Creating A Tech Start-up: Forty Point Checklist

This is my favourite quote by Winston Churchill:

“Success is the ability to go from one failure to another with no loss of enthusiasm.”

Unless you’re the absolute except to the rule (like the one-in-one-hundred-thousand such as Zuck) as an entrepreneur you can expect to fail repeatedly. And especially with technical innovation you have to fail day to day, to perfect your product or service.

The last thing you need, then, while surrounding yourself with the inevitable problems you will encounter while attempting something new and different, is for a known issue to be the one that becomes a major problem in your business.

With this in mind, while comment and opinion certainly has its place in this column, the key to any entrepreneurial venture is execution. So today I would like to offer a blueprint process to getting your start-up off the ground. This guide is inspired by a blog post by Basil Peters – indeed some of it is lifted verbatim, and I’m indebted to Basil for his original list.

Procrastination is just a worthy an adversary as poor planning, so let’s get started:

1. Build your start-up team.

2. If it’s still just you, repeat step one.

  • Statistically, start-ups with co-founders rather than single founders are over twice as likely to receive investment;
  • Some will work evening and weekends until you can raise capital, but do ensure they are definitely ready to leave their jobs if you do;

3. Agree that you want to start a company together. The next several dozen steps will test this.

4. Agree on an idea.

  • The idea is much less important than the team as the idea will likely change and evolve;

5. Agree on the time and money each of the founders will contribute.

6. Agree on areas of responsibility.

  • Choose a co-founder who complements your skills, not one which duplicates them;
  • Who will be on the board?

7. Agree on intellectual property ownership. This is essential.

  • The IP must reside in the company;
  • Create NDAs and employment contracts which you should ALL sign (even founders);
  • Create these even if you’re not paying yourselves anything;

8. Agree on how you will handle personal guarantees, credit cards and other personal liabilities.

  • Steer clear of personal credit card debt if you can;
  • If you rack up directors’ loans against your start-up as long term liabilities, bear in mind you may be pressured by future investors to convert these to equity;

9. Agree on founder compensation and equity allocation.

  • Allocate options to yourself and co-founder vesting (reverse vesting) over four years;
  • Include favourable terms for you the co-founders (eg six months’ redundancy pay, three months’ notice) and a three or six month probation period for staff – they may not work out;

10. Agree on the exit strategy now.

  • This does not necessarily mean running your company toward a quick sale – you should focus on creating a valuable, scalable business – and your aspirations may change, but being aligned monetarily and on life goals provides a foundation to build toward the same end game. Basil says “I know that’s not intuitive, but [not doing this] is one of the most common flaws”;

11. Agree on the capital structure at year three.

  • Create your own cap table now: a spreadsheet of how the capital structure/share register might look after two or three investment rounds. It also allows you to see what the investment will do to everyone’s equity;
  • Agree on the amount of equity for future employees and directors (create a share option pool – usually around 10 per cent but in the US it is often higher. I would recommend a minimum of 15 per cent);
  • Allocate your employees or founding team options over four years;
  • You can get away with a Options letter – include strike price, number of shares (not percentage), vesting schedule (when they have rights to each chunk of the shares);
  • If you are doing equity, not a convertible debt round, consider creating a class of non-voting shares and giving those to your angel round (if they will accept). This means that your voting rights will be different to the total ownership. Useful if, for example, your Series A is not at the stratospheric valuation you hoped and you want to avoid getting close to owning less than 51 per cent between you and your co-founder;

12. Think hard about whether the first dozen steps are fair and equitable. Try to imagine whether they will still seem fair and equitable in a year, or three years.

  • If everyone in the founding team is not absolutely in agreement, stop and try to work it out;
  • Write a letter of agreement outlining all these points. It will not be legally binding, but gets down in writing what has been agreed and makes people really think about what they are agreeing to;

13. Make sure your documents define the legal & corporate jurisdiction (choose which State if you are in the US).

14. Confirm the previous eight steps by signing:

  • Employment agreements;
  • IP assignment agreements;
  • Share options letters;
  • Non-disclosure agreements;

15. Agree on the company articles (the constitution of the business).

  • Change the standard articles so a 51 per cent vote is required to sell the company;
  • Provide for electronic communications for statutory shareholder requirements (one company I started had over 20 angel investors – chasing signed paperwork by post is a nightmare);

16. Check alignment among the founders for points 1-16.

  • If alignment is not perfect, it may now be time for the first offsite strategic planning retreat with an excellent facilitator (perhaps your mentor – see below);

17. Find a least one very experienced advisor, mentor and/or coach who can review and confirm the previous five steps and can help to be a sounding board.

  • If you are going to offer them equity, what remuneration, if any, they will have;
  • Choose someone who you both respect enough – and is strong enough – to challenge you both;
  • Sector expertise is useful as you don’t want to spend all your time explaining everything, but someone under the influence of the cool-aid can sometimes reinforce a bad decision, so get this balance right;

18. Incorporate the company.

19. Have the first board meeting to “hire” the officers and give them the authority to conduct business.

  • Have the first shareholders meeting and the first Annual General Meeting to elect the board;
  • If you do not do these things now by the book, expect a nightmare when it comes to due diligence on future funding. Admin is the last thing you want to do when you are starting a business – you want to build product! But this is not only good discipline, it is your legal responsibility as a company director;

20. Celebrate! You have have your own company!

21. Create a legal share register and issue share certificates.

  • Pay for your shares (in the UK you need to place money in the company bank for the nominal value of the shares. US Delaware companies don’t have nominal share values so check your jurisdiction on this process);
  • You must record the history of issuing shares in the company share register;

22. Have a board meeting to approve the capital structure and share register – another essential legal procedure.

23. Create an electronic minute book and an electronic Due Diligence folder.

  • Place copies of all the paperwork, agreements, NDAs etc in the DD folder (you’ll thank yourself later);
  • Have a folder for board meeting minutes AND record minutes for board meetings. These can initially summarise the main points, you don’t need to quote every word. This attention to process will give comfort to investors at DD time and help demonstrate you have some grip of how to run a business;

24. Create a 12 month budget and five year financial projections.

  • Many people just ask for three, but some ask for five. The worst thing in the world is having to add two years to projections you have already spent way too long on. Just do five from the start;
  • All the projections are complete rubbish. They will all be wrong. Give it your best shot anyway. It will help you understand short term capital requirements – and hopefully give your investors the big carrot of oodles of cash at the end of the rainbow;
  • Assume you will spend more than you will. Easy things to forget (for a UK start-up) include: directors indemnity insurance, employee AND employers’ National Insurance, VAT on sales and the accountant’s and legal bills;

25. Check that your projected capital structure still makes sense now that you have thought more about the numbers – update if necessary – at this stage you still can.

26. Check again that you still have team alignment on all the previous 25 points.

27. If you have not already, write a business plan.

  • A PowerPoint (or Keynote!) deck is fine. The list of slide headings on Sequoia’s web site is as good as any;
  • This is as much to clarify to you and your team plans and direction, as it is for investors;
  • No more than three points on each slide, it is a sales tool, not an exhaustive biography of your product or market analysis;

28. Appoint an accountant.

  • Early stage bootstrapping is all about saving money, but a rubbish accountant now will cost you money later;
  • Appoint an accountancy firm which is large enough to know what they are doing but small enough to care. If you’re in Shoreditch, London, http://www.dands.co.uk is a great example of experience combined with boutique size;

29. Open a bank account.

  • Agree on signing authorities for financial management;
  • If co-founders, allow single signatory but only up to a sensible cap (eg £5,000 or $10,000) with dual signatures required above that;
  • Make sure you have good online banking which ideally interfaces with your accountant’s software;

30. Check again the team is in alignment with last 29 items. Sometimes small disagreements can be a sign of a deeper disagreement.

  • Schedule an offsite strategic planning retreat to perfect alignment if necessary. (Choose an excellent, experienced facilitator to maximise chances of success – perhaps you mentor if he or she is capable);

31. Celebrate achieving the last 30 items!

  • It may not seem important, but it is for psychological reasons and bonding;

32. Get a simple subscription agreement for the founders’ investment.

  • Pay for your start-up equity by transferring the par value cash into the bank;

33. Learn about all of the taxes your company will have to pay.

  • Do not rely on your accountant to make the decisions; they cannot understand your business well enough to do this entirely themselves. You must understand taxes well enough to ensure you are paying all of the taxes the company owes and that you are not creating personal liability for your directors;
  • As directors, pay for anything you can get away with as expenses – all your travel (provided it doesn’t say on the ticket it’s to Disneyland). It is the most efficient way to get money out of the business. Don’t be fraudulent, just be tax efficient;
  • Use an electronic expenses tool (Xpenser, or Expensify) to collate your own and team accounts – all expenses are tax deductible;

34. Make sure none of your employees think they can be contractors outside of working on your start-up.

35. Understand the R&D tax credits program.

  • This allows you to claim back a large percentage of PAYE tax (this is an excellent R&D tax rebate available in the UK, others are available in Canada and other countries);

36. Get insurance (the insurance you really need, not what the broker wants to sell you).

37. Get an alarm system or check security before you move the computers into your office (unless you all have laptops). Two of the offices I had (including a shared one) were burgled.

38. Start planning you investment round and reaching out to investors. Make sure you adhere to EIS for angel investors – Google it – or in the US any legalities for private securities investing.

39. Agree on a fair valuation.

  • Get your external advisor to check and correct the capital structure and share register if necessary. (It’s still easy to fix this but that window is closing fast);
  • Don’t state your valuation in your first conversation with angel investors;
  • Consider convertible debt (offering a discount on the valuation at the next round);

40. Celebrate completing all of the absolutely necessary steps in building a successful start-up!

And then, as soon as the hangover clears, start working on the product, marketing, sales, recruiting, strategic relationships and exit strategy. Good luck…!

Note: This post was previously written by me for publication as an article in The Kernel magazine, an excellent deep-dive blog on the start-up scene. Think The Economist for technology. 

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Entrepreneurship: Timing Is Everything

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

No, none of these people are me.

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

 

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

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

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

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

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

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

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

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

* * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

* * *

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

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

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:

The Mobile Web Existed Without The iPhone …and still does

This is an extended article, to an original shorter response I made to Roberts post here.

The iphone is without question, a game changer for mobile internet. It has woken up not only VCs to the mobile internet, but given the often arrogant and lacklustre stakeholders of the entrenched mobile industry a serious kick up the arse. I think the iphone is great; but you cannot get away from the fact it will remain a tiny percentage of the mobile market for many years to come.

Should VCs invest in iphone-only startups?

What I took away from the Mobile Web Wars last Friday, before the August Capital party, was that VCs might not invest in an iphone-ONLY startup. Im not surprised. They estimate 10 million units by early next year? Thats very small numbers if you’re going to ONLY serve those customers. It’s less than 10% of Facebooks user base. Infact, name one company which has sold for big bucks which has only 10 million users? That would mean a startup would have to reach 100% user takeup for their app to be highly valuable.

I have been frustrated, as many before me, that VCs have the particulars they do about investing in certain types of businesses and have the expectations they do for success – which in turn demand a big market and big ideas which can make big money; but I understand, because that is the game they are in. If you have to make your money back on your fund from only 5% of your portfolio, you have to make sure that probably 100% of your portfolio has atleast the probable chance of making it big – i.e. a 20, 50 or 100 times return.

We [my company, Rummble] are developing an iphone app for Rummble. Why? because we know we can deliver a compelling user experience, that it will work when users install it and that iphone users are typically early adopters or gadget lovers who embrace new technology. They are IT literate and are heavy web users. With an iphone, they take that mobile.

However, we’re also launching a Java app, to serve a vast block of the mobile user base out there, who have phones which will run Java apps.

Startups must consider carefully what I call the three R’s of mobile development: Reach, Resources, Return.

  1. What reach does the platform youve chosen to develop on, give you?
  2. What of your precious resources will it take to develop and support that platform? How does that Reach/Resources calculation look?
  3. What return does your target platform represent? i.e. how will you realise a return, where is the platform most popular, will stakeholders of that platform prevent you from (or take commission from) you realizing a return?

Consequently, bloggers – especially those with the ear of the startup community – should encourage startups to invest their development resources VERY carefully; for example, Google Gears will be supporting many platforms – I guess including iphone – and if they deliver on their promise, provide standardised hooks into the hardware, from the browsers, to access location api, camera, filesystem, etc, from the phone web browser.

The Valley cant afford to be so introspective with mobile, as it has been able to with the traditional Internet

Lastly, as a European, the valley – and many of its bloggers – are notoriously U.S. or atleast Western centric. The iphone IS FANTASTIC! I agree it is! But look outside your own back yard – Japan has been doing amazing stuff on mobile, without Apple, for a long time. India is skipping fixed line internet and doing all sorts of stuff from their non-Apple mobile phones. I’ve been using the mobile web on my Blackberry and before that on my other phones, for years.

The point is that people talk as is the mobile internet didnt exist before the iphone; and maybe for those people as individuals it didnt. But for millions of people it has – and although without question the iphone provides a fantastic user experience (its main reason for its success IMHO), it is expensive, proprietary and has a small install base. That said, I’m waiting for my upgrade to the 3G version 🙂

The mobile internet IS the internet of the future

The mobile internet will, in the future, dwarf the fixed line internet and become the norm. It will make the fixed line internet (and I believe, most laptops) seem like the quaint anomalies of history – where the internet began. You’ll come home, plug in your 1 terabyte iphone-equivalent to a large screen and keyboard and simply unplug it and leave the house or office when you go. I believe I’ll be doing this within 5-7 years.

Those startups keen on building a global – or even U.S. – dominating consumer brand for their service, would be wise to look at what is going on in the rest of the world, where in some places the mobile internet is already ahead of both the U.S. and Europe.