Monday, 25 June 2007

Web 2.0 + Enterprise = Enterprise 2.0 ?

Alastair Bathgate raises the excellent question of whether Enterprise 2.0 is missing something?. I think that in general there is a bit of a tendency to suggest that taking a web2.0 businesses like Facebook ,and then suggesting it to enterprise customers, doesn't really make it "enterprise grade". There's a whole set of essential enterprise needs such as searchable archives, recognition of organisational structure, management access and access control as a minimum. But Alastair also points out that more abstract ideas like processes, audit and compliance really matter in this context too.

Thursday, 21 June 2007

When VC's Say No- Management Issues

There's a great post over at Marc Andreesson's blog. It tries to help entrepreneurs understand why VC's say no, and how to interpret their responses. Marc points out that it's not uncommon to be being turned down due to the investor's view of the management team- but pretty exceptional, if they ever, that they tell you!

Why VC's wont tell you about a management "issue"

The analogy used by Marc and others is that telling someone their startup is no good is like telling the founder that their "baby is ugly". I'm not quite sure what the analogy is for when we have to let them know that we don't think they themselves are not right for their role! I've certainly always tried to find ways to be as honest as possible, but frankly it's tough, in particular because when you do tell them:
  • They just put it down to the the VC being an idiot anyway and carry on regardless.
  • After the first few words, no matter how you dress it up, they stop listening and you never get a second chance to explain.
  • It gets translated into all sorts of random reasons when the entrepreneur relays the story to others- when I gave the bad news to one entrepreneur he relayed it to everyone as we "weren't interested in high risk ventures"- I've no idea where that had come from!

An anecdote about giving honest feedback

I remember early in my investing meeting an interesting firm run by a very bright and young software guy and his mate. The team was supplemented by a the father of one of the founders who had a successful track record in an early stage company. We visited and explored the possibilities with them, but somewhat awkwardly we rated the two young founders highly, but had lots of issues with the dad! Being a somewhat blunt northern type, I had the cheek to suggest that maybe the company would be better off without the dad, but with a new CEO instead (the dad was pushing his son to be CEO when the body language suggested he was much happier as CTO). We heard from them again about 4 years later, looking again to raise money!

How to tell what the VC really thinks...

Here's a few tips (please add any more in the comments)
  • Benchmark first
    Ask around to find out what experience/track record other management who did raise funding had already. If it's your first time in a startup, or first time in a C-level post then it'll need checking especially hard.
  • Aim low
    This is the hardest perhaps, but if you're in any doubt put the person in as interim CEO for instance, if the VC's happy they might still suggest there's no need for a change.
  • Look for indirect feedback
    Perhaps your chairman, non-exec, existing investor etc. could make a phone call, maybe a few days later. We're only human and it's a lot easier to give honest feedback indirectly!
  • Look for consistency
    If you get inconsistent responses from the VC then maybe there's something else behind their decision.
  • Ask!
    Something about human nature perhaps, but a question is a great way to find out!
Any other suggestions?

Tuesday, 19 June 2007

"Engineers can't sell new technology"

Interviewing a potential CEO for one of the portfolio companies today was really thought provoking. He's run and grown technology companies and is a great engineer by heart, therefore I was really surprised when he told us that you "can't use engineers to sell new technology". My gut was screaming "no!", but on reflection I think maybe he had a really sound point. His argument seemed to come down to some prejudices about engineers which might have some grounding:

  • Bright sales people can communicate the product well enough for bright engineers at the customer company to work out how/where to apply it
  • Engineers have a tendency to dive too quickly into the details of the technology before really getting a good picture of the company's needs- so they don't give themselves the chance to listen properly
  • Sales people in the front line tend to be more reassuring to the non-technical contingent of the customers and send the right messages about the nature of the vendor
I think his bottom line was that this kind of thing can be a cause of delays in customer take up of the offering from a new technology vendor. I'm going to chew on this a little, but there may well be something behind this thesis; what do you think?

Further thought

On dicussion with a colleague, we wondered if perhaps the distinction is:
Technically capable customer looking to understand how he can use your technology/productSend a technically literate salesperson to first meeting
Technically ignorant customer looking for help understanding what he/she needsSend a sales engineer to first meeting
The other suggestion the candidate made which I'd wholeheartedly endorse is that for early stage tech companies you can always afford to send two people to the meeting- so that someone is always listening.

39% of IT Managers think Excel is Rogue IT

BluePrism, one of our investees has just conducted a survey into "Rogue IT". It was a surprise to me on first inspection that "complex Excel spreadsheets were Rogue"! On reflection, I guess that's understandable, you can build a great deal of mission-critical stuff in Excel, even without doing Macros/VB (I know we do!).

Sunday, 17 June 2007

b.tween presentation on VC post web2.0

'nuff said:

Wednesday, 13 June 2007

CEOs never stop fundraising

A former CEO of one of our portfolio companies complained to me recently that "we spent 60% of our time in the company marking time whilst we raised more funds", and he expressed great enthusiasm to raise a large round and then spend all his time on the business next time round. Certainly the founders at Me.dium will be glad that they've got $15m in the bank, but back in the real world I'd suggest that a CEO of an early stage company is always raising new money. My view is that the right time to put together the business plan for the next round is the Monday morning after you closed the last lot! Recently we've suffered a couple of follow-on rounds taking more than 12 months to complete- so to have a little headroom you need to plan a long way ahead.

Tuesday, 12 June 2007

Boat Race Analogy

I really like this story, but can't find the correct attribution. The oldest blog post I can find is at is here:Canoe race analogy. But it's too good not to share...

A Japanese company (Toyota) and an American company (General Motors) decided to have a canoe race on the Missouri River. Both teams practiced long and hard to reach their peak performance before the race. On the big day, the Japanese team won by a mile. The Americans, very discouraged and depressed, decided to investigate the reason for the crushing defeat. A management team made up of senior management was formed to investigate and recommend appropriate action. Their conclusion was the Japanese team had 8 people rowing and 1 person steering, while the American team had 8 people steering and 1 person rowing. So American management hired a consulting company and paid them a large amount of money for a second opinion. They advised that too many people were steering the boat, while not enough people were rowing. To prevent another loss to the Japanese, the Americans' rowing team's management structure was totally reorganized to 4 steering supervisors, 3 area steering superintendents and 1 assistant superintendent steering manager. They also implemented a new performance system that would give the 1 person rowing the boat greater incentive to work harder. It was called the "Rowing Team Quality First Program," with meetings, dinners and free pens for the rower. There was discussion of getting new paddles, canoes and other equipment, extra vacation days for practices and bonuses. The next year the Japanese won by two miles. Humiliated, the American management laid off the rower for poor performance, halted development of a new canoe, sold the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the Senior Executives as bonuses and the next year's racing team was outsourced to India!!!!

Inaugural Opencoffee Leeds

Open coffee Leeds was buzzing today- about 20 people I think. Starbucks had kindly provided a "meeting room", which turned out to be a small formal meeting room with board table and chairs- about right for 6 people- but not very "opencoffee". Very interesting conversations with a few startups, technology folk and entrepreneurs. I'll be doing my best to go again to this one- well done to Imran Ali for organising it!

Monday, 11 June 2007

Beware the "Investor No-brainer CV"

I really like Marc Andreessen's recent post: How to hire the best people you've ever worked with- it should be essential reading for everyone involved in startups.
In particular Marc's comment: "beware in particular people who have been at highly successful companies", rings very true:
Our portfolio companies are always looking to raise new cash, and in the UK in particular, management with a track-record is a key attraction for much of this follow-on money. So we can be very tempted by someone who has a CV which shouts "prior blue-chip success" and helps drive a positive fundraising round.
But, we've learnt in practice that such candidates must be approached with caution:

  • No-brainer CV's usually involve larger companies- and in some of these the main attribute for success can be the person's ability to manage "work politics"- something we'd hope to avoid in our tiny investee companies
  • Attribution of success can be very unreliable- the number of people who claim responsibility for successes, strangely, seems to be somewhat larger than those who'll admit to the mistakes!
  • Serendipity matters! It's dangerous to assume that someone who was lucky once will, NECESSARILY be lucky in the startup.
This doesn't even stratch the differences in terms of culture or working practices which may be rather alien to the first-time corporate drop-out!
Our biggest (avoidable!) hiring mistakes have been when we've been tempted to bring in management who had "no-brainer" CV's to help raise follow-on funding, but where we harboured doubts ourselves.

Friday, 8 June 2007

FAQ- how to value a web 2.0 company

I answered a question recently from a linkedin connection, to see if it sparks any debate I thought I'd repeat it here:
How should Web 2.0 companies value their businesses when looking for investment?
For what it's worth my answer was...

This is really crude but really meant to be a framework for you to do your own numbers...
  1. Take an exit that has happened that looks in the same ballpark as where you'd realistically hope to end up..... e.g. Feedburner sold for (I believe around) $100m
  2. Assume you'll need at least one more round of finance that currently planned (that's just the way it usually seems to work out!) and that the next round VC's will therefore demand 40% now to have 25% of the final exit- i.e. $25m from the proceeds.
  3. The next round VC's need a 10x markup in that scenario, so that sort-of works. i.e. they might give you $2.5m for that 40%
  4. Therefore your company is maybe worth $3-4m.
I'd suggest that If you take this model and then factor some differences for your own deal you'll not be a million miles out! Bear in mind strange things can happen when there has been a massive exit but there are zillions of competing early-stage companies ;-) Best of luck with the round! Ed
Any views?

Tuesday, 5 June 2007

NW Startup 2.0 - great line up

Manoj Ranaweera has done a great job of building on the success of the last NW Startup 2.0 event and has got a really interesting lineup of speakers for the 14th of June:

  • Ajaz Ahmed - Look back at Freeserve, his current portfolio and investment opportunities that interests him including finding the next Freeserve opportunity.
  • Sam Sethi - Creation of blognation, the technology scene and raising money and Commercialising blogging.
  • Alain Falys - Strategy of OB10, beyond OB10 and the value Omnis Mundi brings
  • David Ingram - Fund raising and market launch through bloggers in Silicon Valley.

Ajaz enjoys being rude about VC's- so that's always good fun ;-) and Sam has an encyclopedic knowledge of everything web2.0

If you fancy going along then please sign up at this page..

Review of Yuuguu's free screensharing service

Techfold have done a nice review of Yuuguu's screensharing and IM service:Yuuguu - lightweight desktop screensharing and collaboration

Monday, 4 June 2007

Keyman insurance in early-stage companies

Most entrepreneurial managers I know are deeply uninterested in anything like insurance- and it seems strange that in a company where the chance of serious success is pretty small that it could ever be very relevant.

What is keyman insurance

A particular example of insurance that's relevant to early stage companies is the so-called "key man insurance". This provides, usually the company, with a lump sum of cash in the event that death or serious disablement causes a nominated individual to become unable to work for the company. As such it seems to cost a little more than the standard domestic life insurance, but is very dependent upon the age and health of the individual concerned.

Why it is contentious

  • From the "keyman's" point-of-view the insurance doesn't benefit him/her- although arguably if it helps preserve the value in the company which could ultimately flow back to them or their dependents then maybe that's relevant.
  • If the individual was unavailable it'd be "game-over" for the company- therefore there'd be no benefit other than to the creditors.
  • "Investors' risk is spread across a portfolio of investments, so why should they insist the company is burdened with a premium

Tests for the use of keyman insurance

In my view part of the confusion here is that there are two distinct ways in which "keyman" insurance is being used:

  1. to protect investors capital against the loss of a pivotal individual who is deemed to be irreplaceable

    We've suffered one example of this in the life of the fund, where within 4 months of investment the technology lead on a project died quite unexpectedly. In this instance the individual concerned had developed the ideas and done the research behind the company's technology, and there was little prospect that we could go out and hire someone else to "fill those boots". In this instance, had it been in place by that date, keyman insurance to cover our investment would've been helpful- and given the unexpected nature of the death not too expensive either.

  2. To protect the company against the loss of a replaceable individual at a really bad time

    There are probably relatively few "completely irreplaceable" people in our portfolio companies, but there are lots of people who's departure would leave a huge void which would take some time to fill. In my opinion, it is in the interests of everyone concerned that the company is sufficiently insured that it could stand the time and the cost of recruiting a replacement even if the timing was pretty unfortunate. For example, if the company was about to complete a follow-on round and perhaps was rather low on cash, the loss of the individual could cause investors to hesitate. In this instance I'd suggest that everyone involved would like to see that the insurance was sufficient to allow the company to trade on for perhaps 3-4 months whilst a suitable individual was found.

My view

If you accept my view that there are these two types of keyman insurance, I think there's a logical position to be adopted:

Replaceable with time Irreplaceable
Cost to insure Low At least 6 months net burn Cover for cost of investment
High At least 3 months net burn Contentious- Cost of investment- but maybe worth succession planning as an alternative approach

Who should pay

Where keyman insurance is being provided to protect the investors capital, it seems reasonable that this cost might be borne by the investors directly. This can clearly be an emotive issue, but on closer inspection, certainly for our kind of investment, it doesn't make a great deal of difference. In practice the premium comes from investor capital in both cases, and so adding it into deal terms could reasonably be expected to result in the same net situation. However, in my experience VC funds do not retain earmarked funds against each investment, so the only practical solution is for the company to pay the premium- effectively part of their cost of raising money. There's also the consolation that we'd certainly try to keep the use of truly irreplaceable people to a minimum and then usually only for a transitional period.