early: the market is not ready for them, or a pre-requisite technology is not sufficiently widespread.

Even if you argue that – for example – a 35 per cent penetration of smartphones is a big enough target market, the public consciousness has to change to adapt to using these relatively new devices.

One recent report said that many people have yet to install a single app on their smartphone. My mother certainly hasn’t, and she is on her second Android handset. Market surveys, analysis, reports and research all help, but as is so often the case with something new, people do not even know what they want. Instead, you have to take base indicators – can people access my service? Does it solve a problem which exists today? – and find a way to test your assumptions as rapidly as possible. The hard part is being honest with yourself about the results.

Simple tests are often the best. When it comes to your message to the market, if you cannot explain what you do in one sentence in a way your mother understands, keep trying until you can. Then, using that same description, if you cannot find at least a handful of people you know who are desperate to use your product or service after hearing about it, that may be a warning that you are too early to market, you are in the wrong market, or even that your idea is just plain terrible.

Eric Ries’ recent book The Lean Startup has rightly been championed as a crash course in fail fast methodology. It is highly recommended reading.

In order to pre-test your idea, he suggests finding the fastest, dirtiest ways to do so. For example, you can set up fake websites, drive some traffic and see what converts, before you write a single line of code for a “real” product. Starting simple is the cornerstone of Ries’ book and it should be the cornerstone of your start-up. Build something simple and test it. This may be the only way to know for certain if you are too early to market or not. Rapid iteration is essential if you are not going to die in the process of trying to find out.

Messaging, especially in a premature market or with an innovative product, is so critical it can make or break you – fast. When changing the headline wording on the Playtxt homepage, we found sign-up conversions changing by over 40 per cent in both directions. Exhaustive trial and error was the only way to find out what worked; had we done this before building the product, maybe our product would have been different.

Eventually, with Playtxt, we did find a message that worked and we had a product people wanted to use, having meanwhile built too much. Suddenly, sign-ups leapt to 1,400 a day, and with my credit cards maxed out, we ran out of money and had to switch off the service. (1,400 sign-ups a day does not sound like a vast number, but we had to pay for receiving the inbound texts and the SMSs back out to people’s phones.)

* * *

Mark Zuckerberg is smart. I joked with him once that I had educated the market for him by trying to sell the abstract concept of a “social network” and “social software” years before Facebook with Playtxt. In reality, I simply was not shrewd enough to target a homogenous group who all have the same vested interest – 10,000 hormonal Harvard students – and solve a specific problem for people. His original site, “The Face Book”, really sold sex: not the act, but the desire and promise. Who wouldn’t want to check out the other 9,999 students at their university?

* * *

So far, all my start-ups have been based in Europe. But I don’t think geography makes that much difference, insofar as if you are focused on a specific geography, you need to cater for the development stage of your demographic in that territory. The fabled Bay Area has an extremely high percentage of enthusiasts, visionaries and early adopters. In this regard, getting new and innovative services off the ground can be easier. Arguably, it gives the new kid on the block time to prove himself and learn the ways of the world, before leaving home to go and get a real job the other side of Moore’s chasm.

As for me, I’m considering what field my own next start-up should be. I hope I regress to my school days and, if anything, be late this time, not early.

A New Type of Tech Blog

The infamous wordsmith Milo Yiannopoulous has invited me to contribute a column to his new digital publication The Kernel.

Aside from it sporting an excellent name @Nero is intending his new venture to raise the game in Europe amongst the blogs and online publications covering the digital entrepreneurship sector.

My first column is a self flagellation on being too-early-to-market. Titled “Timing Is Everything” it is a brief cronical of two fairly visionary ideas, ultimately neither of which I executed on successfully.

The responsibility of course remains entirely mine for these failures. While mitigating circumstances certainly apply (for example, building forward thinking free-to-use direct-to-consumer services in Europe is almost impossible) the one who steers the ship is still responsible for it sinking in a storm.

You can read more here or if you’ve had enough of me already I highly recommend the other contributors, all of whom have made excellent launch contributions.

Unreal: 50% Of Start-ups I Researched Didn’t Have A Proper Contact Us Page

Based on 40 applications to the start-up competition I recently ran at the MLOVE confestival, 20 didn’t have a clear contact us page with email, 6 had no contact information at all and 4 had no web presence or even holding page.

I was astonished.

Admittedly, it is a small sample size and focused on very early-stage start-ups; but it I still find the fact baffling.

When you’re running a start-up, there is lot’s to do – I know I’ve done a few – but one key ingredient is to make yourself accessible:

  • to investors (who you may need later even if not today)
  • to future team members (who you want to begin enticing from day one)
  • to press
  • to potential partners
  • and to customers or users!

Having no website at all looks even worse (and yes even if you are in “stealth mode”). Have a holding page simply giving a project name and team; or be sensible and use something like LaunchRock or a simple google form to start collecting emails of your future users.

If you don’t want anyone to know you’re doing a new start-up, then perhaps don’t enter a competition!

Not like this

Stealth mode for a start-up is all very well, but don't be entirely aloof from contact, nor ignore business basics such as being easily contactable. By the way, I didn't make this poster, otherwise it would say "you're".

All these factors such as ease of contacting them, the website, the apps, contributed to our choice of the five finalists (and would no doubt contribute to the choice of a journalist to write about you or an investor to take an interest or reach out).

It simply doesn’t bode well for your attention to detail, your ability to design good product or your understanding of user psychology.

(Incidentally, the reason I needed to contact them all was I myself had made an error and neglected to add an email field to the application form…but at least this was a temporary competition!)

Even Some Launched Start-ups Don’t Have One

There was even a service (I’ll leave unnamed) I tried this week which was live and trying to garner users but which had no team page, no contact us page and not even a terms and conditions of use. This is just sloppy, lazy or naive. I’m not sure which of those is worse.

In summary then…

If you have a start-up and have no holding page or contact us form or page with email address that I can find in under 8 seconds or preferably faster, then ADD ONE RIGHT NOW TODAY!

This is certainly one of those blog posts I never, ever expected to be writing.

Incidentally, the winners of the MLOVE11 Start-up competition were Booklet Mobile; congratulations!

More Reading:

The Myth Of Silicon Valley

Recently the on-going discussion of London versus the Valley has got a higher profile again thanks to articles like this and the fact European VC’s still seem unable to evolve let alone revolve: Even Fred Destin say’s European VC’s need revolution not evolution. Here here to that.

While the average London start-up’s dilemna* is should I go to Silicon Valley or stay in Silicon Roundabout? (which I touched upon last week) and takes the mind share of the European tech-elite, I don’t think the Americans give two hoots. Why would they? Silicon Valley is where it’s at, right?

What did catch their attention was Hermione Way’s post The Problem With Silicon Valley Is Itself on The Next Web, which prompted a response from Robert Scoble on Google+, both worth reading by the way.

Has Silicon Valley Lost It’s Way?

Loosely, Hermione complains that The Valley no longer truly innovates and it is full of fluff. Robert says it is still the only place really changing the world and no-one else does in the same way or to the same extent.

Naturally as I’m writing a retort, I must have a different view: I think they’re both wrong; but there is an element of truth in both claims.

With a long history of game changing technologies and innovation, has Silicon Valley had it's day?

With Silicon Valley, it’s the iceberg problem. You only see the tip of what’s going on underneath. Even I have grown tired at times of the sometime obsessions (and many say poor journalism) of platforms like Techcrunch; but you have to be realistic about what they represent. They are not trying to be the BBC or a broadsheet. They are for mass market consumption by the geeks, the early adopters, the DiggNation kids and Appleheads. At this they excel.

As a tabloid Techcrunch will write what sells impressions – they are not representative of the depth of Silicon Valley.

The problem is surely that inevitably, like the general news on TV and in most tabloids, it skews to easily consumed, often banal, content. The lowest common denominator.

The masses are selfish; they don’t care about new window material technology for the Empire State Building, they care about Big Mac $1 Burgers, Foursquare checkins, saving 50% via Groupon on their next t-bone steak. They care about themselves (see: FacebookGoogle+Flickr ..they are all about your ego, about your life).

This is why Techcrunch.com doesn’t shout about the other low level technologies (or indeed publish much about things outside of the USA) and instead you get 3 posts a week for 9 months straight about a company like Foursquare. Well, good for Foursquare. Gaming location, the system and MG all in one go!

Of course, I’m simplifying the argument, but one has to, to make a salient point.

These publishers publish that stuff because people consume it. They don’t care about a new silicon chip design, even if it does save lives or save money. It’s too abstract for most people. 

The Myth Of Silicon Valley

So let’s look back for a moment. Why is Silicon Valley (and it’s venture capital ecosystem) Silicon Valley?  Actually, it has a far longer history of entrepreneurship than most other centres of technology.

Silicon Valley started growing toward it’s present day nearly 100 years ago. During the war, the government funded innovation for large military and cold-war driven contracts with radio related technology, radar and later, other electronic warfare.

This graph is NOT true. Silicon Valley grew gradually since the war, it's taken decades. Click for more information and Steve Blanks excellent -and accurate- history.

Frederick Terman from Stanford played a pivotal role in the 40’s and 50’s pushing students out of education encouraging them (instead of doing PhD’s or masters) to start-up innovative technology firms to serve the country and defend against the Nazis and then the perceived Communist threat.

The 60’s brought transistors, the 70’s microchips, then Microsoft, Apple and the other leviathons we all know today. At the end of the 70’s deregulation in the investment markets enabled Venture Capital to begin in earnest.

London, Berlin, Amsterdam nor Tel Aviv has had any of this history. A few cycles of Silicon Valley computer and internet boom later and there are:

  • 100’s and 100’s of VC’s thus a huge pot of money
  • A tech ecosystem which is bigger than anywhere
  • There is a bubble cycle of hype driving investment and belief in the next big thing
  • and a lack of understanding of the outside world (actually sometimes useful when building a company which every normal person says nobody will ever use: see Twitter).

Add to this a huge early adopter crowd which can test-bake the next crazy Twitteresque idea to see if it’s real – all 2 years in advance of the rest of the western world being ready to use it – and you have a compelling place to create some seriously game changing products and services.

These advantages are why we in Europe are behind with consumer internet, why we don’t have a Google, a Cisco and now with mobile phone software it is the valley where innovation is getting funded in way which will give the start-ups longevity to get their new services right. It’s why Facebook and Google grew in the Valley.

I feel innovation in Silicon Valley – both whether hardcore tech or social media – is alive and well. Hermione should have cause to be worried about her native land though, for the same reasons she moved to Silicon Valley rather than continue in Silicon Roundabout or move to Silicon Alle or Silicon Valley! (do keep up ;-)

European Unadventure Capital

The history and experience in the Valley, also contribute to why European Venture Capital is behind and why our ecosystem is behind. We simply don’t have it.

Had visionaries in Cambridge (and government people in charge of technical innovation) pushed harder during the first dot com boom to make Silicon Fen more than a running joke, then Cambridge England might have had a 10 years start on Silicon Roundabout.

Cambridge was and is about the right size to become a town all about tech. It remains an important centre for science and biotech, but it is no centre for internet start-ups and with the growth of Old Sreet never will be.

The rooftops of Cambridge, including Kings College Chapel. More Fen than Silicon.

I started a localized web portal in Cambridge (wanting to scale to 140 towns and cities) in 1998, but couldn’t get funding. Arguably a lack of vision from investors -rightly or wrongly- prevented access to capital. I pivoted to B2B and a web development company which I later exited.

It’s a hugely wasted opportunity; possibly contributed to by the all suffocating Cambridge University which essentially controls the city and most certainly because of a lack of available investment capital for start-ups.

There’s something going on though, as New York is hardly a small city yet seems to be catching up with it’s Boston neighbour, touting Silicon Alley.

Cities like London and New York are almost too diverse, with lots of other history and other industries, meaning “Tech” will never be elevated to the focus which San Francisco and Silicon Valley enjoys. 

Small means focused.

Where else would you be able to start Square and have tech-savvy iPad owning shop keepers and cafe owners clammer for the service with open arms? Once it’s proven, bug fixed and entrenched in Palo Alto and San Francisco, where everyone carries an iPhone, they’ll raise another 1/2 billions dollars and take over the world.

Old Street is more than a "hotspot", it's burgeoning; but without follow on finance and better skills in the VC community, start-ups are being left as start-ups.

So Silicon Valley Is The Centre Of World Innovation?

In essence I agree with Robert Scoble that the depth of innovation is SV is astounding; however he is wrong to say world changing technologies don’t come from elsewhere.

That ARM processor in nearly every mobile phone you’ve touched in the last 2 years? That’s from Cambridge, England (my home town in fact).

The computer? invented in England.

The jet engine? England (and if our government had funded it to the extent the US government funded innovation in Silicon Valley, WW2 would have been a lot shorter!) 

OK so you see where this is going… 

For me problem with the UK and Europe compared to America and Silicon Valley, is we’re not good at scaling.

Sure, the financial industry seems to do it just fine – raping and pilleging it’s way literally to the top of the global finance worldbut taking good technologies and funding them, patiently nurturing them, growing them, having faith in them and their young founders, to become truly global players seems to be something in the UK and Europe we’re not very good at.

THAT is the big question.

The question is not why can’t we innovate, for we don’t lack of innovation. The question is why are we unable to scale our innovations rapidly to become the global market leader?

Back in Europe, where the history comes from… 

One problem  in London and Europe for technology innovation to scale (aside from these), is certainly finance.

This is grossly ironic, given London’s pre-eminence London is the world’s global financial capital, with New York in second place and Hong Kong in third.

The discussion of the problems with European VC’s, the lack of Googlesque companies and whether a start-up should start, or move, to The Valley, is a persistent topic in the London tech scene. The UK versus US funding debate is always threatening to popup on tech conference panels; to some extent for good reason but it also becomes boring and negative, though I entirely understand why the conversation needs to be had.

The ecosystem in London is less developed and the VC’s (with a few exceptions) are guilty of much of what Nic Halstead (and many more behind closed doors) will tell you: tech venture capital in London is run by financiers. This, is a problem; may be our biggest problem in Europe.

It perhaps underlies other knock-on effects, which is a lack of understanding of early stage capital requirements, what it really takes, to run and scale an internet business and being risk averse.

Read it and weep. I don't agree with the crazy $1 billion invested in the likes of Groupon, but you can't make butter with a toothpick. My own last start-up was expected to compete with our US counterparts of one fifth of the funding. The numbers seem pretty clear.

With little hands on experience, many European VC’s treat a start-up like an investment on the stock-market. Short termist, they undervalue Founders, don’t understand -or invest in- bold long term visions and they often under-capitalise (largely for all the reasons I’ve just listed). Facts seem to back this up (see graph above).

It is also claimed that European venture capitalists more commonly have a background in finance, while US venture capitalists tend to be scientists and ex-entrepreneurs. The implication is that the lack of scientific expertise among European VCs means they are less able to identify investments with high potential, than their counterparts in the US.

Bottazzi, Da Rin and Hellman (2004) undertook a survey of European VC and noted:

‘What may come as a surprise is that less than a third (of VC partners) actually has a science or engineering education.’

Half of all partners in their survey have some professional experience in the financial sector with ~40% having corporate sector experience. The recent European Investment Fund report by Roger Kelly, says that:

“Hege, Palomino and Schweinbacher (2009) observe that US VCs are often more specialized, and note that there is evidence that US venture capitalists are more sophisticated than their European counterparts, which contributes to the explanation for the difference in performance”

So Everything Is European VC’s Fault? Obviously not. I just personally feel it is the biggest single issue.

Entrepreneurs also have to up their game; pitches from many European founders are frankly terrible. Poorly delivered, unfocused product and ill-thought out business case. Both entrepreneur’s and employees need a more “can-do” attitude, to network better and think bigger.  I’m not saying it’s easy, it’s not. I’ve been there many times and made many mistakes myself.

Some people say local culture doesn’t always help, that it’s not fashionable in many countries to be an entrepreneur or want to make millions. I’m not so sure this is an issue – doens’t seem to phase the stockbrokers.

The size issue probably doesn’t help; tax systems, incentives and finance rules are not consistent for VC across Europe – but then again the Finance industry has managed certainly in London (to disastrous results in 2008!) so why not tech VC?

European early stage VC is laughably low compared to the US, in European VC's efforts to invest in later stage supposedly "safer" companies. All capital, little venture.

What to be done?

As an ecosystem, as a government and as a Venture Capital community, we should then now focus more on how to scale our businesses and fund the existing innovation from the many good entrepreneurs, encouraging a drive for global domination and find a way to teach European venture capitalists how to be more entrepreneurial and visionary, rather than only get more people to start a tech-business, without the proper mid and late stage finance, skills and infrastructure in place.

* Seems to be a world or argument raging about dilemna or dilemma. OED says Dilemma, but then why does the Times write dilemna? I’m sure I was taught dilemna, but the odds seem to be on the side of dilemma.

More reading on European VC’s:

Should I Stay Or Should I Go?

So if European Venture Capital is a bit f***ed in Europe, because:

  • there is too little choice/competition
  • many can’t raise a further fund
  • most don’t have hands on experience of product, the industry or running a team let alone their own start-up; most have a finance background
  • U.S. VC’s understand start-ups, product and vision in a way U.K./European VC’s do not
  • Performance of the European tech VC sector has been abominable

…should you even bother?

Should you not up sticks to the yellow brick road of The Valley and San Francisco, or stay in Europe with the losers? Some people who’ve already left for the west coast would say follow up-sticks and follow them there.

London or San Francisco: Something I’m Asked Every Week

The conundrum of supporting your home ecosystem or heading for the promised land, is also evident from the start-ups I advise. On nearly every occasion, during the first or second mentoring meeting the question arises:

 “Do you think we should go to the U.S?”.

For many consumer orientated start-ups the answer is: “Yes, go”.

However it depends on the start-up and be under no illusion: The Valley is no answer for a crappy product, poor team or flawed vision.

To all, I say that in Europe:

  • valuations will be lower
  • exit opportunities possibly fewer
  • then there is size of home market of the U.S., it’s vast (Europe is fragmented)
  • in Europe there is a lack of concentration of early adopters and “ambassadors” for your crazy new consumer service, compared to the west coast
  • American users in general are more ready to try new things & promote new services than European users
  • lack of product expertise with European/UK staff
  • potentially a lack of entrepreneurial spirit amongst start-up employees
  • lower appreciation / valuing of the share options you dish out
  • a social (and industry) stigma against failure
  • all the VC problems discussed above (for many consumer facing start-ups, without a revenue stream today, VC funding is highly unlikely indeed in Europe)
  • you’ll likely be under-capitalised and be expected to do more, with less (not always a bad thing, but not a good way to compete with US competitors)
  • at best the under-current of strategy and discussion (and at worse the entire focus) of your investors will always be on revenue before user numbers and product

There are up sides though working in Europe though:

  • cheaper engineering labour in Europe (even in London; would you believe it, it’s true!)
  • being closer to customers if you’re B2B
  • you can be a be a bigger fish in a smaller pond
  • potentially you can also start here in stealth mode being “under the radar” to get going if you have an original idea
  • target markets Silicon Valley does not (e.g. Yelp took YEARS to move outside of the US, losing out to Qype and others)
  • being OUTSIDE the bubble can sometimes help – the valley can be a distraction with it’s geekfest parties and all-consuming check-in-latest-buzz-word shenanigans
  • arguably easier (and cheaper) to set up a UK Ltd Company and do the paperwork for your first year’s trading than in the USA with a Delaware corporation
  • generous government grants – most pretty easy to get and many match like for like funding on angel rounds
  • a focus on revenue (yes, this can be a good thing too)

In addition, there is a growing list of incubators and start-up programs in the UK and Europe. Seedcamp remains prevelent and there are new VC’s like Hoxton Ventures and angels such as Stefan Glaenzer who promise pubicly to operate more intelligently, in a more informed, fairer manner which supports the entrepreneur and their vision.

The next 12 months will certainly be interesting – and despite the frustrations I’m optimistic about the future for Silicon Roundabout in London.

The real challenge for Europe is improving the support VC’s give start-ups and the way they approach deals. The second is getting rid of the social stigma of failure or conversely, wanting to earn zillions of pounds or euros!

In short, we (Europe and the UK) need to learn to scale start-ups.

That all said, having spent nudging 30% of my time there the last 3 years, when I do another start-up, it will probably be from the Valley.

Don’t feel bad though, most of America’s TV is our fault. At least we’re good at exporting something.

*** STOP PRESS ***

A VC recently posted on the ICE List suggesting that the lack of revolutionary investment in high-risk ideas has been the pressure from LP’s on VC’s to be conservative.

This pressure -she argues- has in the past caused a lack of risk taking on visionary projects. i.e. those longs shots ahead of the curve (Twitters, Facebooks).  I’m not sure if there is a real case for that as a reason.

These types of projects, as an entrepreneur repeatedly too early to market and who has failed to get VC’s to even understand where the market is headed, is a topic close to my heart.

Perhaps of course for those ventures it was my sales pitch, but -naturally- I would argue many VCs simply don’t understand enough about the market they invest in to understand a 5 or 10 year horizon, nor will put their proverbial balls on the line to risk investing in such a roll of the dice.

I would suggest these grand consumer projects (and certainly those which offer up no revenue until great mass is achieved) have never been embraced -let alone liked- by European VC’s. I see no past evidence of the inverse being true and I also can’t see how that is ever going to change.
I’ve become sadly resolved that we’d be better to work on improving the way EU VC invests in those sectors which already attract funding today; i.e. SaaS, enterprise, B2B and maybe consumer which has an immediate biz model & revenue stream (although these are still usually under-capitalised compared to US counterparts with whom they compete).
There is plenty of work to do around valuations, terms, knowledge and conduct; while being realistic about the appetite to build a next gen Twitter. I simply don’t think any EU VCs are hungry to do that.
I think that we (Europe) can give up on having the next Facebook, or more exactly, the thing which looks nothing like Facebook because it’s some AR LBS NFC MOSOSO which changes again the way the masses communicate, share, live work or play
…but I’d love someone to prove me wrong.