Monday, 30 July 2007

Business plan obfuscation: Twitter style

Scoble points out that there's a difference between "not having a business plan" and not telling the world what your business plan will emerge to be. I like the term "Business plan obfuscation" too- that's a handy label! However I'd suggest that there's a halfway house between investors backing the eventual business model, and investors backing the public business model: it's not that uncommon for a company to have several business models available to pursue, some more ambitious and flaky, others more concrete and modest.
I've seen investors back the same company, but on different expectations of which business model will pan out- that can be OK if there's enough cash to properly reach a decision, but generally it's better if everyone has the same goal.
Sometimes the plan VC's actually bought into at the start is the same as the plan the company wants to tell the world about at that time, and the same as the plan that produces first revenue and also the plan that results in the big exit. However, often it doesn't quite work out that way! I think most VC's get this; I'm sure that when Fred Wilson quotes what he said about being the same for Twitter: "The question everyone asks is "What is the business model?" To be completely and totally honest, we don't yet know.", then the key here is the "the",Twitter may today show the world only a "geek-trendy" product, but I'd suggest that they may be several business models in the works, with different revenue streams, different risk profiles and different work profiles.
However, it's interesting to note that when Yuuguu launched its truly free screensharing service there was suspicion from some potential users about the company's business model. If you're "free" it can be important that people understand if there's some "hook" that will kick in if they start using the service. Now that Yuuguu has launched it's low-cost international conference call service everyone can see their long-term business model, or maybe they are just seeing the first revenue model...

Friday, 27 July 2007

Role of the Chairman in Early Stage Technology companies

The Role of a chairman in early stage tech. companies is a little different from the standard in a small company due to the emphasis on growth and support of a growing team.

Aspect Comments
Team Building
  • Contributing to the management development plan
  • Mentoring and support for the CEO- acting as their private sounding-board
  • Leading the process of recognising the need to change CEO and the search for the new CEO
  • Monitoring the executive team's relationships and bringing action if conflicts arise
  • Monitoring the performance of the executive team and actioning required change
  • Providing discreet feedback and guidance for the CEO
  • Conducts formal CEO appraisal/performance review
  • Assists CEO in selection of exec board members
Financial Governance
  • Ensuring financial reporting is regular, clear and appropriate
  • Taking a lead role in negotiating remuneration
  • In the absence of a dedicated FD, having oversight of the accounting process
  • Recognising future cash requirements and ensuring the board deals with cashflow planning well in advance
  • Leading on the development of the company strategy
  • Ensuring that investors interests are properly represented by the strategic options presented to the board
  • Mentoring the CEO on the strategic development
  • Providing a second voice in fundraising discussions
  • Opening contacts for fundraising and corporate events
  • Providing independent feedback to investors on fundraising comments
  • Gathering feedback from investors on their view of the exec team
Representing Shareholders Interests
  • At all times to remain clearly focused on the interests of shareholders over management
  • Providing independent feedback to investors on the state of company and management
  • Ensuring transparency of information flow between management and shareholders
Proceedings at Board Meetings
  • Collects input from all directors and management on the board agenda - this facilitates surfacing difficult issues.
  • Creates the board meeting agenda with the CEO.
  • Ensures report(s) have been issued well in advance of the meeting
  • Runs the agenda of the board meeting, holding items to schedule or extending the time spent on them if the consensus is to spend more then the appointed time on an item. This frees the CEO to focus on content and allows the Chairman to keep the meeting on track.
  • Gathering input from, and providing feedback to, shareholders from the board meetings.

Obviously all this is in addition to the normal obligations of any director!

Saturday, 21 July 2007

Outsoucing Development for Consumer Internet Startups

Nic Brisbourne from Esprit Capital has a thought provoking post about outsourcing development for early stage consumer internet companies. I think this is a useful discussion as the issues are clearly a little different for this kind of company than they are for a mature enterprise working in a more stable competitive environment.
We've had portfolio companies try various places on the spectrum from "mainly outsourced" to "nothing outsourced"- and we have CEO's who'd advocate strongly taking particular positions. My own instinct is that core "difficult" bits of software (like perhaps some kind of ranking agent or P2P engine) are best inhouse. Also, stuff which might have to change rapidly and frequently as you develop your service (e.g. some kind of web scraping thing), might work more easily in-house.
On the other hand stuff which can be simply and robustly defined at the start and are which is more "commodity" coding (e.g. replicate this competitor feature) might be better outsourced, partly to keep the company's fixed costs down, but also to help keep the core team focussed.
Something else that might form part of the equation for this kind of company is that the cost of capital is so high for most early start companies that time to delivery (including time specifying,negotiating & contracting) can be more important that it'd be for an established company looking at taking the same choices.
Finally, I'd suggest that we've seen companies where outsoucing has helped because during development stages the balance of development skills changes. Perhaps the company's built an inhouse team expert in standard ajax, php and database stuff, but there's a key element which requires skills in developing search agent stuff. Often the inhouse team will prefer the idea of building up their own skills in this area, but that can mean the company is paying (in cash and time) for learning curve towards a skill which is not expected to be a long term requirement.
I guess putting this together means that our experience favours mostly in-house, but I'm sure there's much more to talk about on this issue!

Tuesday, 17 July 2007

Economics of Software-as-a-Service

Talking to a former exec from an IM supplier to SMEs I gleaned some useful insight today. His company had sold a fairly standard type of secure IM to SMEs. To start off with they'd sold the software, installed on the customer's servers, on a rental model, mimicking the "Software-as-a-Service" approach which is now so popular with startups. However, he explained that the company had gained much more sales traction with customer when, after some time, they reverted to a classic upfront software licence and downstream support payment model. Whilst I could understand one or two customers feeling this way I was initially surprised that it was such a transformational change. I was surprised that customers weren't fairly uniformly delighted with being able to link the timing of the cost to the timing of their benefit.
Without knowing the details I can only speculate, but it did strike me that the USP for this provider's product was really about helping them feel secure in an application, IM, where their particular customers were less comfortable (otherwise I'd argue that there are loads of similar alternatives). So to some degree they were selling to maybe the "late majority" rather than "early adopters". Maybe these people in particular could be said to be rather slower to adapt to new models for buying software, but also perhaps to be characterised by a different cost of capital.

Cost of Capital

In economic terms most SME's, but especially early-stage technology companies, have a VERY highcost of capital (I've seen it figured out to be around 80%), whereas the customer's cost of capital- particularly if it is itself stable/mature (i.e. late majority), maybe more like 12-20%. It therefore makes little sense from a purely economic standpoint for an early stage company to use a "rental" type payment model for software provided to a customer who's an established business. Perhaps more simply put, an early-stage company may have to pay precious early-stage venture equity rates for money to fund the working capital element of providing a "rental model".

Summary of differences

I've attempted to put together what I could think were the key selection differences between a "rental" model and an "upfront" model.

"up-front" model"rental" model
Favourable where vendor has higher cost-of-capitalFavourable where the vendor has lower cost-of-capital
Suits better laggard customersSuits better early-adopter customers
High investment can make for reluctance to change outContractual commitments can keep customers "locked-in"
"Capital" budget can be harder for vendor to accessContractual details on termination, rate increases etc can be harder to negotiate through purchasing
Upfront revenue particularly helpful where costs of acquiring customers are highRental revenues helpful where costs of supporting customers are high

(Please use the comments section below- I'm sure this is far from exhaustive- and I'll add your contributions into this table as best I can.)
You may be surprised to realise how strong the Cost-of-capital effect is in practice. Take the following example:

  • Company A sells their system on a rental model for £10,000
  • Company B sells the same thing on an upfront plus support basis for £15,000 upfront and £2,500 annual support charge.
The Net Present Value of both of these revenue streams for a early-start company with a 50% cost of capital is actually about the same (my workings are here), whereas I suspect that most of their customers would very much prefer to pay that little bit more for a perpetual licence!
As always your comments are very welcome.