European Startups, Get Your Pitch Together

A blog post by Andrew J Scott previously published on Techcrunch

I’ve pitched at least 250 investors over the years, mentored hundreds of startups and have plenty of fail behind me. So I feel I know a thing or two about pitching, and European startups are so often really rather bad at it.

Austria, and specifically Vienna, is famous for classical music and Sachetorte more than tech startups, but I’d heard good things about Pioneers Festival and so wearing my early-stage investor hat, I found myself consuming 50 startup pitches at the Haus der Industrie. To give yourselves a better chance of securing funding – and customers – here are 10 suggestions to get right.

1. Problem/Solution Fit

Define what you do; this is the most basic aspect of a pitch. To my ongoing astonishment, this so often gets overlooked or poorly communicated.

According to the interactive event app (which allowed investors to submit questions and vote) at least half of the startup pitches didn’t communicate clearly what they do. Top of the feedback was “I don’t get it.” Often the judges didn’t get it either and had to ask in the Q&A.

Andrewscott

The size of the problem you solve and how well you solve it creates the value in your business. There is simply no excuse for not being able to pitch coherently the problem you solve and how you solve it in one minute let alone three minutes.

A good test is to pitch your Mum (use your team’s family, too). This is a serious suggestion. If your mother understands it then you’ll guarantee tech investors (and your customers) understand what, why and how, too.

2. Speak English Clearly

As a born English speaker whose only second language is French in the form of a pigeon, I feel a tinge of guilt criticising others who don’t get to pitch in their native tongue, but the harsh truth is that unless you can speak clear English as a CEO pitching an international market, you’re going to struggle. I’ve even heard that a Y Combinator representative said that CEOs with “thick unintelligible foreign accents” quite simply fail.

Record yourself and ask a native speaker their honest opinion. Better, record yourself and ask other people for whom English is their second language. Invest in lessons/speech therapy if necessary. And in addition to that…

3. Speak Slowly

As an occasional MC/speaker I certainly still sometimes fall foul of this. Speaking more slowly does not come naturally. It feels odd. But it sounds good. Slower speech will not only help with clarity if you have a strong accent, it will give you more gravitas. There are lots of great resources to help you improve your speaking; this is one of many. If you feel that you’re talking way too slowly, you’re probably speaking about the right speed.

4. The Right Slides

Too many decks continue to be confused, bloated, overly complex or all three. I’d recommend you take Sequoia’s template as a starting point, though some cash / revenue projections may not apply if you’re very early stage. They’ve made a lot of money in this business. If it’s good enough for them, it should be good enough for most investors.

Bear in mind obviously the content will change depending on whether this is a deck to be read, studied closely pre-investment or something you’re presenting in three minutes. Equally, if your presentation is just three minutes you obviously wouldn’t include all these slides; apply common sense.

5. Less Is More: Simple Content

If I’m reading a slide, I’m not listening to you. When I’ve finished reading, I’ll look at you again and start listening again. You have precious seconds to make an impression and you want people to engage with you, the human being on stage, and listen to what you’re saying.

Complicated slides compete for audience attention. Why set yourself up with a competitor? Steve Jobs was possibly the king of scarce slides, using imagery and allegedly never more than three bullet points and usually only a word (or three) each. You may not be launching the new iPhone but you can steal Steve’s tricks to help keep people focused on the important things: What you’re saying.

6. Tell a Story

Humans are emotional animals; yes even investors. With a three minute pitch (as it was at Pioneers) you might think it’s a distraction to tell a story. But don’t forget story telling is the most ancient of modern human’s ways to communicate information, be it cave gossip or religion.

Half your challenge is to engage the audience within the first 5-10 seconds before their heads tip back down to phones and laptops. A snappy authentic story which positions your problem / solution fit can engage and differentiate you. Don’t include fluff (this isn’t bedtime story telling) but providing context and stimulating curiosity in the first 30 seconds, may mean people leave the wifi alone for the remainder of your pitch.

7. Practice!

If you believe Malcom Gladwell then 10,000 hours is the time it takes to become supremely accomplished at anything. That’s not feasible for your pitch obviously, but practicing 10, 20 or 50 times is. With all the cost and time to attend a conference, not to mention the subsequent impact your 1, 3, 5 or 10 minute pitch will have on an audience, practice really will help make perfect.

So many founders I know don’t properly practice their pitches for specific events which often have specific pitch lengths. So practice; rinse, wash, repeat. It will really pay off.

8. Pause

Before you begin, take a few seconds to pause. There’s more about this in the book I recommended above. Gaining composure and asserting yourself on the stage is vital and you can afford five seconds to avoid the impression of a manic hyena, before you launch into your winning pitch.

9. Answer questions quickly

The Q&A session is a great time to show your mettle. Perhaps surprisingly, this is closely linked to practice. If you’ve not pitched “friendly” investors, your team, your family or others, you won’t be used to answering the tough questions.

Get to the point when answering the question and if cornered (e.g. because an investor asks your valuation or you don’t know the answer) know in advance what you’re going to say, even if it’s “I’m happy to discuss that afterwards off stage.”

Even if you’re a seasoned pitch artist for your startup, sit down and write the 10 questions you’d hate to be asked. They’re probably exactly the ones you’ll get.

10. Hire a Coach

You can hire a coach or get a mentor or another entrepreneur to help you shape your deck, but you can also hire a coach to help you with your presentation skills.

Given how important a snappy delivery with absolute clarity in a startup world of elevator pitches is, paying for a day or two of presentation coaching (assuming you hire someone good) could make all the difference the next time you’re onstage, and it’s something startup founders rarely seem to see value in doing.

Don’t forget, even the most populous leaders in our world do this – from Presidents to Prime Ministers – they all have coaches or have been coached.

In Conclusion

There are many more tips and tricks you can employ (and far better speakers or teachers than I out there who can give them) but reviewing the performance of the 50 startups Pioneers, these thoughts were the elephants in the room, which, as startup founders, you need to take outside the zoo and aggressively cull from your startup pitches.

It’s worth adding that conference teams themselves can sometimes be guilty of compounding problems. If you’re a conference organizer, these are my top three gripes as an attendee watching pitches or having been a founder having to pitch:

Bad MC. It continues to amaze me how poor so many hosts are at tech conferences and I find myself wondering why they were chosen. Despite “only” introducing each startup, the MC sets the whole tone of an event – they define the energy in the room. They should be able to connect with an audience, gain the audience respect and carry the audience with them if there are problems and keep things on time gracefully.

Being an MC is hard. I know, I’ve done it and I can always improve. So pick your MC carefully, ask them how they will prepare, ask them what’s important about being an MC, get recommendations and don’t consider it an afterthought – they will make or break the perception of your event.

Poor AV or presentation transition. You have plenty of time to test and practice rapidly changing pitch decks and to confirm that your sound system works. Don’t make a founder’s job even harder when they’re already wracked with nerves by fiddling around with PowerPoint/Keynote problems.

Poor acoustics. You’re presumably paying an AV company to run your sound system. If you’re in the pitch room and speech isn’t clear, it’s their job to fix it. Or, don’t pick a room with naturally awful acoustics for voice. Somewhere which is good for chamber music, may not necessarily be good for startup pitches.

Epilogue: The Audience

I’d like to end on a note to the audience at these events.

We Europeans are a hard crowd to please and there’s nothing worse than being an MC or a founder speaking to an audience of unengaged stones. So next time you’re asked to welcome someone on stage, give them a truly energized round of applause or hey, laugh at the MC’s joke even if it’s not going to win him an Emmy Award… Just a little bit of enthusiasm, even if feigned, goes a long way.

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.

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.

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.

Tech Start-up Incubators and Seed Programs

UPDATE 3: Aug 2013: Visit www.f6s.com for a global list of accelerator programs

UPDATE 2: List of 7 niche accelerators in the US for specific verticals

UPDATE 1: Bumped in to this list which is a bit more thorough

For a list simply of co-working spaces, here is a good one, or there is also a list of other resources at the bottom of this post.

Some start-ups I take to or advise are not well versed with the start-up or incubator programs which are open to them.

Often, if they’ve heard of them, they are sometimes worried about losing control or being dicatated to by outsiders if they join the program. This is the wrong way to look at incubators. In fact – especially the US incubators – usually offer pretty good terms and a host of other benefits, such as introductions to follow on funding and free access to experienced mentors.

In the case of the famous incubators such as Paul Graham’s Y Combinator (whose model which has been copied by many) merely having been chosen by it means you are signficantly increasing your likelihood of funding.

*** This is an imperfect list, cribbed shamelessly from different places including you the readers, Quora and elsewhere – please add missing ones at the end of this post thanx! ***

Industry Specific Accelerators

Health http://rockhealth.com/

USA

US West Coast Silicon Valley, Incubators

Y Combinator, www.ycombinator.com Mountain View, CA

The Founder Institute, www.founderinstitute.com  SV and San Francisco

I/O Ventures, www.ventures.io  Mission Area in San Francisco

Plug and Play, PATC, www.plugandplaytechcenter.com  Sunnyvale, Redwood City and Palo Alto among others

AngelPad, www.angelpad.org  SOMA area in San Francisco

Summer@Highland, www.hcp.com/summer  Menlo Park and Lexingon, MA

New one: 500 startups Accelerator Program, www.500startups.com  Mountain View, CA

Dog Patch Lab, www.dogpatchlabs.com  San Francisco, CA

Xconomy http://www.xconomy.com

SF-based RockHealth which has partnered with the Mayo Clinic and Accel http://rockhealth.com

West Coast collab / co-working spaces

TechShop Scientists, steampunkers, inventors, technology manufacturers, and hobbyists with over 700 members in Menlo Park, 600 members in San Francisco, and 300 members in Raleigh

The Hub San Francisco and Berkley, with international network of sister spaces around the world – with 31 spots and each one interlinked

Incubators in other US Cities

TechStars, www.techstars.org  Boulder, CO and Boston, MA

Launch Box, www.launchboxdigital.com  Washington, DC

DreamIT Ventures, www.dreamitventures.com  Philadelphia, PA and New York, NY

Alphalab, www.alphalab.org  Pittsburgh, PA

Shotput Ventures, www.shoputventures.com  Atlanta, GA

Capital Factory, www.capitalfactory.com  Austin, TX

Gangplank http://gangplankhq.com/ Free to members in return for supporting the place, 260 South Arizona Avenue Chandler, AZ 85225

MidVentures, www.midventures.com  Chicago, IL

Excelerate, www.exceleratelabs.com  Chicago, IL

Momentum www.omentum-mi.com West side of Michigan

Start@Spark Boston, MA, and New York, NY,

MidVentures http://www.midventures.com

Betaspring, Providence, RI

Better Labs, San Jose, CA

Bizdom U, Detroit, MI

Excelerate http://www.exceleratelabs.com

http://masschallenge.org  Boston, MA

http://www.launchpad.la  Los Angeles, CA

Collab / Co-Working Spaces

IndyHall http://indyhall.org/ 20 North 3rd St, Unit 201, Philadelphia, PA 19106

New York, USA Collab / Co-Working Spaces

New Work City the “grandaddy” of NYC coworking spaces as it has been operable for the past 4 years. Located at 412 Broadway in Little Italy; drop in day rates available, max 80 people.

Most NYC collab spaces below have long waiting lists apparently.

General Assembly at 902 Broadway in the Flatiron. The 20,000-sq ft “campus,” opened in January 2011

WeWork Labs at 154 Grand Street, is a co-working hybrid founded in April 2011 by Adam Neumann

Projective Space (formally known as SohoHaven) was created by three brothers, James Wahba, Johnny Wahba, and Tim Wahba, located at 447 Broadway in Soho (5500 sq ft)

Dogpatch at Union Square at 36 E 12th St, also have places in SF and Cambridge, MA. Dogpatch NYC is full aparrently.

Hive at 55

Tech Space

Greendesk

Greenspaces

Coworking Brooklyn

WeCreateNYC

Israel

The Time – http://thetime.co.il

Incentive – http://www.incentive-il.com

Granot Ventures – http://www.granot-ventures.com

JVP Studio – http://www.jvpvc.com

Xenia – http://www.xenia.co.il

Lool http://lool.vc

United Kingdom

London, Silicon Roundabout

White Bear Yard  –  http://whitebearyard.com  and http://passioncapital.com

HackFwd  –  http://hackfwd.com

The Hub  –  http://westminster.the-hub.net/

Collab Start-up / Co-Workspaces

www.techhub.com  – Shoreditch, Old Street Roundabout

http://www.theiw.org — Clerkenwell, Smithfield

http://club.workspacegroup.co.uk  — Clerkenwell & Leathermarket, Bermondsey

http://kingscross.the-hub.net/ The Hub at Kings Cross

Rest of UK

The Difference Engine http://thedifferenceengine.eu

Springboard http://springboard.com  Cambridge, Cambs

Entrepreneurs for the Future Incubator Birmingham, UK. Birmingham Science Park Aston, Holt Street, Birmingham, B7 4BB @entrepreneurs4f

Oxygen Accelerator Accelerator Birmingham, UK. Birmingham Science Park Aston, Holt Street, Birmingham, B7 4BB @oxygenaccel

Ignite100 Accelerator Newcastle, UK. Suite 20, Adamson House, 65 Westgate Rd, Newcastle upon Tyne, NE1 1SG, UK @particular_matt

Startupbootcamp Accelerator London, UK.  @SBootCamp

Collab Start-up workspaces

FlyTheCoop http://flythe.coop  Manchester

Old Broadcasting House http://www.oldbroadcastinghouse.co.uk Leeds

www.theskiff.org  Brighton

My Catalyst Co-working Leeds, UK. Shine, Harehills Road  @jasondainter

Germany

Berlin, Silicon Alee

Startupbootcamp Accelerator London, Berlin.  @SBootCamp

Ireland

Incubators

http://nbtstartups.com/ – Cork, Ireland

Co-Working Spaces

TBA

Europe

Norway

Ignitas Accelerator, Oslo, Nedre Vollgate 4 @ignitas

Global

or Countrywide Directories of Co-Working spaces

Loosecubes Evangelical about co-working

European Co-Working Spaces A list on an external website

**************************** Add an entry ****************************

Nokia: “Yuk, my grandma has one” or why chasing pure profit is bad for your brand

When a 6 year old reacts to your brand by saying “old Nokia, that’s bad [as a choice of phone]” you should know you’re in a lot of trouble.

I believe in Capitalism

I believe in Capitalism mainly because at a simple level, it prevents a lot of wars (you can’t fight people you want to sell to and make money from).  That’s a good a good thing of course; but many parts of entirely unrestrained capitalism are bad.

By un-restrained I mean profit generation devoid of other considerations: social impact, ecological, moral (etc) and the obsessive chasing of that profit.

What’s this have to do with a mobile phone brand which is perceived as irrelevant by children?

Slavery to the stock market (or your shareholders) via quarterly reports builds companies which do not perform as well as they could. This short termism, is actually the opposite trait needed by a business which wants to become a dominant global player or a brand loved – ultimately irrationally – by it’s customers. A lovemark.

Failure to see inevitable changes on the horizon (even by previously innovative brands) seems to be rife in the corporate world. The mobile and technology industry is no exception.

Blinkered In The Boardroom

I believe much of this stems from the board room, where quarterly figures – and bonuses for those C-level staff – usually get top priority. Why else would once innovating start-ups become rigid behemoths?

Protecting the share price is the remit of a traditional corporate CEO, no responding instead to the market changes and customer’s demands (and I mean the customer who is your market, not the stock market). Arguably, Nokia’s brand is failing for lack of responding to customer’s wants and needs.

Long before the iPhone was released, the Nokia N95 promised a revolution; but was too slow, too hard to use and without interesting applications. It was an evolution of every previous model, not a revolution.

Revolutions are not popular with shareholders, because revolutions create uncertainty. We all know you can’t have innovation without risk taking, an element of uncertainty and a healthy dose of revolution to create the next big thing.

Yet even today, Nokia still remains with it’s head in the sand – delusional even – about the realities in the market place. The new CEO preaches to the stock market, desperately trying to halt a further share price fall, instead of taking the drastic steps required to revolutionise the business.

When a child of 6 is saying:

“Quite old, 90 or something” or “My grandma has one”

and when 20-somethings are saying:

“It was cool when I was 14” or “it used to be good”

..that is who you should be listening to, not the stock market.

Children on the BBC's "Secrets of Superbrands" being asked what phones (thus brands) they think are good. Click to find this on BBC's iPlayer.

In fact, screw the stock market. An obvious and understandable course of action is the last thing you need to be doing. Unless shareholders are panicking about your change of course, you’re probably not doing enough to have any hope of getting your company back in the game, let alone leading it.

Other brands also struggle to escape their corporate stagnation.

Asked on the BBC’s recent Secrets of Superbrands documentary “if Microsoft were a person who would they be?” a 20-something replied:

“They would be old”

Another said

“Microsoft is like someone who has been divorced recently; settled down and is dull; but then is thrust out into the world after their divorce and has to pretend to be young again”

As the program suggests, they’ve even had to hide their brand from some, asked “Who makes Xbox”? the response from Xbox owners was “errr, dunno”. Presumably this is also why Microsoft created “Bing” and not “Microsoft Search”.

A fallorn looking Bill Gates during the 90's monopoly hearings. He's now long gone as CEO, instead doing great things for the world with his Foundation; but has Microsoft got the right stuff to be relevant in 20 years? Shareholders today probably don't care.

You Can Run But You Can’t Hide

I believe that running away from the inevitable will simply persist an enevitable decline. You need to fight it head-on . Microsoft should have called it “Microsoft Search” and then focused efforts on changing the entire core brand perception – instead of diluting efforts into a new brand Bing which won’t feed into the street-cred of other parts of the same company.

Sony was described as a “Middle class” person … “like all the other bank workers” or  “a reliable elder statesman”. Probably not the vision of a cutting-edge technology brand they’d prefer.

The reasons for these brand perceptions are complex and multiple; but business is driven from the top – by the CEO. The leader. The board.

They are the ones responsible for authorising and enabling radical change or at least, aggressive evolution.

Perhaps that is why Apple, was described as

“the type of person who invites you to their birthday party, but they you have to do exactly what they want to do all evening”.

Personality is important for leadership and for the brand. In Apple’s case, that’s Steve Jobs.

Steve Jobs's Apple was compared to a religion. It does, however, seem to be led by someone who believes in giving customers what they want, not what the stock market expects or demands

Listening to the stock market on a monthly – if not daily – basis might mean the CEO get’s his yearly bonus and makes the company look wonderfully successful short term …but only right up until it falls over a cliff into free-fall decline.

Groupon (allegedly “the fastest growing company in history”) is a great example of the fallacy of the markets, ropey reported earnings and the smoke and mirrors of financial reporting.

SME’s are not allowed to get away with such accounting hijinx, it seems so wrong that the corporates are – and everyone goes along with it (the Morgan Stanleys, the Goldman Sachs’s) because they have a vested interest. It’s all a big game for the major stakeholders and those taking these giants to IPO.

I wrote a post recently on where Groupon might be headed in the future; but if @DHH’s Groupon post is accurate then they may have to get there quicker than one assumes.

The stellar share price of Google and Apple are at least, on the whole, based on genuine risk taking, a real business model and a radical approach to solving problems and creating innovation.

In order to maintain their position, they’ll need to continue to look to their customers, not to the stock market or their short term share price, in order to maintain that success.

Perhaps Larry and Sergey recognised that, which is why Eric is no longer CEO.

How To Avoid: Yuk My Grandma Has One

Whatever your company size, don’t try and please your angel investors, your shareholders, your board members or your VC backers.

Please your customers alone and do what you think your customers will want. They are your real shareholders.

Beginners Guide: How To Approach An Angel Investor

Over the last year fives years for two startups I’ve raised a little under $1 million dollars from 30 angel investors. I’ve probably spoken or pitched ten times that many. It’s a dark art and here is my two penneth which may help you along your way to do the same or better…

This is intentionally quick fire and inexhaustible, so if there are any questions I’m happy to field them in the comments.

Deck or Presentation

This is an excellent outline of a deck, from one of the kings of Silicon Valley VC, Sequoia.

Most angels will want to see an exec summary if not a deck as above; make sure this exec summary is STRICTLY one page. Work at it until it is. There is lots of content out there on this. Here was mine from 2009 for Rummble; Imperfect, but not too bad either.

You could also use a strip down deck if its hard (as Rummble was) to explain the product because it’s completely new or a different concept. So, maybe 5-7 slides as accompaniment. I’d advise sending as a PDF — and you’ll need a presentation deck (few words for when you pitch with it) and one WITH words to explain, for when you send it.

So you need two decks – one to pitch with in person and one to email for reading with out your explanation, which includes notes for each slide explaining.

Great book on writing powerpoints / presentations is Lifes a Pitch; you can read it in 1-2 hrs, but well worth the money.  .. in fact  I was so impressed by the book I wrote a blog post about Lifes a Pitch here.

Amount of Money

Angel investors are less sensitive (on the whole) to being flexible on amount of money invested. By this I mean that if you go to a VC and say “1.5m” then it suddenly drops to 1.1m, many will have pause in their confidence of your projections. An angel may be more understanding – often because it is an earlier stage of the company’s development – that the burn rate (the amount you spend each month) is a movable target. This said, be sure about your numbers and don’t get bullied in to saying the investment is too much or too little. Be confident.

Ask an Angel up front some basic questions. Don’t be shy. You need to know:

  • Do they have the money?
  • What is the typical size of the investment they do
  • What was the size of the last 3 investments and in to which companies

You are investing in them as they in you – this is a two-way street and not a one-way interview process.


How To Find Angel Investors

There are lots of brokers out there. People who will help you find money. Avoid most if not all of them. Definitely avoid anyone asking for an up-front fee or retainer, except in the most exceptional of circumstances if there is a small fee to pitch or something at a really excellent event – however I’d argue if it IS a really excellent event then it won’t be charging.

Rates for commission on investments vary of course depending on size and whatever the person thinks they can get away with(!) but something from 2.5 to 12.5% isn’t unreasonable, 12.5% being on the smaller amounts of money. I’ve taken one or two investments from personal introductions via  a business contact which included a 5% commission paid in stock, which was for around £60,000 ($100,000) if I remember correctly.

There are many people who can do an intro, just plug yourself into your local entrepreneur community. Don’t know where it is or who they are? That is what Google is for my dear reader!

You will need to press the flesh and attend all manner of events to find Angel Investors and to meet those who can introduce you. Using a filtering process when talking to someone at an event will help you work out if they are worthwhile investing time in. Questions like:

  • What sort of space do you invest in? (angel investors tend to invest in things which excite them or which they understand)
  • Are you actively investing at the moment? (then you can move on to the questions above – politely of course!)
  • Do you know any other angel investors who might be interested?

There are angel networks out there. Some are better than others. The Cambridge Angels in my experience are not hugely active – but I do know people who have had money from them. Equally, the re-energised London www.keiretsuforum.com has some great people associated with it and is also now being run from the West Coast I believe, rather than as a completely independent satellite here in the UK as it was before.

Super Angels

The Super Angels are those higher-profile more prolific angels who either:

  • invest a small amount in many companies
  • invest larger amounts (in total investment size – e.g. $100 to $1m+ )
  • or have just created a very good PR vehicle for themselves!

Genuine Super Angels who are both prolific, have great PR and genuinely know what they’re talking about include Dave McClure and Ron Conway are two big names; but these are just two of very many, most West Coast hailing.

Venture Capital as an Angel Round

This can be good provided you get huge added value – i.e. a real top-tier investor such as Fred Wilson & co OR the person leading the round can add vast industry experience. Otherwise, you may be simply dancing with the devils sooner than you’d need.

To talk about the way VC’s operate is another post entirely and not to be covered here. Have a browse of www.TheFunded.com if you’re not aware of the ups and downs of taking Venture Capital;  it’s a mine field and more often than not ends in tears for one if not both parties.

Due Diligence

Get your paperwork in order. I have been far more succesful in this with Angel Investors than I was with VC’s, largely because at the earlier stage of businesses I was the one doing the accounts & paperwork and so I wasn’t relying on anyone else who might get things wrong. On that basis, it is worth paying for a qualified good accountant, or book-keeper, if you can’t do it yourself and ensure it is right, to make sure your DD is in order. At one point I had a shareholder doing it but he turned out not to be competent in this field.

There is nothing more worrying for an investor, large or small if your accounts are a mess or share paperwork is not in good order. It’s a pain, it’s annoying but make sure it is done. Otherwise at worse you may lose the investment, at best they will haggle for a better pricing of the round (in their favour) on account of there being a higher risk because your admin is in a mess.

  • Accounts
  • Shares paperwork (and Companies House or your country equivalent)
  • IP / ownership
  • Contracts (employment and suppliers)
  • Tech documentation
  • NDAs & legals

…all need doing. I put copies as PDFs in a DropBox and share them that way.

Keep In Contact

I used to send out quarterly emails to shareholders. That meant that when then I had a problem, or wanted help, they knew what was going on and could respond. Yes it is tiresome to take 3 hours out to write a long-winded update of what is going on and plans, problems, failings, successes and wins; but it really keeps them in the loop and those who take an interest (if you don’t have a monthly board meeting with all your angels on one board) will then be well versed when you run out of cash or have a problem.

I used www.streamsend.com so I could monitor not only how many and who read the emails (I had over 30 shareholders!) but also ensure that the emails go to them and didn’t end in spam.

Pricing

Make sure you understand pre-money, post-money and the terms around what your company is worth and what you want to give away. Plenty on Google about this too 😉

I am sure there are many more things, but as a beginners guide, that should suffice!

How Do I Know If An Investor Has Money To Invest?

So I’ll be honest– I was reading my fellow entrepenuer Doug Richard’s blog and posted a reply (which in my typical verbose fashion turned out almost being an entire post in itself). Being a frugal chap, I thought I’d update my neglected blog AND point you back in the direction of Dougs blog and his School for Startups (not to be confused with Startup School in the U.S, run by Paul & his wife who also founded Y-Combinator)

This is an important question for entreprenuers raising their first round of Angel or VC funding:

Does the white-winged messenger from the gods you’re courting for investment with your fabulous new Google-killing start-up, actually have any money to invest?

Fallen Angel, in a cemetary somewhere in Rome

“Fallen Angel” (Photo Credit: Raquel Giffard)

After reading Dougs post, I felt one thing had been overlooked: Ask the Angel.

I’d recommend the entrepreneur look the angel in the eye, preferably during the first 10 minutes of a meeting and simply as the question “Do you have the money available to invest at the moment?” Any entrepreneur who is going to last the distance in business is going to need to be able to follow their gut as to when someone is telling the truth or telling porky pies.

I’ve found it is surprising how few people ask direct questions, out right, in person, to their face. It often reveals either a more candid answer that you might expect, or atleast you garner the answer indirectly from their reaction.

Few angels like to be seen as “not investing”. They want to keep their finger on the pulse- and there is often that sense of not ‘wanting to miss the next big thing’. Many I know will justify this by arguing that they could always make another asset liquid if they really had to, to take advantage of an opportunity (i.e. for those newbie’s reading- by selling a house, land, stock from another company to have cash available to invest) but I’d argue that this rarely happens in order to invest in a start-up.

So called “Angel Networks” are notorious for being full of timewasters, who use them as much as a club and enjoy the notion of being an investor, while rarely investing or indeed not having the capital to do so. That is not to say ALL Angel Networks are bad; some are OK but approach with serious caution. Personally, I’d also avoid any which charge upfront fees.

In summary, IMHO it is best to ask direct question up front, at the start. It is not rude. It’s demonstrating practical business sense – and an ability to be candid and pull no punches.

Lastly, all this applies in spades and more to VCs. For the uninitiated, make sure you ask them a boat load of questions. What is their fund size? When did it close? How much do they have left? What was the last investment they did? What size was it? When was the last time they did an investment the size of yours and in a comparable sector? So, Angels are not the only investors who like to appear to have money to invest, when they dont…

Quickfire overview:

  • Whether VC or Angel, ask out right if they are investing
  • Ask about specific last investment – inc. size and type of deal
  • Have conversations face to face and follow your gut instinct as to whether they are wasting your time
  • Ask to speak to the last entreprenuer they invested in
  • Don’t be afraid to ask other VCs or investors – the Angel or VC may found out, but it just means you’re doing your due diligence
  • Check www.thefunded.com for feedback about VCs. Some of it is just bitter talk from rejected applications- but mostly its good stuff.
  • Don’t take any money at any cost – the devil is usually in the detail

Lastly, re-read Dougs post as everything he says is bang on: there is nothing better than to get free advice from a seasoned Angel investor, but be clear about your own goals and beliefs- no one wants to invest their money in a CEO who is a push over. Equally, not a CEO who won’t listen or cant change position given good reason. Make sure you’ve got that balance right.